Money Laundering
Money laundering is the process of disguising the origins of illegally obtained funds and making it appear as though it comes from legitimate sources. For example, laundering money made from drug trafficking and making it appear as regular business income. Money laundering is typically performed by moving the funds around between different accounts, businesses, and jurisdictions so that their origin is very difficult to trace. However, governments in most jurisdictions have implemented Anti-Money Laundering (AML) controls and practices to better fight such practices.
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Examples
Imagine you are an investigator tracking a suspected case of money laundering. You uncover a criminal operation where illicit drug money is being laundered through a chain of luxury car dealerships. The process of money laundering can be broken down into the following 3 stages:
Placement: The criminals deposit large sums of cash from illegal drug sales into the car dealership, making it appear as though the money comes from car sales.
Layering: The dealership then sells luxury cars to fake buyers, later exporting them to foreign markets where they are resold. The funds from these transactions are transferred through offshore bank accounts and shell companies, making it difficult to easily track where the money came from.
Integration: Finally, the laundered money is reintroduced into the economy through real estate purchases and high-end investments, appearing as legally earned income.
FAQ
What are the most common methods of money laundering?
Common money laundering methods include structuring (breaking large sums into smaller deposits to avoid detection), trade-based laundering (using inflated invoices or fake transactions), shell companies (businesses that exist only to move illicit funds), money mules (people with clean financial histories launder the money for criminals), gambling schemes (presenting illicit funds as gambling winnings), and real estate laundering (purchasing properties with dirty money and reselling them).
How do banks detect money laundering?
Banks prevent money laundering on two fronts. First, when someone is opening an account, the bank performs KYC/KYB to verify the identity of the person, their source of funds and wealth, and perform background checks. Secondly, once someone has an account, the bank performs transaction monitoring to spot and report any suspicious transactions or behaviours.
What are the consequences of money laundering?
The consequences of money laundering include severe legal penalties, asset seizures, and hefty fines. Additionally, businesses involved in money laundering, whether knowingly or unknowingly, may suffer reputational damage, regulatory sanctions, and loss of consumer trust.
