Understanding the methods of Money Laundering

Money Laundering is the process of changing the colors of the money. In this process tax evaded money starts appearing like income from legitimate sources. This process is carried out with the simple objective of moving the money obtained from criminal activities through the global financial system. There are different methods of money laundering through financial system.

  • Structuring : This is a method of placement whereby cash deposits are divided into smaller deposits of money. This method is used to avoid detection and anti-money laundering reporting requirements. A sub-component of this is to use smaller amounts of cash to purchase bearer instruments, such as money orders, and then ultimately deposit those, again in small amounts.
  • Bulk cash smuggling: This involves physical transportation of cash to another jurisdiction and depositing it in a financial institution. Generally the money is moved to jurisdiction with greater bank secrecy or less rigorous money laundering enforcement. A sub-component of this is to transport fake currency to enemies. Fake Currency destroys the economy of the enemy nation.
  • Cash-intensive businesses: In this method, a business typically expected to receive a large proportion of its revenue as cash. Criminal uses bank accounts of cash intensive businesses to deposit criminally derived cash. Such enterprises often operate openly such as shop in a mall or a petrol station. Cash revenue from legitimate business is added to the illicit cash. In such cases the business will usually claim all cash received as legitimate earnings.
  • Trade-based laundering: These methods of money laundering involve under- or over-valuing invoices to disguise the movement of money. For example, the art market has been accused of being an ideal vehicle for money laundering due to several unique aspects of art such as the subjective value of artworks as well as the secrecy of auction houses about the identity of the buyer and seller.
  • Shell companies and trusts: Trusts and shell companies disguise the true owners of money. Trusts and corporate vehicles, depending on the jurisdiction, need not disclose their true owner. Sometimes referred to by the slang term rat-hole, though that term usually refers to a person acting as the fictitious owner rather than the business entity.
  • Round-tripping : Here, money is deposited in a controlled foreign corporation offshore, preferably in a tax haven where minimal records are kept, and then shipped back as a foreign direct investment , exempt from taxation. A variant on this is to transfer money to a law firm or similar organization as funds on account of fees, then to cancel the retainer and, when the money is remitted, represent the sums received from the lawyers as a legacy under a will or proceeds of litigation.
  • Bank capture: In this case, money launderers or criminals buy a controlling interest in a bank, preferably in a jurisdiction with weak money laundering controls, and then move money through the bank without scrutiny.  
  • Casinos: In this method, an individual walks into a casino and buys chips with illicit cash. The individual will then play for a relatively short time. When the person cashes in the chips, they will expect to take payment in a check, or at least get a receipt so they can claim the proceeds as gambling winnings.
  • Other gambling: Money is spent on gambling, preferably on high odds game. One way to minimize risk with this method is to bet on every possible outcome such as cricket match. Event that has many possible outcomes are preferred so no outcome have short odds. The bettor will lose only the small amounts and will have one or more winning bets. These winnings can be shown as the source of money. The losing bets will remain hidden.  
  • Black salaries: A company may have unregistered employees without written contracts and pay them cash salaries. Dirty money is used to pay these contract labor.
  • Tax amnesties : It is a limited-time opportunity for taxpayers to pay a taxes on evaded income, in exchange for forgiving liability. For example, those that legalize unreported assets and cash in tax havens.
  • Transaction Laundering: When a merchant unknowingly processes illicit credit card transactions for another business. It is a growing problem and recognized as distinct from traditional money laundering in using the payments ecosystem to hide that the transaction even occurred e.g. the use of fake front websites .

These were some of the methods of money laundering used in India and by other western nations.