3.1 Types of Financial Crime and Predicate Offences
Key Takeaways
Money laundering is commonly described in three stages, placement, layering and integration, though prosecutors do not need to prove every stage.
Terrorist financing can use funds of legitimate origin, so monitoring looks at destination and purpose as well as source.
First-party fraud is committed by the account holder, while third-party fraud uses another person's identity or account.
The FATF glossary lists 21 designated categories of predicate offences, including corruption and bribery, fraud, and tax crimes.
Every CAFCA control exists because a specific crime exploits a specific weakness. Domain 1 expects you to name the main types of financial crime, explain how each one shows up in FinTech, and recognise the predicate offences that create criminal proceeds in the first place. Classification matters. A sanctions match is blocked or rejected and reported to the sanctions authority. Suspected laundering of fraud proceeds is investigated and may lead to a SAR or STR. An unauthorised payment from a hacked account triggers fraud-recovery steps and possibly reimbursement duties.
Money laundering
Money laundering (ML) is the processing of criminal proceeds to disguise their illegal origin. The classic three-stage model is a teaching tool, not a legal test:
- Placement: criminal money enters the financial system. Examples include cash loaded at retail reload points, gift cards bought with stolen cards, or stolen funds pushed into a newly opened wallet.
- Layering: transactions put distance between the money and its source. Examples include rapid transfers across apps and accounts, crypto swaps and chain-hopping, and round-tripping through merchant accounts.
- Integration: the money re-emerges looking legitimate. Examples include an early loan repayment, a property purchase, or invoices paid to a front company.
In FinTech the three stages can happen within minutes on instant rails. That is why Domain 3 stresses real-time monitoring and pass-through red flags.
Terrorist and proliferation financing
Terrorist financing (TF) is the raising, moving, storing or use of funds to support terrorist acts, individuals or organisations. It differs from laundering in two ways that exam questions test:
- The money may come from legitimate sources, such as salaries, donations or small business income.
- Amounts are often small, for example low-value P2P transfers, crowdfunding contributions or prepaid card loads, so high-value thresholds miss them.
Proliferation financing (PF) funds the development or acquisition of weapons of mass destruction. FATF Recommendation 7 requires countries to apply targeted financial sanctions linked to PF, and since 2020 FATF expects countries and firms to assess PF-related sanctions-evasion risk.
Sanctions evasion
Sanctions are legal restrictions on dealing with designated persons, entities, regions or sectors. Evasion includes fronts and nominees, false shipping or invoice data, use of third-country intermediaries, and deliberately stripped payment information. Sanctions breaches can carry strict civil liability in some regimes, OFAC being the main example, so they are screened in real time rather than reviewed after the event.
Fraud: first-party and third-party
| Fraud type | Who deceives whom | FinTech examples | Typical signals |
|---|---|---|---|
| First-party fraud | The genuine account holder deceives the firm | Bust-out after building credit; false "item not received" disputes; loan stacking; applying with real identity but false income | Sudden credit use followed by default; disputes that do not fit the history; inconsistent income data |
| Third-party fraud | A criminal uses someone else's identity or account | Identity theft at onboarding; account takeover (ATO); card-not-present fraud with stolen cards | New device and new payee followed by maximum transfer; mismatched identity data; card-testing patterns |
| Synthetic identity fraud | A criminal builds a fictitious persona from real and fake data | Thin-file applicants that "season" before a bust-out | Identifier mismatches; authorised-user tradelines; shared devices |
| Authorised push payment (APP) scams | A victim is tricked into sending the payment themselves | Romance, investment, impersonation and purchase scams | Out-of-character payment to a new payee, often under coaching |
The proceeds of fraud are criminal property, so fraud teams and AML teams must share cases. This is the FRAML idea covered in Chapter 11. Some regimes also add consumer-protection duties. In the UK, for example, mandatory reimbursement for APP scam victims on Faster Payments began on 7 October 2024, with a reimbursement cap of £85,000.
Predicate offences
A predicate offence is the underlying crime that produces the proceeds being laundered. The FATF glossary lists 21 designated categories of offences that every country should treat as predicates. They include participation in organised crime, terrorism and its financing, human trafficking and migrant smuggling, sexual exploitation, drug and arms trafficking, trafficking in stolen goods, corruption and bribery, fraud, counterfeiting currency and products, environmental crime, murder and grievous bodily injury, kidnapping, robbery or theft, smuggling, tax crimes (direct and indirect taxes), extortion, forgery, piracy, and insider trading and market manipulation.
Bribery and tax evasion appear in the CAFCA outline because they often go unnoticed. A bribe may arrive as a "consulting fee" paid into a sole-trader wallet. Tax evasion may look like income split across many personal accounts. Several regimes now make companies criminally liable for failing to prevent these crimes. The UK has corporate offences for failure to prevent bribery (Bribery Act 2010), facilitation of tax evasion (Criminal Finances Act 2017) and, since 1 September 2025, fraud (Economic Crime and Corporate Transparency Act 2023).
Why FinTech features increase exposure
Speed, remote onboarding, high volumes of small transactions, cross-border reach, instant settlement and open APIs all benefit customers. They benefit criminals in the same way. Chapter 2 links these features to each FinTech model.
Realistic exam scenario
A freelance-marketplace payout wallet receives 40 card-funded payments from unrelated cardholders in one evening. The wallet holder withdraws the balance to a crypto exchange within an hour. Several cardholders later report the charges as unauthorised. The activity is third-party card fraud (the predicate offence), followed by layering through the wallet and an exit to crypto. The firm should freeze remaining funds under its terms, treat the cardholders as victims, investigate the wallet holder as a possible mule, and consider a SAR or STR.
Common exam traps
- "Clean money cannot be terrorist financing." Wrong. TF can be funded from legitimate sources.
- Treating fraud as only a loss event. Fraud proceeds are criminal property, and moving them is laundering.
- Assuming all three ML stages must be proven. The stages are descriptive, not legal elements.
- Forgetting tax crimes and bribery are designated predicate offences.
A customer repeatedly opens disputes claiming online orders never arrived, yet delivery records and device data show the customer received and used the goods. How is this best classified?
Sanctions evasion, because the goods moved across a border
First-party fraud, because the genuine account holder is deceiving the firm
Third-party fraud, because the merchant is the victim
Synthetic identity fraud, because the dispute history shows a fabricated customer profile
Why can terrorist financing be harder to detect than laundering of drug proceeds?
Funds may be legitimate and move in small amounts, so source and high-value rules miss them
It only involves sanctioned countries, which list-based screening already blocks automatically
It always moves as physical cash, which digital firms' monitoring systems cannot see
It is legally exempt from SAR reporting until a terrorist act has actually occurred
Which of the following is one of FATF's designated categories of predicate offences?
Failure to update a customer address
Breach of a FinTech's internal acceptable-use policy
Late filing of a corporate annual return
Tax crimes related to direct and indirect taxes
Sections you finish are checked off in the contents.