What is Money Laundering?

  • By Greg Brown
  • Published: Jul 10, 2023
  • Last Updated: Jul 21, 2023

what is money laundering

Money laundering is a crime with roots dating back nearly 2000 years ago. Hiding profits from extortion and greedy government officials, Chinese merchants converted profits into hard assets and moved them out of the territory. Once safely out of reach, merchants converted the assets back into currencies.

The process of engaging in financial transactions in order to conceal the identity, source, or destination of illegally obtained money under US law is known as Money Laundering. Under UK Law, the definition is much broader;  it is defined as “any action with the property of any form that is either wholly or partially the proceeds of a crime that conceals the fact that the property is the proceeds of a crime or obscures the beneficial ownership of said property.”

Where Did Money Laundering Begin?

The term Money Laundering was coined in the mafia era of the 1920s and 30s. Mafia organizations at the time were earning vast sums of money bootlegging liquor, illegal gambling, prostitution, and any other underground activity. Cash was piling up in warehouses, and Mafia Dons needed a way to explain the funds legitimately. One of the many profitable businesses owned by criminal organizations was the cash-only laundromats. Over time, it became difficult for even these businesses to explain away massive profits.

Meyer Lansky is known as the father of money laundering. An Al Capone contemporary, Lansky was determined not to receive the same fate (convicted of tax evasion in 1931) as the famous mob boss. Meyer Lansky used the Swiss banking system to hide the vast profits being generated at the time. Lansky would place illegal profits into a Swiss bank known for their secrecy and discretion. He would then loan money to other foreign banks. Repayments received by Lansky and his associates would come back clean as a whistle or laundered. 

Stages of Money Laundering

No matter what global region you choose to examine, the three steps of money laundering are basically the same. Each step can occur simultaneously or one step at a time.

  1. Placement is the first step of money laundering, whereby Illegally acquired funds are physically removed from their source and placed into a legitimate financial institution. Dirty money can be entered into the financial system in a few ways.
  • Blending is where illegal funds are blended with legitimate funds. This combination is typically accomplished by cash businesses such as casinos, car washes, tanning salons, and so on.
  • The second technique is invoice fraud which is the most common method. This technique involves over or under-invoicing third parties with phantom goods and shipping charges. Fraudulent documentation is created to back up the charges.
  • Smurfing is a method where large sums are broken down into smaller, less conspicuous sums below the reporting threshold. The funds are then deposited into multiple banks by multiple people or by a single person over an extended period of time. 
  • Offshore accounts have been used for decades to launder dirty money. This method easily conceals the money’s actual owner and source.
  • Aborted transactions require several dirty businesses to be effective. Money is transferred to a lawyer or accountant until a proposed transaction is completed. The transaction is canceled, and the money is returned as clean as a baby’s bottom. 

       2. The second stage of the money laundering process is layering. This step separates the criminal activity from the proceeds by different            techniques to layer the dirty money. Layering is a complex process designed to hide the source of money. These activities include using            several banks and accounts, and professionals act as intermediaries making complex transactions through corporations and trusts with            layers of financial accounts. Conversion tactics include converting cash into traveler’s checks, stocks, bonds, letters of credit, art, and                jewelry. The layering aims to disguise the paper trail and anonymize criminal identities. The purpose of layering is to place as much                  distance as possible between illegal, dirty money and the present condition of the money.

        3. The final stage of the money laundering process is integration. In this step, the laundered money is returned to the criminal clean. The          dirty money can now be used in any way the criminal chooses. Laundered money can be reinserted into the financial system through                real estate or new businesses. Integration is done with care to create a plausible explanation for the money. If done correctly, integration          makes it nearly impossible to convict criminals because there is no documentation or paper trail to follow. The primary objective of                    integration is to give the money back to the criminal organization so as not to draw attention.

Methods and Techniques Used In Money Laundering

Criminals use several financial fraud schemes to launder ill-gotten gains, and new methods are devised daily as technology and communication expand globally. 

Round-tripping is a method when funds are sent on a trip to various accounts, shell companies, individuals, and countries with insufficient regulatory oversight. Once the money is sent on its trip, it is returned to the owner with a shiny new veneer of being legal currency. It is easy to get around law enforcement because of the complexity of round-tripping. Each trip can be made more difficult and complex if the trip before it is not successful. 

 Future Trends and Challenges in Money Laundering Prevention

how to prevent money laundering

Cryptocurrency has made money laundering a lot more successful for the criminal. Virtual money is not regulated uniformly globally, making this the perfect money laundering method. Regulators, global law enforcement, and the banking systems are playing catch-up to today’s mobs. 

Online gambling is the perfect vehicle for money launderers to clean their illicit money. The placement and layering steps can be accomplished with online gambling, making the process quicker and easier. Two accomplices can sit at the same online table, quietly transferring money to each other.

With the global marketplace fully in place, big-ticket sales can be placed and funded without law enforcement batting an eye. Criminals in America can purchase diamonds, art, luxury cars, and other items across the globe to use for money laundering. 

Money laundering is illegal in every shape and form. However, it will continue as long as the criminal can act without fear of investigation and prosecution.

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