What is Money Laundering?
Money laundering is the process of hiding the source of money that comes from criminal activity, usually by passing it through a legitimate business or financial institution.
Money laundering is illegal and plays a crucial role in criminal organizations. “Dirty money” is cash that comes from illicit activities, such as drug trafficking. Criminals use different money laundering techniques to hide where this money came from — laundering it to make it “clean.” By finding a way to run the money through legitimate businesses and deposit this money into legitimate financial institutions, criminals can make it appear that these funds come from legitimate sources. After the money has been laundered, the criminal can then use the funds for any purpose.
Did you watch ‘Breaking Bad’? If so, you know that Water White — former high school science teacher turned meth kingpin — made dirty money by selling meth. He then ran that money through legitimate-looking, all-cash businesses (such as nail salons and a car wash) to clean it and show a purportedly legal source for the funds. That process was a classic example of money laundering.
Money laundering is like a washing machine...
Criminals take “dirty money” and launder it so that it comes out clean and usable, free from suspicion. The washing machine is usually a legal business or financial institution that can hide where the money actually came from. Once the funds pass through the washing machine, it is part of the legitimate financial system.
Money laundering is a process that generally goes through these three sequential stages: 1. Placement 2. Layering 3. Integration
It can also involve more steps, depending on the scheme. The ultimate goal is to disassociate the funds from illegal activity, such as drug trafficking or organized crime, so that you can spend it freely.
Placement is where criminals take the proceeds of crime and introduce them into the legitimate financial system.
One method of placement is using a legitimate cash-based business, such as a laundromat. Criminals blend dirty money with the laundromat’s real business sales. They may also include fake invoices and receipts to give the illusion of more sales. Money launderers deposit all the funds together into the business’s bank account.
“Smurfing” or “structuring” is another placement method. U.S. banks are required to report any transaction over $10,000. With this method, the criminal hires “smurfs” to deposit small amounts of dirty money to different banks, under the $10,000 threshold.
Layering is where the criminals try to hide and obscure the origin of the money. They move their money around through multiple transactions. For example, they may take the funds from the bank to buy tradable property, such as expensive artwork, gold bonds, fancy cars, or real estate. Another option is to invest in a legal business. Some criminals layer by transferring the funds in and out of several different bank accounts and across several countries.
The integration stage is the time to “collect the laundry.” This last step is to return the money to the original criminal or his associates so that they can spend the clean cash. This might mean selling the tradable property that was purchased in the layering stage. If the criminal invested in a business, this might mean a steady stream of income in the form of profit or a generous salary.
Now, the criminal can reintroduce this money back into the mainstream economy and spend the clean cash without anyone asking questions.
Let’s say you’ve decided to pursue a life of crime. You suddenly have $1M in cash. This dirty money is too dangerous to spend openly without getting caught.
Step 1: Placement You walk into a casino with cash and buy chips. You play for a while and put down a few small bets. Then, you cash in your chips and take payment in the form of a check. Now, you can deposit the check into a bank as gambling winnings.
Step 2: Layering You take the money from your bank account to buy and sell expensive, exotic cars.
Step 3: Integration You sell your cars and keep the clean cash. Your money is no longer dirty because it comes back to you through a legal transaction — the sale of your vehicles.
The rise of technology and the Internet have created a different type of money laundering. Money can change hands instantly through peer-to-peer (P2P) transfers on mobile phones and online payment services. The rise of virtual private networks (VPNs) can also hide your IP address or even make it seem like you are in a different country. These tools can make your transactions appear anonymous.
Technology has made it much more challenging to follow a money trail. Newer money laundering techniques involve cryptocurrencies (digital currencies that operate outside a central bank). Virtual currencies, such as Bitcoin, have greater anonymity than traditional currency, which makes illegal transactions harder to track.
Since cryptocurrencies are digital, it’s easier to take funds from multiple people, mix them up, and then redistribute the cryptocurrency to each person. The purpose is to mix potentially identifiable funds — like dirty money — with others to obscure the money’s original source. These services are known as cryptocurrency mixers.
Both the proceeds of a crime and the act of laundering money are illegal. Money laundering is a white-collar crime. Generally, the maximum sentence for money laundering is 20 years in prison and a fine.
Money laundering is against the law because it allows criminals to profit from illegal activities. The cash that is laundered came from a crime. So, the money was illegally obtained.
Another concern is that the money that has been laundered may also be used to fund additional criminal activity. Prosecuting money laundering can cut off the funding and resources used to perpetrate more crimes. Terrorist groups often are funded through money laundering.
Overall, by making money laundering illegal, the government can help take the profit out of crime and potentially catch more criminals by following the dirty money.
Federal laws, anti-money laundering organizations, and anti-money laundering software are a few ways that money laundering can be detected and prevented.
The first money laundering law was the Bank Secrecy Act of 1970. This established record keeping and reporting requirements to help identify a paper trail for all illicit funds. This act also required banks to report cash transactions over $10,000 to prevent large deposits from questionable sources.
Money laundering didn’t become a federal crime until 1986. The Money Laundering Control Act of 1986 allowed the government to prosecute money laundering as a federal crime so long as it could prove that the offender tried to conceal the origin of the money.
Since the first stage of money laundering is to deposit cash into banks, banking agencies began implementing stricter anti-money laundering procedures. For example, the Annunzio-Wylie Anti-Money Laundering Act of 1992 required banks to verify and keep records for all wire transfers. Just two years later, the Money Laundering Suppression Act required all banking agencies to develop anti-money laundering examination procedures. These anti-laundering program requirements were later expanded to include more financial institutions, such as businesses.
Today, several law enforcement agencies help prevent money laundering. As of November 2019, the Financial Action Task Force (FATF) is an intergovernmental agency with 39 global members. Its mission is to combat money laundering and terrorist financing.
The Financial Crimes Enforcement Network (FinCEN) is a government bureau that prevents and prosecutes financial crimes, including money laundering. Under FinCEN, the Bank Secrecy Act Advisory Group (BSAAG) advises the Treasury on how to operate under the Bank Secrecy Act of 1970.
Finally, the High Intensity Money Laundering and Related Financial Crime Area (HIFCA) Task Forces concentrate law enforcement in local zones where money laundering is most common.
To help comply with the Financial Industry Regulatory Authority’s (FINRA) Anti-Money Laundering (AML) Compliance Program, many financial institutions have adopted AML software. This software platform generates vast amounts of data related to a firm’s customers and financial transactions.
AML software can analyze a firm’s data to help monitor and flag potential money laundering activities. If something is detected, the firm can then file a Suspicious Activity Report with the Financial Crimes Enforcement Network (FinCEN) on the AML software platform.
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