Criminals in the financial realm mostly generate their income from illicit activities such as drug trafficking, terrorist funding, robberies, and more. The wealth that they accumulate has to be “cleaned up” before it could be used for meeting regular expenses. This cleaning-up process brings money laundering into the picture.
Below, we will look at what money laundering is all about, and how it helps criminals in converting their illegitimate wealth into clean, non-traceable and usable currency.
What is Money Laundering?
Money laundering is the act criminals use to disguise huge amounts of illegally generated money as legitimate. The money generated using illegal methods is considered “dirty” and is thus unusable. Because of this, criminals resort to money laundering, which helps them make their money clean and usable. Let’s learn how this happens.
How does Money Laundering Work?
There are three stages of money laundering: placement, layering, and integration. By understanding what happens in each stage, you can understand how money laundering works:
1. The Placement Stage
In the placement stage, the criminals introduce their dirty money into financial systems. For instance, they might:
- Deposit money in small amounts in the bank.
- Purchase financial instruments like checks or money orders.
- Offshore the money, i.e., send it overseas. This puts a distance between the money and the criminals on paper, reducing the chances of being detected.
Often the placement is done through numerous small transactions. This helps the criminals avoid any suspicions that might arise if there’s too much cash involved in a single transaction. Although criminals don’t necessarily know which activity might get flagged, organized syndicates move with caution.
2. The Layering Stage
Layering is the second and, probably, most complex of the money laundering stages. This stage involves blending dirty money with legitimate money in numerous transactions. Multiple transactions make it hard to detect the actual source of the cash. Here’s how it’s done:
- Buying and cashing out chips for gambling in a casino make the cash look legitimate.
- Sending money through various accounts across borders.
- Purchasing extremely overpriced goods or services from companies owned by launderers.
The motive of the layering stage is to add as many layers as possible to hide the illegal source of the money.
3. The Integration Stage
When the money reaches this stage, it becomes quite difficult to track. As a result, it’s in this stage where the illegitimate cash re-enters the legitimate economy and becomes clean. And criminals do that by spending lavishly on hefty investments such as boats, real estate, luxury cars, planes, and other assets.
So, that’s how the dirty money gets cleaned using money laundering. Let’s now learn about common money laundering schemes in play. This is to help businesses be more vigilant about money laundering and prevent such instances.
Common Money Laundering Schemes
All sorts of individuals come to casinos to try their luck. However, criminals use casinos for a very specific reason: money laundering. They use cash to buy chips and store them or convert them into cash after some playing.
Several businesses that primarily function on cash are commonly used for laundering money. Such businesses knowingly allow large amounts of illicit cash to enter the legitimate business, which gets cleaned after the criminals pay their cut.
Smurfing is the process of dividing a large sum into small parts and depositing it into a single account. Small parts of the huge cash pile are sent to multiple partners who take part in laundering money and then forward the money to a single account.
Usually, when there’s a huge sum (cash) involved, authorities get notified. However, criminals use smurfing and divide the amount into smaller sums, thus preventing any detection.
Foreign Investment Schemes
This is a pretty smart method wherein the laundered sends the full amount to a foreign investor. The investor, in turn, invests the entire amount or small sums, whichever suits them, into the launderer’s own business. This process helps in cleaning the money for the criminals.
How can Businesses Deal with Money Laundering?
Businesses that can be potentially exploited or used as money mules by criminals can implement anti-money laundering (AML) regulations. For instance, businesses can opt for reliable tools for performing KYCs or customer due diligence when onboarding customers. These tools ensure only the most genuine customers enter the system. Also, such tools maintain the risk profile of the customers and track their transactions and report potentially suspicious ones. This allows businesses to take the necessary steps to protect themselves.
Money laundering is what fuels the criminal economy at the core. If criminals manage to successfully launder money via businesses, it can lead to reputational damage and even legal repercussions. And in some worse cases, the businesses end up shutting down completely.
Therefore, businesses need to take measures such as the implementation of AML regulations to keep themselves safe from such criminals.