What Is Money Laundering?
Money laundering is an illegal activity that makes large amounts of money generated by criminal activity, such as drug trafficking or terrorist funding, appear to have come from a legitimate source. The money from the criminal activity is considered dirty, and the process “launders” it to look clean. Financial institutions employ anti-money laundering (AML) policies to detect and prevent this activity.
Key Takeaways
- Money laundering disguises financial assets without detecting the illegal activity that produced them.
- Online banking and cryptocurrencies have made it easier for criminals to transfer and withdraw money without detection.
- The prevention of money laundering has become an international effort that includes terrorist funding among its targets.
- The financial industry also has its own set of strict anti-money laundering (AML) measures in place.
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How Money Laundering Works
Money laundering is essential for criminal organizations that useillegally obtained money. Criminals deposit money in legitimate financial institutions to appear as if it comes from legitimate sources. Laundering money typically involves three steps although some stages may be combined or repeated.
- Placement: Injects the “dirty money” into the legitimate financial system.
- Layering: Conceals the source of the money through a series of transactions and bookkeeping tricks.
- Integration: Laundered money is disbursed from the legitimate account.
The Bank Secrecy Act (BSA) requires financial institutions to keep records of cash purchases of negotiable instruments, file reports of cash transactions exceeding $10,000, and report suspicious activity that might signal money laundering.
Types of Transactions
- Structuring or Smurfing: Large allotments of illegally obtained cash are divided into multiple small deposits and spread over many different accounts
- “Mules” or cash smugglers: Cash is smuggled across borders and deposited into foreign accounts
- Investing in commodities: Using gems and gold that can be moved easily to other jurisdictions
- Buying and Selling: Using cash for quick turnaround investment in assets such as real estate, cars, and boats
- Gambling: Using casino transactions to launder money
- Shell companies: Establishing inactive companies or corporations that exist on paper only
Electronic Money Laundering
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 increasingly difficult. Proxy servers and anonymous software make the third component of money laundering, integration, difficult to detect as money can be transferred or withdrawn with little or no trace of an Internet protocol (IP) address.
Money 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.
Money laundering may involve cryptocurrencies, such as Bitcoin. While not completely anonymous, they can be used in blackmail schemes, the drug trade, and other criminal activities due to their relative anonymity compared with fiat currency.
AML laws have been slow to catch up to cybercrime since most laws are still based on detecting dirty money as it passes through traditional banking institutions and channels.
Prevention
According to the United Nations Office on Drugs and Crime, global money-laundering transactions account for roughly $800 billion to $2 trillion annually, or 2% to 5% of global gross domestic product (GDP).In 1989, the Group of Seven (G-7) formed an international committee called the Financial Action Task Force (FATF) to fight money laundering on an international scale. In the early 2000s, its purview was expanded to include terrorist activity.
The United States passed the Bank Secrecy Act in 1970, requiring financial institutions to report cash transactions above $10,000 or unusual activity on a suspicious activity report (SAR) to the Department of the Treasury. This information is used by the Financial Crimes Enforcement Network (FinCEN) to be shared with domestic criminal investigators, international bodies, or foreign financial intelligence units.
Money laundering was deemed illegal in the United States in 1986, with the passage of the Money Laundering Control Act. After Sept. 11, 2001, the USA Patriot Act expanded money laundering efforts. The Association of Certified Anti-Money Laundering Specialists (ACAMS) offers a professional designation known as a Certified Anti-Money Laundering Specialist (CAMS). These individuals work as brokerage compliance managers, Bank Secrecy Act officers, financial intelligence unit managers, surveillance analysts, and financial crimes investigative analysts.
What Is an Example of Money Laundering?
Cash earned illegally from selling drugs may be laundered through highly cash-intensive businesses such as a laundromat or restaurant where the illegal cash is mingled with business cash before deposit. These types of businesses are often referred to as “fronts.”
What Are Signs of Money Laundering?
Money laundering red flags include suspicious or secretive behavior by an individual around money matters, making large transactions with cash, owning a company that seems to serve no real purpose, conducting overly complex transactions, or making several transactions just under the reporting threshold.
How Is Real Estate Used for Money Laundering?
Criminals use real estate transactions, including undervaluation or overvaluation of properties, buying and selling properties rapidly, using third parties or companies that distance the transaction from the criminal source of funds, and private sales.
How Are Cryptocurrencies Used in Money Laundering?
The U.S. Financial Crimes Enforcement Network (FinCEN) noted in a June 2021 report that convertible virtual currencies (CVCs), or cryptocurrencies, are a currency of choice in various online illicit activities. CVCs can layer transactions and obfuscate the origin of money derived from criminal activity. Criminals use several 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.
The Bottom Line
Money laundering disguises illegally obtained financial assets.Global governments and financial institutions have anti-money laundering measures in place. Online activity and digital assets have added to money laundering transactions.
