Money laundering is a very serious criminal activity.
Most people have heard of the term money laundering, but many would need a dictionary (or Wikipedia) to actually tell you what it meant.
Relative to how severe a crime it is, money laundering isn’t really that complicated, and is much more prevalent than you might think.
What Money Laundering Is
A criminal has just ‘inherited’ a large amount of money illegally. Simply depositing it into a personal or business account of his will assuredly raise suspicion at his bank. So would not claiming it on his taxes, something that might be difficult to explain to the authorities.
So, what does that criminal do with his dirty money? Clean it, of course.
Simply, money laundering is taking illegally-obtained money and making it look like it was earned legally instead.
This is done by criminals through certain kinds of transactions, investments in assets, and other moves that hide the original source of the funds.
The end result is money that ‘looks’ legal and is able to be used without raising the suspicion of authorities.
The term allegedly came from notorious mobster Al Capone, who liked to hide his illegal profits as legitimate income in the many laundromats he owned.
Today the term is something of an umbrella term to describe many different methods of deceiving the law about where money came from.
The recent third series of Narcos depicts wide-scale money laundering activities used by the Cali Cartel to conceal their illicit source of funds originating from drug trafficking.
Laundering is a big problem.
In the United States alone, an estimated $300 billion is laundered annually through banks and similar institutions, which accounts for 2% of the country’s entire economy.
Globally, estimates go as high as $2 trillion, or as much as 5% of the world’s GDP.
The advent of digital banking and cash management has made moving money quickly and covertly easier than ever by criminals, making laundering one of the biggest crimes of our time.
The Three Steps of Laundering
Even though the practice has been around for centuries and has gotten increasingly complex, there are still just three basic steps that criminals employ to launder money: placement, layering and integration.
Once dirty money is obtained by criminals, placement is the first step.
This involves putting the funds into a bank account registered to a business (real or otherwise) or to a middleman.
This step is where most would-be launderers get caught, as putting large amounts of money into these accounts out of nowhere generally looks suspicious if not done carefully.
Next the money needs to be layered, or exchanged through multiple transactions so that its original source can’t be traced.
There’s many ways that criminals tend to do this, including dispersing the funds to many different bank accounts or buying expensive assets like houses or cars.
Finally, the launderer seeks to get their now-clean money back through integration.
More transactions are made that re-direct the money back to the criminal. Sometimes this may take the form of a salary as head of a newly created business or nonprofit. Other times it may be invested in legitimate businesses, complete with fake invoices attempting to show the money was genuine income.
Ways Criminals Do It
While the basic three steps don’t vary that much, there’s a huge variety of ways criminals go about laundering their money.
Structuring: During the placement step, the money is broken down into several smaller deposits in order to better avoid detection.
Often this is done by way of purchasing securities like money orders that are then re-deposited again in small quantities.
Casinos and Gambling: The dirty money is converted into chips at a casino, played with for a short while, then cashed out in the form of a check.
Sometimes this is also done through fixed-odds betting terminals (FOBTs) as players play and lose a little bit, then cash out so they have a receipt to show as proof of their ‘winnings’.
Round-Tripping: Money is placed into the account of a foreign business, then received back as a tax-exempt foreign direct investment.
It can also be when two companies agree between one another to sell and then buy back an asset at the same price. Sometimes this is called a ‘lazy susan’.
Cash-Intensive Businesses: Criminal businesses that tend to receive large influxes of cash sneak in illegal money into their accounts, mixing it in with legally earned money.
Common businesses used for this method are strip clubs, casinos, and car washes (as Pacino did and also Walt and Skyler in Breaking Bad).
There are many other ways of laundering, and it’s a practice that’s constantly evolving especially as financial transactions shift to being more digitally-based.
Detection and Punishment
In most western nations, laundering money wasn’t actually a crime until the 1980s and 1990s.
Before that, governments were more likely to pin criminals with a similar crime (like tax evasion) if they were suspicious of large amounts of crime-created money being moved.
Prevention measures in many countries require all transactions over a specified amount ($10,000 in the U.S.) to be reported by banks, credit card companies, insurance companies, and similar.
Laws also require that banking institutions take actions to confirm the real identity of their customers and businesses. Should a transaction seem unordinary for that particular person, a suspicious activity report is often filed.
These reports usually go to a financial crimes agency or task force that analyzes the data to determine if investigative action should be taken.
Many anti-laundering recommendations are also put forth by the Financial Action Task Force on Money Laundering (FATF), an international organization devoted to stopping laundering.
Punishments for laundering also vary wildly by country, especially since it’s often done in conjunction with another crime (like tax evasion and whatever was done to originally obtain the dirty money).
In the United States, cases that strictly involve just laundering are punishable by a maximum of 14 years in prison.
For financial institutions, even just neglecting to report activity that might be laundering can carry up to five years.
The Future of Laundering
Some of the proclaimed benefits of cryptocurrencies like Bitcoin are that transactions are anonymous and not controlled or regulated by any central organization.
However, these strengths are also weaknesses in that criminals can more easily launder money via the digital currencies, which is why governments are working quickly to pass cryptocurrency regulation.
Many countries like China, Russia, Canada, and others have already passed or proposed anti-laundering laws pertaining to digital money.
As cryptocurrencies see an uptick in popularity and usage, it will be interesting to see how governments attempt to stop criminals from using them to launder money.
Somewhat ironically, the person who actually figures out how to do that will likely make a lot money.
The contents of this blog are provided as an information guide only and do not amount to legal advice. The blog seeks to raise awareness of, and educate the public on, money laundering issues in order to shine the spotlight on and prevent this criminal activity.