What is Money Laundering and How it is Done?

What is Money Laundering?

Money laundering is termed as that process where individuals or organizations due to their greed for profit, conceal the origin of illegally sourced money and enter that money into the country’s legitimate financial system. In other words, when financial assets are earned via illegal means and those assets are disguised into ‘clean’ assets and used by any individual or organization, then it is a case of money laundering. The main purpose is to fake the source of funds so that the individuals or organizations involved can use those funds as profits by leading law enforcement or financial institutions astray.

This procedure is a real setback for society as it influences drugs and arms dealers, terrorists, and other sorts of criminals to run their illegal businesses without any fear. We term the individuals or organizations as criminals because of their unlawful activities or businesses. These kinds of activities are spread across the world which questions the integrity of a nation’s financial system if these activities are left unchecked or unexposed.

What is Electronic Money Laundering?

Due to the Internet era, money launderers have achieved a new way of transferring money. With the advent of the digital economy, digital banking proceedings have been on the rise where peer-to-peer (P2P) mobile payment transfers and anonymous online payment services have made identification of illegal money transfers even more difficult.

Electronic money laundering involves digitally complicated transactions and transfers across borders, challenging the authorities to detect the source and destination of such kinds of funds. In addition to this, there are some proxy servers and software that make it almost impossible to detect the Internet Protocol (IP) address via which money is transacted. The transactions might also take place via online sales and auctions, virtual gaming websites and gambling websites, where illicit money is converted into undetectable real and clean ‘white” money.

The latest medium of electronic money laundering (e-money laundering) includes cryptocurrencies for instance Bitcoin or Dogecoin. Nowadays, cryptos are used in drug trafficking, blackmailing and other criminal activities as they are a bit difficult to trace as compared to the traditional currency.

Process of Money Laundering

The process of money laundering undergoes three steps: Placement, Layering and Integration. These three steps are taken in order to cover the origin of funds, make them untraceable and finally help the individuals or organizations to use the “black” money for multiple purposes without detection.

Step 1: Placement

The first step of money laundering is the placement where unclean money is introduced in the market. Being the initial step, the money launderers take extra measures to deposit huge sum of money so that the authorities does not suspect its illegality. Some measures taken by the money lauderers are:

• They follow “Structuring” where they deposit cash in little amounts, i.e., dividing the huge sum into smaller parts so as to avoid suspicion.
• Instead of using whole cash, they purchase monetary instruments for example cheques or money orders.
• Another method is diverting their money via cash businesses like casinos, car washes, etc.

Using these methods, once they are able to introduce the black money into the financial system, then they start to conceal the source.

Step 2: Layering

In this method, the money launderers involves in a series of transactions to build confusion and taking the funds far away from its true source. This is layering, covering the process of money laundering. Layering can be done by:

• Transacting money using multiple bank accounts, mostly performed across borders.
• Taking help of shell companies (corporations who doesn’t hold any asset or operation, usually build to hold funds of other businesses)
• The money launderers might use digital currencies (e.g., cryptocurrencies) to divert the series of transactions.

The main purpose of layering is to build a complicated web of transactions which would make the law enforcement department quite difficult to detect the originality of those funds. After successfully layering the funds, the money launderers can further protect themselves from suspicion by the authorities.

Step 3: Integration

This is the final process of money laundering where the illicit funds are put into the legit financial system via different means. It can be purchasing of real estates, luxury assets or investing in new businesses. By this time, the originality of the funds has been covered and it appears to be white “clean” money which makes the law enforcement department very difficult to differentiate between the legal and illegal assets.

After this integration stage, individuals or organizations can further use their illegal money to either carry on their illegal activities or use it to improve their lifestyle considering the minimum risk of detection. This stage hence highlights the importance of stringent anti-money laundering regulations and alertness in observing transactions for slightest indication of possible money laundering.

How is Money Laundering done?

Money laundering can be done using variety of techniques depending on the anti-money laundering regulations and practices. The money launderers keeps on changing their strategies depending on those rules and regulations. Some of the commonly used schemes are cash smuggling, real estate investments and shell companies. These schemes utilize the loopholes of the financial system and the money lauderers cover the source of their illegal funds.

1. Cash Smuggling: In this technique, huge sum of cash are transported physically to international borders, mostly with the purpose of either depositing the amount in foreign banks or investing it in financial assets which have the least chance of coming under the authorities scrutiny. Offenders can avoid being caught by the domestic financial regulators and law enforcement by transferring the funds overseas. This makes it herculean for the authorities to detect the origin of funds and put charges against the money launderers.

2. Real Estate Investments: Investments in real estate offers a potential platform for money laundering. The source of funds are disguised by converting the illegal funds into legalized assets. Offenders can cunningly launder their cash and reintroduce them into the lawful clean market by first using illegal money in purchasing assets and then trading those assets to generate profit. As a huge amount of money is involved in the real estate business and also as the value of the assets appreciates with time, money launderers have a great opportunity in this technique to conceal their illicit funds and generate profits.

3. Shell Companies: Some corporations are build just for the name which doesn’t hold any asset or operation rather they are a medium of money laundering are known as the Shell companies. They usually don’t have employees or any physical presence. They are rather used to conceal the identity of the offenders (owners of the shell companies) so that the authorities have a tough time to uncover the origin of funds and hold the individuals or organizations involved accountable.

