Money laundering refers to any activity that will transform illegally gained or tax avoided money into a legitimate source income. It is a process where the money obtained from the criminal activities such as drug trafficking or other organized crime activities is introduced into the financial system.
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 the 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 investment into different tranches to divide it 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 business. 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 other.
Layering of Money
The second stage of money laundering is layering. Layering is conducted to conceal the original source of funds. Businesses and financial institutions are used in every layer of money laundering. Below are some common methods used for layering:
- Converting dirty money into financial instruments. Banker’s 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 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
This is the phase where laundered money is brought back to the financial system, usually through the banks.
- Property Dealing – Buying the 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 and act since 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 the culture of compliance and provide education to its staff. Certified Anti Money Laundering Expert is one of the certification programs which help the bankers to effectively combat money laundering.