What Is Money Laundering?
When criminals make lots of money illegally, they have a real issue on their hands. You can not show up to a car dealer with $2M in cash to buy your next Ferrari. You also can’t pay for other big-ticket items like real estate, land, planes, and other things if your money is not in a bank somewhere.
In today’s advanced financial systems, banks and governments require information on where large sums originate from to take deposits into their banks. If the money has been acquired through illegal business operations, showing any evidence will put them in jail.
The only way for criminals to use their “blood” money is through money laundering, which involves making the money appear to come from legitimate sources, such as businesses.
Laundering is the art of taking so-called “dirty” money and legitimizing it through a clean source.
Money laundering is a serious financial crime with criminal repercussions in most countries around the world. Most financial companies implement Anti-Money Laundering (AML) policies dictated by their local and global governments to help detect and prevent this activity.
How does money laundering work?
Engaging in money laundering is important for criminal organizations that want to use the money they obtained illegally effectively. The process of laundering money usually involves three steps: placement, layering, and integration.
The placement is the process of putting the “dirty” money into a legitimate financial system. Often, cash-based businesses are used, as there are fewer paper trials than businesses that use credit cards, checks, or other methods.
Up next, layering is about concealing the real source of money by having several transactions and magic in bookkeeping. The more complicated (and the more layers) between the source of the money and how it is legitimized, the harder it is to find.
Lastly, integration is the final step, in which a representative withdraws the laundered money from the legitimate account for purchases, investments, and legal operations.
Money laundering also comes in many forms. Criminal organizations often do this activity to bypass tax laws and other cash policies imposed by many countries. One of the most popular money laundering processes is by using a “front.” A front is a legitimately registered business, but the amount of cash flow from that business is suspicious.
For example, money launderers may use a Gentlemen’s club or a bar as their front. The businesses will report the cash flow from the business itself and, behind the scenes, add in illegally obtained revenue streams. The money launderers can withdraw the funneled cash on their fronts almost instantly. They no longer have to worry about withdrawal charges or reporting their cash for tax purposes.
Some other techniques in money laundering
Historical methods of money laundering include the process of smurfing, which divides the banking of large sums of money into multiple small transactions. These transactions are also usually spread out over many different accounts so they can avoid detection. Furthermore, criminal organizations use currency exchanges, wire transfers, mules, and cash smugglers to move the cash across borders.
Another money laundering method involves investing in mobile commodities like gems and gold. It is easy to move these commodities to other jurisdictions, which is why they became the best choice as a source of dirty money. In addition, they can discretely sell and invest in valuable assets such as real estate. They can also engage in gambling, counterfeiting, and creating shell companies.
There are also modern methods of money laundering that utilize the existence of the internet. As you see, the key element in money laundering is to fly under the radar. The use of the internet allows criminal organizations to launder money and easily avoid detection. The rise of online banking institutions, anonymous online payment services, peer-to-peer transfers, and virtual currencies actually paved the way for money laundering to become rampant easily. Through these methods, detecting illegal money transfers became even more difficult.
Nowadays, criminal organizations can also use proxy servers and anonymizing software. By doing so, they can make the third step of money laundering, integration, almost impossible to detect. These modern technologies allow them to withdraw and transfer money without leaving any trace or IP address.
Another method of money laundering is through online auctions, sales, gambling, and virtual gaming. Organizations or criminals can convert their ill-gotten money to gaming currency and then transfer it back into real, reusable, and untraceable “clean” money.
Launderers can also use phishing, in which they tell the victim that they won a fictitious lottery and that they will deposit the amount into their bank account. Well, they really make multiple deposits into the victim’s bank account, but with the condition of transferring them to another bank account. The laundering happens at this stage!
Money laundering countries
By the end of June 2018, the Financial Action Task Force had investigated eight countries with incomplete or suspicious legal provisions regarding their anti-money laundering and anti-terrorist financing policies.
These countries are Ethiopia, Pakistan, Serbia, Sri Lanka, Syria, Trinidad & Tobago, Tunisia, and Yemen. These countries have also agreed to review and revise their compliance efforts regarding Anti-Money Laundering and Anti-Terrorism Financing. The FATF designated these countries as high-risk countries regarding Anti-Money Laundering matters. On the other side of the globe, North Korea has also been declared a high-risk country and is being monitored if it goes against AML/CFT policies set by the FATF.
Something to Ponder On
Generating large sums of money through illegal means has implications for the economy. Countries need to strengthen their Anti-Money Laundering efforts and policies further to reduce their risk.
Everyone aspires to generate a lot of money, but you shouldn’t do that through illegal means. You can make many investments, such as stock trading, government bonds, and royalties. So, think twice before you engage in money laundering!