Around $300 billion worth of money is laundered every year in the US and more than £100 billion in the UK. This is an alarming fact for high-risk industries, such as real estate, banking, financial institutions, currency exchange companies, payment processing companies, and so on.
The first step toward curbing money laundering practices is to educate yourself and your staff about it and understand its sources and channels.
This article walks you through the nitty gritty of money laundering and walks you through some examples to understand it better and prepare against it.
What Is Money Laundering?
Cybercriminals are always lurking over the internet to illegally obtain money and use it for drug trafficking, dealing illegal arms, smuggling, and a bunch of other terrorist activities. Money laundering is when criminals meticulously hide the illegal sources of their income and make their business transactions appear ‘legitimate.’
The real goal of money laundering is to cover one’s tracks and make the proceeds—cash, investments, or luxury items—appear to have come from a legal source.
Impact Of Money Laundering
Major money laundering activities can have a huge impact on economies if not controlled. Globally, the total amount of money laundered accounts for 2-5% of the GDP. As a result, it slows down the economic growth of a country and promotes crime and corruption.
Organizations employ Anti-Money Laundering (AML) practices to ensure their financial safety, and various countries have set regulations to help businesses comply with the best practices.
You’ll find plenty of resources explaining AML regulations—however, you can click here to learn more about the risks and requirements of AML in the banking sector and how you can boost your banking AML.
Importance Of AML Regulations
- It helps you stay compliant with AML regulations set by your country
- It protects your customers’ and employees’ personal information
- Adhering to AML regulations helps you strengthen your business reputation and build a good rapport with your customers and stakeholders
- It saves you from incurring losses and controls the flow of dirty money in your system
How Does Money Laundering Work
The first step in the money laundering process involves putting the money into an account that can’t be traced back to its original owner. Then, criminals find a way to move that money around and make it look like legitimate income or investments.
All in all, launderers follow a strategic and well-planned process to launder large bucks into their accounts. The best way to enforce protection against money laundering is to understand how a launderer’s mind works and what their typical laundering process looks like.
This helps you stay one step ahead in planning the best strategy to prevent unforeseen criminal activities and strengthen your resources.
Stages Of Money Laundering
Stage 1: Placement
In this stage, the launderer places funds into an account they control. These accounts can be held in various ways:
- Banks
- Credit unions
- Money service businesses
The purpose of placing these funds into an account is to make it appear legitimate and not connected with criminal activity.
Stage 2: Layering
This involves moving money from one financial institution to another, from one country to another, and from one person to another. Basically, the launderer establishes two different sets of accounts and moves funds through different types of transactions.
For example, say a launderer wants to move $100 million in cash across borders without it being identified as part of a criminal enterprise or terrorist organization.
They may do this by moving the cash through several different banks or currency exchanges in each country, where it is deposited before it reaches its final destination.
Stage 3: Integration
The final step is where launderers deposit their dirty money into a legitimate bank account. Since their transactions seem all legitimate to their banks, it allows them to move on with their life without much worry.
To make the process even more smooth, launderers use shell companies instead of their own name and use accounts at multiple banks (or even offshore). In some cases, this could mean opening multiple accounts in different countries, making them harder to track down by authorities.
Once deposited into these accounts, they can then be invested or used for other purposes—like buying real estate or businesses overseas through shell companies—until they’ve been completely cleansed of all traces of criminal activity associated with them (i.e., “cleaned”).
Examples Of Money Laundering
Money launderers are always on the lookout to come up with strategies and ways to break into a system and disrupt their cash flow. Although there can be multiple ways to launder dirty money, the following are some common examples that are quite prominent today.
Purchase Of Assets Or Real Estate
Real estate is one of the most popular ways to launder money and is also one of the easiest. Buying real estate involves cash transactions that are difficult for authorities to track.
For example, criminals buy a house for $200,000 in cash and then sell it for $300,000 five years later—that’s a $100,000 profit. They make such schemes work by using shell companies or offshore accounts as their frontmen (the people who actually purchase their property).
One Currency To Another
Launderers who have, say, USD 10 million cash and want to launder $5 million worth of drugs usually convert their cash. To get through without being detected by law enforcement agencies around the world, they convert some of that money into euros or yen before moving on with their plan.
Smurfing
Smurfing is a form of money laundering where launderers take big amounts of cash and break them down into smaller amounts. Drug dealers often use it and other criminals to hide their profits from authorities.
Smurfing involves using one or more banks to deposit large sums of money into their account at regular intervals. Then, they withdraw those deposits over time without ever touching the original amount (or having any physical evidence that it was deposited).
This way, law enforcement can’t track where the money came from—unless they happen to check every single transaction made by each bank account holder over an extended period of time.
Shell Companies
Shell companies are a way to hide the true owner of assets. They can be used for money laundering, tax evasion, and terrorism financing.
How Do Shell Companies Work?
Shell companies are created when an individual or group sets up a company without having any real business activities or operations in it.
This is done by filing paperwork with government agencies that allow them to be listed on public records as if they were real businesses, even though they’re not actually doing anything.
Fake Loans
A loan is a promise to pay back the money, usually with interest. The borrower makes the promise to pay back a sum of money in the future.
Launderers usually hack into someone’s profile, trace their IP addresses, steal their identity and credentials, and pose as them to apply for loans. Since all these activities happen right under the original account owner’s nose, they only realize the wrongdoings once they’re notified of a big transaction.
Casino Gambling
Gambling is a prominent way to launder money as they have no reason to suspect or investigate suspicious activity. Casinos are required by law to report any suspicious transactions they encounter (which is why casinos keep records).
False Import And Export Invoicing
This involves importing and exporting consumables (for example, food, toiletries, etc.) on an invoice that does not reflect the actual cost or value of the item being sold.
It instead reflects a “true” rate on another invoice or similar document for a customer at a higher price than retail owners actually purchased them for.
Front Businesses
A front business is a kind of illegal business owned by one person but is used to launder money and hide the true owner. This can be done by using a complex network of shell companies and banks to move money around the world.
A bank account at a major international bank might be used to launder funds from illegal activities such as drug trafficking or financial fraud.
Money Laundering Is A Serious Problem
Money laundering is a risk to society, national security, and peace and stability.
Your knowledge of money laundering and AML regulations will allow you to strengthen your company’s financial security and meet legal obligations set by your government.
Closely monitor various transactional touchpoints in your organization, report any suspicious behavior and take prompt actions to nip an issue in the bud.
After all, it’s better to be safe than sorry.
