Money laundering is the act of conducting financial transactions that hide the true identity of their owner or that redirect funds from their original source. The process is done in such a way as to conceal the illegal origins of money through the use of third parties.
Needless to say, money laundering is a punishable act. It is a grave criminal offense that involves both street-level and white-collar culprits. Various financial companies have already implemented anti-money-laundering systems to detect and apprehend this particular conduct.
How Does Money Laundering Work?
Money laundering is a technique commonly used to hide the origin of illicit money and transactions by making them appear legitimate. This type of activity is illegal, largely because it allows criminals to hide and move their money around, making it very difficult to trace. Even law enforcement encounter obstacles and challenges in monitoring this scheme.
The process of money laundering involves creating a new source of funds and disguising the source by using a hidden destination. They use these funds to purchase legal goods and services. Transactions are often structured to avoid reporting requirements or to facilitate the movement of illicit money. Criminals hide their income by channeling it through shell companies, offshore bank accounts, or other entities.
Most money laundering activities follow the same procedures:
- Placement – Just as its name suggests, placement is the process of putting the “illegal money” into various legitimate financial structures.
- Layering – In this part, the money’s source is being concealed through various methods. The most popular ones are rolling the money in numerous transactions and bookkeeping strategies. In the hands of experts, these methods cannot be easily detected.
- Integration – The final procedure involves the laundered money being withdrawn from legal accounts. Criminals will be able to use this money for any purpose and activity that they want. Since the money’s source is supposedly “clean,” nobody would bat an eye on it.
Of course, the ways you can cleanse illegal money are pretty numerous. Some are simple and obvious, while others are quite intricate and subtle. The most common method is using legitimate, cash-based businesses (which are owned by a criminal group or organization). For instance, if the organization owns a grocery, it is typical that they will inflate the cash receipts of the said store on a daily basis. In this way, they can funnel the illegal money through the grocery toward their bank account. Once the money is in there, they can withdraw the funds whenever they want. Authorities call these businesses “fronts.”
Variations Of Money Laundering
There are different variants of money laundering. One of them is smurfing. Smurfing is a practice that has been around for many years. It occurs when a person who is making money through illegal means (such as selling narcotics, selling pirated software, etc.) transfers portions of the money to different accounts. In this way, nobody would suspect anything.
Criminal organizations can also accomplish money laundering through currency exchanges and wire transfers. Mules are often employed, too. These are smugglers who carry large amounts of money throughout different borders. Their goal is to deposit the ill-gotten cash in various foreign accounts. Usually, they pick countries or regions where the enforcement against money laundering is not stiff.
It is also common for money launderers to involve themselves in gold and gem investments. They can be transferred to different jurisdictions with few questions as to how they were acquired. Furthermore, criminal organizations also invest in assets such as shell companies, real estate, and even gambling.
The rise of the Internet also paves the way for new money laundering strategies. The existence of anonymous online payment platforms, online banking institutions, and peer-to-peer transfers made the process of detection even more difficult. Moreover, money launderers typically use proxy servers and anonymity tools so that their transactions will be hidden from the eyes of enforcement. They can deposit and withdraw money without any trace. Even their IP addresses can be covered.
Money laundering is also apparent in online sales, gambling, and auctions. The illegal money can just be converted into gaming currency. Of course, they will just convert it to clean money whenever they need to. The latest method money launderers use focused on cryptocurrencies. Many criminal organizations prefer them because they are more discreet than traditional fiats.