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 in order to take the deposit into their banks. Obviously if the money has been acquired through illegal business operations, showing any evidence will land them jail. 

The only way for criminals to be able to use their “blood” money is through money laundering. That is, to make the money appear to come from legitimate source 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 that has criminal repercussions in most countries around the world. Most financial companies implemented Anti Money Laundering or 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 effectively use the money that they obtained illegally.  The process of laundering money usually involves three steps. These steps are 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 less paper trials than businesses where credit cards, checks or other methods are used. 

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 where a representative will withdraw 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 an Gentlemen’s club or a bar as their front. The businesses will not only report the cash flow from the business itself, but behind the scenes, it will also add in illegally obtained revenue stream. The money launderers can withdraw the funneled cash in 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

The historical methods of money laundering include the process of smurfing, which is the dividing of 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. 

There is also another money laundering method that involves investing in mobile commodities like gems and golds. It is easy to move these commodities to other jurisdictions, which is why they became the best choice as a source of dirty money. Aside from this, they can also 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 which 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 easily become rampant. Through these methods, detecting illegal money transfers became even more difficult. 

Criminal organizations can also use proxy servers and anonymizing software nowadays. By doing so, they can make the third step of money laundering, which is integration, almost impossible to detect. Through the use of these modern technologies, they can withdraw and transfer money without leaving any trace or IP address.

Also, one more method of money laundering is through online auctions, sales, gambling, and virtual gaming. By using these methods, organizations or criminals can convert their ill-gotten money to gaming currency. After that, they will transfer it back into real, reusable, and untraceable “clean” money. 

Launders can also use phishing, wherein they will 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 to the victim’s bank account but with the condition of transferring into another bank account. The laundering happens in this stage!

Money laundering countries

By the end of June 2018, the Financial Action Task Force has investigated eight countries that have 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 towards Anti Money Laundering and Anti-Terrorism Financing. The FATF designated these countries as high-risk countries with regard to Anti Money Laundering matters. On the other side of the globe, North Korea has also been declared as a high-risk country and is being monitored if it would go against AML/CFT policies set by the FATF.

Something to Ponder On

Generating large sums of money through illegal ways has its implications for the economy. Countries need to further strengthen their Anti Money Laundering efforts and policies to reduce their risk. 

Everyone aspires to generate a lot of money, but you shouldn’t do that through illegal means. There are a lot of investments that you can venture such as stock trading, government bonds, and even in royalties. So, think twice before you engage in money laundering!