Money laundering is a way to make illegally earned money or money that was not properly taxed look like it came from a legal source. It involves taking the money earned from illegal activities like drug trafficking or organized crime and putting it into the regular financial system. This is done to hide the illegal origin of the money and make it seem like it was earned through legal means. Essentially, it’s a way for criminals to use the banking system to make their illegal money look clean and legitimate.
How is it done? In uncountable ways.There are three stages of money laundering, each with a unique purpose. This is how it works:
Placement of Money
This is the first stage where the process starts with the physical placement of money in the bank account, for instance, in a bank, casino, local or international shop or currency exchange.
In this stage, the criminal entities enter the business ecosystem as a customer, investor or vendor. Placement is conducted through several methods, a few are mentioned below.
- Smuggling Currency – Physical movement of currency or financial instruments such as bonds or demand drafts across borders.
- An Accomplice Bank – A banker that knowingly accepts deposits from smugglers and criminals and perpetrates the schemes like cuckoo smurfing.
- Securities broker – The securities brokers who would put investments into different tranches to divide them to thwart any suspicions.
- Blending funds – Criminals might open shell companies to avoid the detection of their laundering scheme. Then, they start mixing the dirty money with the money from legitimate businesses. It’s akin to hiding cash within cash.
- Asset Purchases – The most obvious form of laundering money is to purchase big assets. Once the transaction takes place, tracing back the source of income can be a challenge.
- Currency exchanges – 9/11 attack proved that currency exchanges were used to remit the proceeds of crime from one country to another.
Layering of Money
In the process of money laundering, the second stage is called “layering.” Layering is done to hide where the money originally came from. To achieve this, businesses and financial institutions are involved in each layer of the money laundering process. Here are some common methods used for layering:
- Converting dirty money into financial instruments. Bankers’ drafts and money orders are readily used for this.
- Huge amounts of money is transferred across the bank accounts in different banks in different countries under the pretext of import or exports.
- Buy and sell. In this case, the criminal buys a large asset with illegal money and then sells it, locally or internationally. After this buy-sell cycle, tracing the asset back to the criminal’s source of income becomes difficult.
- Buying and selling real estate assets, financial assets, etc.
Integration of Money
Integration is the phase when laundered money re-enters the financial system. People often use banks to bring the money back in. Here are some common methods
- Property Dealing – Buying property from illegal money is a common form of laundering money. Usually, this is done through a shell company.
- Shell Companies and Fake Loans – The culprits create a fake company and then give a loan to themselves. This loan amount is the laundered money
- Foreign Banks as Accomplices – If a foreign bank is an accomplice in laundering money it would be difficult for law enforcement to investigate the financial transactions. Moreover, such banks are protected by international laws such as bank secrecy act which is applied in the United States.
- Bogus invoices from import/export – Money launderers also use import and export as a way to enter black money into the system. They would exaggerate a bill to justify the payment by creating fake invoices or inflating the value of funds received from exports.
Guidelines issued by Financial Action Task Force require financial institutions to create a culture of compliance and provide education to their staff. Certified Anti Money Laundering Expert is one of the certification programs which help bankers effectively combat money laundering.