How to Prevent Money Laundering?

In order to prevent money laundering, certain strategies can be implemented. Businesses in order to safeguard themselves from the financial and reputational risks linked with money laundering, they should take some proactive measures. This would further contribute in the global endeavor to fight against this crime and uphold the integrity of the financial system. Few strategies that can be implemented are:

1. Implementation of Stringent Anti-Money Laundering (AML) Policies: This strategy can be the first step towards prevention of money laundering activities. The AML policies should be customized keeping in mind the potential risks associated and the weaknesses of the corporations. It should further include specific guidelines for tracing and filing suspicious activities. A strict AML policy can help corporations to:

• Portray their diligence in fighting against this financial crime
• Decrease the risk of penalties and damage to the image

2. Observing Transactions: This strategy will also help combat money laundering. If the corporations regularly keeps a check on the financial transactions and also analyze the patterns of transactions, then it becomes much easier to identify suspicious or unusual transactions. Transactions which require monitoring include: huge sum of cash deposits or frequent depositing, cross border transfers which might pertain to frauds and transactions which deviate from customer’s regular pattern. Such form of suspicious transactions must be traced and reported to safeguard the other customers and altogether the legitimate financial system.

3. Training and Awareness Programs for Employees: This strategy would curb money laundering by ensuring that the employees understand their duties and responsibilities and are well aware to detect any wrong patterns or red flags. The training program might include:

• Awareness on the various stages included in money laundering
• The different methods and techniques used by money lauderers for laundering
• The vulnerabilities and risks associated with the enterprise

Corporations must engage their employees in detecting and preventing money laundering by establishing a workplace environment where the most important task is to be aware and vigilant. Thus, by implementing all of the above strategies, money laundering can be curbed to some extent.

Examples of Money Laundering

Although the money launderers once caught face huge penalties, the financial institutions, who are the most vulnerable in money laundering, are not spared from giving penalties as it was due to their negligence and weak AML policies. Thus, in order to fall into the trap of money laundering penalties, financial institutions, banks and other enterprises who are at risk of money laundering must duly follow the AML policies.

Numerous real world examples can be found in the past years, as though AML regulations are there, the criminals must more smarter to conceal and penetrate the system to launder black money. Let us look into two famous cases of money laundering of this century, one is the case of Wachovia Bank fraud and another is the Panama Papers scandal.

Wachovia Bank Case

In the early 2000s, one of the largest banks in US was Wachovia. They had a huge customer base from Mexico and Columbia who dealt with drug cartels and it was reported that around $110 billion was processed by the bank for drug deals from 2004 to 2007. This money laundering process had multiple stages and crossed multiple borders. From US, drug dealers smuggled cash by selling drug in the Mexican border and then laundered the money in exchange houses and finally deposited the money in the Mexican bank account as they did not have strict rules.

Later, the amount was sent back to US via Wachovia bank accounts and as per reports, Wachovia did not treat those transactions as suspicious rather they tried to help in the laundering. Finally, when US Drug Enforcement Agency investigated the whole incident, Wachovia was acquired by Wells Fargo and the parent company had to pay a penalty of $110 billion, an amount much less compared to the laundering amount in 2010 and the case was settled.

Panama Papers Case

In another big scandal shell companies were involved in money laundering. In 2016, Panama Papers were exposed for money laundering and tax evading in global arena taking help of a large number of shell companies. A law firm, Mossack Fonseca had some documents which got leaked revealing the high-profile money laundering scandal. Many big figures were involved in this scandal including politicians, corporate giant leaders and celebrities. This scandal revealed the role of shell companies offshore in supporting money laundering and evading tax. This highlighted the need for increased transparency and accountability in offshore businesses.

FAQs

1. What are the stages of Money Laundering?

Answer:

Money laundering has three stages:

• Placement; where offenders introduce funds obtained from illicit sources into the financial system. This is done by dividing the huge sum of money into smaller amounts deposited in different accounts.
• Layering; where money is transferred to different locations so that offenders cannot be traced.
• Integration; where the money is brought back to the owners as clean white money.

2. What are the common methods to launder money?

Answer:

There are different types of laundering money. Some of them are: smurfing (smuggling), using mules, shell companies, trading commodities (usually illegal goods), investments in real estate, counterfeiting and gambling. Nowadays, digital money laundering has been on the rise.

3. What is wash wash scam?

Answer:

The wash wash scam is a technique used by fraudsters who influence target people by promising them huge amount of money in exchange of actually cleaning dirty cash. The target people are provided with fake banknotes which are being dyed to be real. These type of scam is commonly known as black money or dollar scam. The targeted individuals are always financially weak people.

4. When can one identify money laundering easily?

Answer:

During the placement stage, the laundering can be identified as huge sum of money entering into the financial system may raise eyes of many officials.

5. In Anti-Money Laundering, what is termed as dirty money?

Answer:

In AML regulations, “dirty” money is called to those money which are obtained from illicit activities and is laundered concealing its true source. The activities involved in dirty money are sex trafficking, drug smuggling, terrorist activities and other illegal means.

6. Why is money laundering illegal?

Answer:

Money laundering is illegal as it facilitates the concealment of criminal proceeds, allowing individuals to enjoy the benefits of their illicit activities while undermining the integrity of financial systems.