Money laundering is essential for criminal organizations that wish to use illegally obtained money effectively. Dealing in large amounts of illegal cash is inefficient and dangerous. Criminals need a way to deposit the money in legitimate financial institutions, yet they can only do so if it appears to come from legitimate.
Banks are required to report large cash transactions and other suspicious activities that might be signs of money laundering.3
The process of laundering money typically involves three steps: placement, layering, and integration.
- Placement surreptitiously injects the “dirty money” into the legitimate financial system.
- Layering conceals the source of the money through a series of transactions and bookkeeping tricks.
- In the final step, integration, the now-laundered money is withdrawn from the legitimate account to be used for whatever purposes the criminals have in mind for it.
Note that in real-life situations, this template may differ. Money laundering may not involve all three stages, or some stages could be combined or repeated several times.4
There are many ways to launder money, from the simple to the very complex. One of the most common techniques is to use a legitimate, cash-based business owned by a criminal organization. For example, if the organization owns a restaurant, it might inflate the daily cash receipts to funnel illegal cash through the restaurant and into the restaurant’s bank account. After that, the funds can be withdrawn as needed. These types of businesses are often referred to as “fronts.”
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.
Other money-laundering methods include:
- Investing in commodities such as gems and gold that can be moved easily to other jurisdictions;
- Discreetly investing in and selling valuable assets such as real estate, cars, and boats;
- Gambling and laundering money at casinos;
- Counterfeiting; and
- Using shell companies (inactive companies or corporations that essentially exist on paper only).
Electronic Money Laundering
The Internet has put a new spin on the old crime. 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 even more difficult. Moreover, the use of proxy servers and anonymizing software makes the third component of money laundering, integration, almost impossible to detect—money can be transferred or withdrawn with little or no trace of an Internet protocol (IP) address.
Money also 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.
The newest frontier of money laundering involves cryptocurrencies, such as Bitcoin. While not totally anonymous, they are increasingly being used in blackmail schemes, the drug trade, and other criminal activities due to their relative anonymity compared with more conventional forms of currency.5
AML laws have been slow to catch up to these types of cybercrimes, since most of the laws are still based on detecting dirty money as it passes through traditional banking institutions and channels.
Preventing Money Laundering
Governments around the world have stepped up their efforts to combat money laundering in recent decades, with regulations that require financial institutions to put systems in place to detect and report suspicious activity. The amount of money involved is substantial. According to the United Nations Office on Drugs and Crime, global money-laundering transactions account for roughly $800 billion to $2 trillion annually, or some 2% to 5% of global gross domestic product (GDP), although it is difficult to estimate the total amount due to the clandestine nature of money laundering.4
In 1989, the Group of Seven (G-7) formed an international committee called the Financial Action Task Force (FATF) in an attempt to fight money laundering on an international scale. In the early 2000s, its purview was expanded to combating the financing of terrorism.6
The United States passed the Bank Secrecy Act in 1970, requiring financial institutions to report certain transactions, such as cash transactions above $10,000 or any others that they deem suspicious, on a suspicious activity report (SAR) to the Department of the Treasury.13 The information that the banks provide to the Treasury Department is used by the Financial Crimes Enforcement Network (FinCEN), which can share it with domestic criminal investigators, international bodies, or foreign financial intelligence units.7
While these laws were helpful in tracking criminal activity, money laundering itself wasn’t made illegal in the United States until 1986, with the passage of the Money Laundering Control Act.8 Shortly after the Sept. 11, 2001, terrorist attacks, the USA Patriot Act expanded money-laundering efforts by allowing investigative tools designed for prevention of organized crime and drug trafficking to be used in terrorist investigations.1
The Association of Certified Anti-Money Laundering Specialists (ACAMS) offers a professional designation known as a Certified Anti-Money Laundering Specialist (CAMS). Individuals who earn CAMS certification may work as brokerage compliance managers, Bank Secrecy Act officers, financial intelligence unit managers, surveillance analysts, and financial crimes investigative analysts.9
Why is it important to combat money laundering?
Anti-money laundering (AML) seeks to deprive criminals of the profits from their illegal enterprises, thus eliminating the main motivation for them to engage in such nefarious activities. Illegal and dangerous activities, such as drug trafficking, people smuggling, terrorism funding, smuggling, extortion and fraud, endanger millions of people globally and impose tremendous social and economic costs upon society. As the proceeds of such activities are legitimized by money laundering, combating money laundering may result in a reduction in criminal activity and hence a significant benefit to society.
How are cryptocurrencies being used in money laundering?
The U.S. Financial Crimes Enforcement Network (FinCEN) noted in a June 2021 report that convertible virtual currencies (CVCs)—another term for cryptocurrencies—have grown to become the currency of choice in a wide range of online illicit activities.10 Apart from being the preferred form of payment for buying ransomware tools and services, online exploitative material, drugs, and other illegal goods online, CVCs are increasingly used to layer transactions and obfuscate the origin of money derived from criminal activity. Criminals use a number of money-laundering techniques involving cryptocurrencies, including “mixers” and “tumblers” that break the connection between an address (or crypto “wallet”) sending cryptocurrency and the address receiving it.
How is money laundering conducted in casinos?
One common form of money laundering in casinos is to buy chips from the casino with cash, and to receive checks in return for the chips from the casino, often without gambling at all or placing minimal bets.
What are some ways in which real estate is used for money laundering?
Some common methods used by criminals for money laundering through real estate transactions include undervaluation or overvaluation of properties, buying and selling properties in rapid succession, using third parties or companies that distance the transaction from the criminal source of funds, and private sales.11Learn the Basics of Trading and InvestingLooking to learn more about trading and investing? No matter your learning style, there are more than enough courses to get you started. With Udemy, you’ll be able to choose courses taught by real-world experts and learn at your own pace, with lifetime access on mobile and desktop. You’ll also be able to master the basics of day trading, option spreads, and more. Find out more about Udemy and get started today.