What Is Money Laundering?

What Is Money Laundering?

Money laundering is an illegal activity that makes large amounts of money generated by criminal activity, such as drug trafficking or terrorist funding, appear to have come from a legitimate source. The money from the criminal activity is considered dirty, and the process “launders” it to look clean. Financial institutions employ anti-money laundering (AML) policies to detect and prevent this activity.

How Money Laundering Works

Money laundering is essential for criminal organizations that use illegally obtained money. Criminals deposit money in legitimate financial institutions to appear as if it comes from legitimate sources. Laundering money typically involves three steps although some stages may be combined or repeated.

• Placement: Injects the “dirty money” into the legitimate financial system.
• Layering: Conceals the source of the money through a series of transactions and bookkeeping tricks.
• Integration: Laundered money is disbursed from the legitimate account.

Types of Transactions

• Structuring or Smurfing: Large allotments of illegally obtained cash are divided into multiple small deposits and spread over many different accounts
• “Mules” or cash smugglers: Cash is smuggled across borders and deposited into foreign accounts
• Investing in commodities: Using gems and gold that can be moved easily to other jurisdictions
• Buying and Selling: Using cash for quick turnaround investment in assets such as real estate, cars, and boats
• Gambling: Using casino transactions to launder money
• Shell companies: Establishing inactive companies or corporations that exist on paper only

Electronic Money Laundering

The rise of online banking institutions, anonymous online payment services, and peer-to-peer (P2P) transfers with mobile phones have made detecting the illegal transfer of money increasingly difficult. Proxy servers and anonymous software make the third component of money laundering, integration, difficult to detect as money can be transferred or withdrawn with little or no trace of an Internet protocol (IP) address.

Money can be laundered through online auctions and sales, gambling websites, and virtual gaming sites, where ill-gotten money is converted into gaming currency, then back into real, usable, and untraceable “clean” money.

Money laundering may involve cryptocurrencies, such as Bitcoin. While not completely anonymous, they can be used in blackmail schemes, the drug trade, and other criminal activities due to their relative anonymity compared with fiat currency.

Prevention

According to the United Nations Office on Drugs and Crime, global money-laundering transactions account for roughly $800 billion to $2 trillion annually, or 2% to 5% of global gross domestic product (GDP).In 1989, the Group of Seven (G-7) formed an international committee called the Financial Action Task Force (FATF) to fight money laundering on an international scale. In the early 2000s, its purview was expanded to include terrorist activity.

The United States passed the Bank Secrecy Act in 1970, requiring financial institutions to report cash transactions above $10,000 or unusual activity on a suspicious activity report (SAR) to the Department of the Treasury. This information is used by the Financial Crimes Enforcement Network (FinCEN) to be shared with domestic criminal investigators, international bodies, or foreign financial intelligence units.

Money laundering was deemed illegal in the United States in 1986, with the passage of the Money Laundering Control Act. After Sept. 11, 2001, the USA Patriot Act expanded money laundering efforts. The Association of Certified Anti-Money Laundering Specialists (ACAMS) offers a professional designation known as a Certified Anti-Money Laundering Specialist (CAMS). These individuals work as brokerage compliance managers, Bank Secrecy Act officers, financial intelligence unit managers, surveillance analysts, and financial crimes investigative analysts.

The Bottom Line

Money laundering disguises illegally obtained financial assets. Global governments and financial institutions have anti-money laundering measures in place. Online activity and digital assets have added to money laundering transactions.