We look into the practice of money laundering - what it is, how it's done, and what are the consequences for money launderers and those who enable them.
Ucha Vekua, August 26th, 2021
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Large and organised criminal enterprises, or individuals who are massively involved in financial crime, face a major problem - they end up with huge amounts of cash, which they need to hide in order to avoid investigations by legal authorities. To deal with this problem, they create ways to conceal money obtained from illegal activities and get it back in a ‘clean’ way.
This is called Money Laundering - the process of making the proceeds of crime appear legitimate.
In this article, we’ll tell you more about the money laundering process in general and dive deep into this topic to discuss the primary reasons people launder money, how it works, and look at some real-life examples.
The illegal process of ‘cleaning’ large amounts of money made as a result of criminal activity is called money laundering. This activity can be something like drug trafficking, or funding terrorism. Essentially, money obtained from criminal activity is considered dirty, and the money launderers are those who try to make it look clean - knowingly or unknowingly.
Money laundering is a serious financial crime and most companies in this field have Anti-Money Laundering (AML) policies to prevent it. It can have huge effects on various industries such as banking or financial services. No one knows the total amount of money laundered yearly, but various organisations have estimated it to be in the hundreds of billions of dollars.
People have been finding ways to launder money ever since it became a necessity. With the help of money laundering, criminals make sure that crime pays.
The idea is simple - money launderers are given money with criminal origins. They need to use any way possible to make it seem legitimate and within the legal economy. When it comes to big finance, criminals usually have one of three things in mind: investing, hiding, or using it immediately. And from an investigator's perspective, they need to follow the money to understand its origins. That's why criminals want to move it further and faster so that it can’t be followed. This is the main reason why money laundering takes place.
Most money laundering strategies and techniques share three basic steps. These are Placement, Layering, and Integration. Each one of these steps can be extremely complex and complicated because of the activity involved. Let's break them down:
Money Laundering is the process of making crime proceeds legitimate. Different methods and techniques have been developing throughout the centuries to achieve this process successfully. All three steps - placing, layering, and integration have continued to adapt to evolving defences.
The classical process of money laundering can include:
Additionally, criminals are now using advanced technologies to accomplish their goals and launder money online. Methods change, but the process always stays the same.
There are several techniques and methods that are commonly used to launder significant amounts of money. Of course, it requires a lot of effort, observation, and attention to detail because more and more solutions are being implemented to forbid such activities. However, classical techniques still work on a large scale. These can include:
As we mentioned previously, there are various methods to make dirty money seem clean. In almost every case, you can see the similar steps that money launderers take to make this happen. The structure and length of these procedures often depend on the specific case.
Government officials and financial institutions have been observing these kinds of actions closely to showcase and detect money laundering activities. Here are the most common types of money laundering which have been encountered:
This is money laundering that works on a global scale. The team required for this consists of a group of people based in different parts of the world and a centralised money manager who drives all the transactions. They can receive, hand over, and transfer criminal requests for a specified fee. This process is easy to understand but hard to execute - the basic idea is to have a distributed network. The owner of the ‘dirty’ money contacts the manager and explains how much money he needs to be laundered.
Professional Money Launderers use Proxy networks. This group of people supply a type of banking service to the criminal group. The core objective is to move a client’s money to the final destination through complicated financial transactions. It can be extremely hard to achieve this, which is why they tend to use multiple shell companies to achieve this. The only goal of these companies is to redistribute and mix funds from various sources.
Before the digital era, it was hard to move funds from one place to another - there was always a risk that people would disappear with the money. It’s now much simpler to send money over a long distance thanks to technology. Professional money launderers have grabbed this opportunity to take their operations online, bringing a whole set of new risks to their lives, as it’s easier for financial institutions and banks to monitor online transactions and notice suspicious activities. This is why operations like the Dark Web launched to make it harder for officials to track transactions.
This is the most modern type of money laundering. Cryptocurrency, as a definition, is a decentralized type of virtual money. It is becoming widely accepted in many places worldwide, increasing the threat of money laundering. It is hard to control the origin or destination of funds due to the high-level encryption implemented in the system. This motivates professional money launderers to exploit every opportunity to use them, and there are lots of real-life examples of this.
As we already saw from our examples above, it is very common to launder money to obscure funds generated by illegal activity. There is a whole list of use cases where individuals apply the most common techniques and methods, and launder money successfully. The most common industries for those activities are drug trafficking, embezzlement, arms trafficking, and more.
Usually, money laundering cases hardly ever make it to the national headlines. Even though there are lots of operations happening every year, the general public still doesn’t hear much about it. However, a search on any news site will hand you a myriad of interesting stories, such as the case of a Nigerian influencer who admitted money laundering earlier this year, the UK’s FCA taking action against NatWest for failures in their prevention of money laundering, and the incredible story of OneCoin, which became an enthralling podcast series.
Effective money laundering schemes can have social, political, and economic consequences. It has negative effects on businesses and societies. Depending on the scale of crime, it can destroy the economy, weaken the banking sector, and erode trust in new technologies like cryptocurrency. This is why government sectors and relevant institutions should use every method to prevent these kinds of activities. Beyond this, private businesses have also been seriously harmed by money laundering operations.
It is essential to understand all the consequences of these processes in both governmental and private fields. It affects the country's economy and social well-being. Money Laundering activities undermine the legitimate private sectors, causing economic distortion and instability, and help companies face the loss of revenue and reputation.
The United States Act of Congress came up with the Money Laundering Control Act of 1986, which made money laundering a federal crime - it was the first time money laundering was truly criminalized. The act consists of two main sections - the first prohibits individuals from engaging in any kind of transaction generated from a specific crime. The law also requires people to understand the source and confirm ownership or control of the funds. The second section prohibits individuals from spending more than $10,000 derived from specified unlawful activities. This carries more minor penalties than money laundering.
Different countries have different measures to tackle money laundering. As we saw, it can have many negative effects on a country's economy, and social well-being. So, governments should look to fit their punishment to the crime. For example, in the UK, individuals can face a jail sentence of up to 14 years, or a large fine. It can also depend on the amount of money involved. In the United States, a person can get a sentence of 20 years in prison and fines of up to $500,000 or twice the value of the property involved in this operation.
In the United States, money laundering was not officially recognized as a federal crime until 1986. Before that, the government needed to prosecute a related crime depending on each case. In that year, the Money Laundering Control Act came into force and then they could confiscate wealth by demonstrating that concealment had occurred. It had some positive effects on preventing major criminals from activities like drug trafficking.
It is important to fully understand the money laundering process and find the best methods of prevention, to fight potential damage to governments, financial institutions and wider society. Fortunately, most countries have a set of laws, policies, and regulations that financial institutions, and companies involved in money handling, can use to monitor their clients actively and prevent financial crime. They do it with the help of Anti-Money Laundering (AML) regulations, which target a wide range of activities.
Various companies, banks, and financial institutions implement anti-money laundering compliance programs to avoid risks and do their job in the safest way possible. The starting point of this compliance in the digital world is online identity verification. It is crucial to run AML checks when welcoming a new client because companies are responsible for doing everything to discover money laundering tactics and report them properly. That’s why it is essential to choose the right solution to help your company achieve this.
Here at Veriff, we work hard to build trust online and make the digital world safer with the tools we are building daily. Have a look at our AML & KYC Compliance Solution that can help your team prevent suspicious activities, fight fraud effectively, and stop money laundering before it happens.