Looking for the Needle in a Stack of Needles: Tracking Shadow Economic Activities in the Age of Big Data

Manju Bansal in MIT Technology Review: “The undocumented guys hanging out in the home-improvement-store parking lot looking for day labor, the neighborhood kids running a lemonade stand, and Al Qaeda terrorists plotting to do harm all have one thing in common: They operate in the underground economy, a shadowy zone where businesses, both legitimate and less so, transact in the currency of opportunity, away from traditional institutions and their watchful eyes.
One might think that this alternative economy is limited to markets that are low on the Transparency International rankings (such as sub-Saharan Africa and South Asia, for instance). However, a recent University of Wisconsin report estimates the value of the underground economy in the United States at about $2 trillion, about 15% of the total U.S. GDP. And a 2013 study coauthored by Friedrich Schneider, a noted authority on global shadow economies, estimated the European Union’s underground economy at more than 18% of GDP, or a whopping 2.1 trillion euros. More than two-thirds of the underground activity came from the most developed countries, including Germany, France, Italy, Spain, and the United Kingdom.
Underground economic activity is a multifaceted phenomenon, with implications across the board for national security, tax collections, public-sector services, and more. It includes the activity of any business that relies primarily on old-fashioned cash for most transactions — ranging from legitimate businesses (including lemonade stands) to drug cartels and organized crime.
Though it’s often soiled, heavy to lug around, and easy to lose to theft, cash is still king simply because it is so easy to hide from the authorities. With the help of the right bank or financial institution, “dirty” money can easily be laundered and come out looking fresh and clean, or at least legitimate. Case in point is the global bank HSBC, which agreed to pay U.S. regulators $1.9 billion in fines to settle charges of money laundering on behalf of Mexican drug cartels. According to a U.S. Senate subcommittee report, that process involved transferring $7 billion in cash from the bank’s branches in Mexico to those in the United States. Just for reference, each $100 bill weighs one gram, so to transfer $7 billion, HSBC had to physically transport 70 metric tons of cash across the U.S.-Mexican border.
The Financial Action Task Force, an intergovernmental body established in 1989, has estimated the total amount of money laundered worldwide to be around 2% to 5% of global GDP. Many of these transactions seem, at first glance, to be perfectly legitimate. Therein lies the conundrum for a banker or a government official: How do you identify, track, control, and, one hopes, prosecute money launderers, when they are hiding in plain sight and their business is couched in networked layers of perfectly defensible legitimacy?
Enter big-data tools, such as those provided by SynerScope, a Holland-based startup that is a member of the SAP Startup Focus program. This company’s solutions help unravel the complex networks hidden behind the layers of transactions and interactions.
Networks, good or bad, are near omnipresent in almost any form of organized human activity and particularly in banking and insurance. SynerScope takes data from both structured and unstructured data fields and transforms these into interactive computer visuals that display graphic patterns that humans can use to quickly make sense of information. Spotting of deviations in complex networked processes can easily be put to use in fraud detection for insurance, banking, e-commerce, and forensic accounting.
SynerScope’s approach to big-data business intelligence is centered on data-intense compute and visualization that extend the human “sense-making” capacity in much the same way that a telescope or microscope extends human vision.
To understand how SynerScope helps authorities track and halt money laundering, it’s important to understand how the networked laundering process works. It typically involves three stages.
1. In the initial, or placement, stage, launderers introduce their illegal profits into the financial system. This might be done by breaking up large amounts of cash into less-conspicuous smaller sums that are then deposited directly into a bank account, or by purchasing a series of monetary instruments (checks, money orders) that are then collected and deposited into accounts at other locations.
2. After the funds have entered the financial system, the launderer commences the second stage, called layering, which uses a series of conversions or transfers to distance the funds from their sources. The funds might be channeled through the purchase and sales of investment instruments, or the launderer might simply wire the funds through a series of accounts at various banks worldwide. 
Such use of widely scattered accounts for laundering is especially prevalent in those jurisdictions that do not cooperate in anti-money-laundering investigations. Sometimes the launderer disguises the transfers as payments for goods or services.
3. Having successfully processed the criminal profits through the first two phases, the launderer then proceeds to the third stage, integration, in which the funds re-enter the legitimate economy. The launderer might invest the funds in real estate, luxury assets, or business ventures.
Current detection tools compare individual transactions against preset profiles and rules. Sophisticated criminals quickly learn how to make their illicit transactions look normal for such systems. As a result, rules and profiles need constant and costly updating.
But SynerScope’s flexible visual analysis uses a network angle to detect money laundering. It shows the structure of the entire network with data coming in from millions of transactions, a structure that launderers cannot control. With just a few mouse clicks, SynerScope’s relation and sequence views reveal structural interrelationships and interdependencies. When those patterns are mapped on a time scale, it becomes virtually impossible to hide abnormal flows.

SynerScope’s relation and sequence views reveal structural and temporal transaction patterns which make it virtually impossible to hide abnormal money flows.”