Money laundering is a serious financial crime used by both white-collar criminals and street criminals. Today, most financial firms have anti-money laundering (AML) policies in place to detect and prevent this type of activity.
Main points
Money laundering is the illegal process of making "dirty" money appear legitimate rather than illegally obtained.
Criminals use a variety of money laundering techniques to make illegally obtained funds appear clean.
Online banking and cryptocurrencies make it easier for criminals to move and withdraw funds without detection.
Preventing money laundering has become an international effort that now includes terrorist financing as one of its goals.
The financial industry also has its own set of strict anti-money laundering (AML) measures.
How is money laundering performed?
Money laundering is critical for criminal organizations that wish to use illegally obtained funds efficiently. Handling large amounts of illicit cash is inefficient and dangerous. Criminals need a way to deposit funds into legitimate financial institutions, but they can only do so if the funds appear to have come from a legitimate source.
The money laundering process typically involves three steps: placement, layering and integration.
Placement: Secretly injecting "dirty money" into the legitimate financial system.
Layering: Concealing the source of funds through a series of trading and accounting techniques.
Consolidation: This is the final step where the laundered money is withdrawn from legitimate accounts and used for whatever purpose the criminals want.
Please note that in real life this template may differ. Money laundering may not involve all three stages, or some stages may be combined or repeated multiple times.
There are many ways to launder money, from the simple to the very sophisticated. One of the most common techniques is the use of legitimate, cash-based businesses owned by criminal organizations. For example, if the organization owns a restaurant, it may inflate daily cash receipts and move illegal cash through the restaurant into the restaurant's bank account. Afterwards, funds can be withdrawn as needed. These types of businesses are often called "frontiers."
What is money laundering? How does it work behind the scenes?
money laundering variations
Other methods of money laundering include:
Invest in commodities such as gemstones and gold that can be easily transferred to other jurisdictions;
Carefully invest and sell valuable assets such as real estate, cars, and boats;
Gambling and money laundering in casinos;
The counterfeiting and use of shell companies (companies that are inactive or that exist essentially only on paper).
What is electronic money laundering?
The Internet has given a new dimension to an age-old crime. The rise of online banking institutions, anonymous online payment services, and mobile peer-to-peer (P2P) transfers has made it more difficult to detect illicit fund transfers. Additionally, the use of proxy servers and anonymizing software makes the third component of money laundering - consolidation - nearly impossible to detect - funds can be transferred or withdrawn with little or no Internet Protocol (IP) address .
Money laundering can also occur through online auctions and sales, gambling sites, and virtual gaming sites, where ill-gotten gains are converted into gaming currency and then back into real, usable, untraceable “clean” currency.
The latest frontier in money laundering involves cryptocurrencies such as Bitcoin. While not completely anonymous, they are relatively anonymous compared to traditional currencies and are therefore increasingly used for extortion, drug dealing and other criminal activities.
How are cryptocurrencies used for money laundering?
The U.S. Financial Crimes Enforcement Network (FinCEN) noted in a June 2021 report that convertible virtual currencies (CVCs), another term for cryptocurrencies, have become the currency of choice for a variety of illegal activities online. Not only is CVC the preferred payment method for purchasing ransomware tools and services, online exploitation materials, drugs, and other illicit goods online, it is increasingly used to layer transactions and obfuscate the source of funds for criminal activity. Criminals use a variety of money laundering techniques involving cryptocurrencies, including "mixers" and "tumblers," which disrupt the connection between the address (or crypto "wallet") sending cryptocurrency and the address receiving it.
What is money laundering? How does it work behind the scenes?
Why is fighting money laundering important?
Anti-Money Laundering (AML) aims to deprive criminals of the profits they make from illegal enterprises, thereby removing their primary motivation for engaging in such nefarious activities. Illegal and dangerous activities such as drug trafficking, human smuggling, terrorism financing, smuggling, extortion and fraud harm millions of people around the world and impose huge social and economic costs on society. Since the proceeds of such activities are legitimized through money laundering, combating money laundering may lead to significant benefits to society by reducing criminal activity.
