Money laundering is the illicit technique of making massive amounts of money obtained via criminal activities. Activities like drug trafficking or terrorist financing, appear to have originated from a legitimate source.
This is seen as a serious financial crime, so, this article will explain everything you should know about money laundering. Also, financing terrorism, and the laws put in place to combat these issues. Read on to find out more about it.
What is Money Laundering?
The goal of most criminal acts is to generate a profit for the individual or group that carries out the act.
Money laundering is the processing of these criminal proceeds to disguise their illegal origin.
This process is of critical importance, as it enables the criminal to enjoy these profits without jeopardizing their source.
Illegal arms sales, smuggling, and the activities of organized crime can generate huge amounts of proceeds.
Check out How Criminals Launder Money
Money Laundering Process
A common method of “washing” money is funneling it through restaurants or businesses that have a lot of cash transactions.
The money laundering process usually goes something like the following:
1. Initial placement
A criminal or criminal organization owns a legitimate restaurant business. Money got from illegal activities is gradually deposited into a bank through the restaurant.
The restaurant reports daily cash sales much higher than what it actually takes in.
Say, for example, that the restaurant takes in $2,000 in cash in one day.
The money is now deposited in the restaurant’s legitimate bank account and appears as ordinary deposits of restaurant business proceeds.
2. Layering the money
To deal with tax issues and further disguise the criminal source of the extra deposited funds, guess what? The restaurant may invest the money in another legitimate business, such as real estate.
Things are further obscured from the authorities by using shell companies or holding companies that control several business enterprises that the laundered money may be funneled through. The “layering” often involves passing the money through multiple transactions, accounts, and companies.
It may pass through a casino to be disguised as gambling winnings,.
Go through one or more foreign currency exchanges, be invested in the financial markets, and ultimately be transferred to accounts in offshore tax havens where banking transactions are subject to much less scrutiny and regulation.
The multiple pass-throughs from one account, or one enterprise, to another make it increasingly difficult for the money to be tracked and tied back to its original illegal source.
3. Final integration
In the final phase of money laundering-integration-the, money is placed into legitimate business or personal investments. It may be used to purchase high-end luxury goods, such as jewelry or automobiles.
It may even be used to create yet another business entity through which future amounts of illegal cash will be laundered.
At this stage, the money has, ideally, been sufficiently laundered so that the criminal or criminal enterprise can use it freely without resorting to any criminal tactics.
The money is typically then either legitimately invested or exchanged for expensive assets such as property.
Variants of Money Laundering
One common form of money laundering is called smurfing (also known as “structuring”). This is where the criminal breaks up large chunks of cash into multiple small deposits, often spreading them over many different accounts, to avoid detection.
Money laundering can also be accomplished through the use of currency exchanges, wire transfers, and “mules”-cash smugglers, who sneak large amounts of cash across borders and deposit them in foreign accounts, where money-laundering enforcement is less strict.
Different Methods of Money Laundering
Money laundering can take several forms, although most methodologies can be categorized into one of a few types. These include “bank methods, smurfing [also known as structuring], currency exchanges, and double-invoicing”.
1. Structuring:
Often known as smurfing, is a method of placement whereby cash is broken into smaller deposits of money, used to defeat suspicion of money laundering and to avoid 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.
2. Bulk Cash Smuggling:
This involves physically smuggling cash to another jurisdiction and depositing it in a financial institution, such as an offshore bank, that offers greater bank secrecy or less rigorous money laundering enforcement.
3. Cash-intensive Businesses:
In this method, a business is typically expected to receive a large proportion of its revenue as cash uses its accounts to deposit criminally derived cash.
This method of money laundering often causes organized crime and corporate crime to overlap. Such enterprises often operate openly and in doing so generate cash revenue from incidental legitimate business in addition to the illicit cash.
4. Trade-based Laundering:
This method is one of the newest and most complex forms of money laundering. This involves under- or over-valuing invoices to disguise the movement of money.
5. 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.
Read Also What the Government Knows About Laundering
Influence of Money Laundering on Economic Development
Launderers are continuously looking for new routes for laundering their funds.
Economies with growing or developing financial centers, but inadequate controls are vulnerable as established financial center countries implement comprehensive anti-money laundering regimes.
Launderers, who tend to move their networks to countries and financial systems with weak or ineffective countermeasures will exploit differences between national anti-money laundering systems.
Some might argue that developing economies cannot afford to be too selective about the sources of capital they attract. But postponing action is dangerous. The more it is deferred, the more entrenched organized crime can become.
Fighting money laundering and terrorist financing is, therefore, a part of creating a business-friendly environment which is a precondition for lasting economic development.
What is Terrorist Financing?
The offense of terrorist financing involves the provision, collection, or receipt of funds with the intent or knowledge that the funds will be used to carry out an act of terrorism or any act intended to cause death or serious bodily injury.
It also includes collecting or receiving funds intending that they be used or knowing that they will be used for the benefit of a terrorist group.
Learn more about the Difference Between Money Laundering & Terrorist Financing?
Anti-Money Laundering and Anti-Terrorism Financing laws important?
Money laundering and Terrorist Financing diverts resources away from economically and socially productive uses and can negatively affect a country’s financial system by undermining its stability.
Weak Anti Money Laundering (AML) and Countering the Financial of Terrorism (CFT) controls will also have reputational consequences for a country’s financial system.
It is important that a country is seen as having a robust AML regulatory framework with financial firms effectively implementing AML systems and controls as it dissuades criminals from targeting that financial system.