Define: Money Laundering

Quick Summary of Money Laundering

Money laundering is the illegal process of disguising the origins of money obtained through criminal activities, such as drug trafficking, corruption, or fraud, to make it appear as though it was derived from legitimate sources. The process typically involves three stages: placement, layering, and integration.

In the placement stage, illicit funds are introduced into the financial system through methods like cash deposits, currency exchanges, or purchases of valuable assets. In the layering stage, the money is moved through various transactions and accounts to obscure its trail, often involving complex financial transactions across multiple jurisdictions. Finally, in the integration stage, the laundered funds are reintroduced into the economy as apparently legitimate wealth, making it difficult for authorities to trace their illicit origins.

Money laundering enables criminals to enjoy the proceeds of their illegal activities without attracting suspicion and allows them to evade detection by law enforcement. It poses significant risks to the integrity of financial systems, undermines efforts to combat crime, and can have far-reaching economic and social consequences. Therefore, governments and financial institutions implement stringent anti-money laundering regulations and measures to detect, prevent, and deter money laundering activities.

Money laundering is the practice of engaging in financial transactions in order to conceal the identity, source, and/or destination of money and is a main operation of the underground economy.

In the past, the term “money laundering” was applied only to financial transactions related to organised crime. Today its definition is often expanded by government regulators (such as the United States Office of the Comptroller of the Currency) to encompass any financial transaction which generates an asset or a value as the result of an illegal act, which may involve actions such as tax evasion or false accounting. As a result, the illegal activity of money laundering is now recognised as potentially practiced by individuals, small and large businesses, corrupt officials, members of organised crime (such as drug dealers or the Mafia) or of cults, and even corrupt states, through a complex network of shell companies and trusts based in offshore tax havens.

The increasing complexity of financial crime, the increasing recognised value of so-called “financial intelligence” (FININT) in combating transnational crime and terrorism, and the speculated impact of capital extracted from the legitimate economy have led to an increased prominence of money laundering in political, economic, and legal debate.

History

Process

Money laundering is often described as occurring in three stages: placement, layering, and integration.

1. Placement: refers to the initial point of entry for funds derived from criminal activities.
2. Layering refers to the creation of complex networks of transactions that attempt to obscure the link between the initial entry point and the end of the laundering cycle.
3. Integration: refers to the return of funds to the legitimate economy for later extraction.

However, The Anti-Money Laundering Network recommends the terms

1. Hide: to reflect the fact that cash is often introduced to the economy via commercial concerns, which may knowingly or not knowingly be part of the laundering scheme, and it is these which ultimately prove to be the interface between the criminal and the financial sector
2. Move: clearly explains that the money launderer uses transfers, sales and purchases of assets and changes the shape and size of the lump of money so as to obfuscate the trail between money and crime or money and criminal.
3. Invest: the criminal spends the money; he/she may invest it in assets or in his/her lifestyle.

Examples

If a person is making thousands of dollars in small change a week from a business (not unusual for a store owner) and wishes to deposit that money in a bank, it cannot be done without possibly drawing suspicion. In the United States, for example, cash transactions and deposits of more than a certain dollar amount are required to be reported as “significant cash transactions” to the Financial Crimes Enforcement Network (FinCEN), along with any other suspicious financial activity which is identified as “suspicious activity reports.” In other jurisdictions, suspicion-based requirements are placed on financial services employees and firms to report suspicious activity to the authorities. Methods to conceal the source are therefore required.

Irregular Funding

One method of keeping this small change private would be for an individual to give money to an intermediary who is already legitimately taking in large amounts of cash. The intermediary would then deposit that money into an account, take a premium, and write a check to the individual. Thus, the individual draws no attention to himself and can deposit his check into a bank account without drawing suspicion. This works well for one-off transactions, but if it occurs on a regular basis, then the check deposits themselves will form a paper trail and could raise suspicion.

Captive Business

Another method involves establishing a business whose cash inflow cannot be monitored, funnelling the small change into this business, and paying taxes on it. All bank employees, however, are trained to be constantly on the lookout for any transactions which appear to be an attempt to get around the currency reporting requirements. Such shell companies should deal directly with the public, perform some service-related activity as opposed to providing physical goods, and reasonably accept cash as a matter of business. Dealing directly with the public ensures plausible anonymity of source. An example of a legitimate business displaying plausible anonymity as a source would be a hairstylist. Since it would be unreasonable for them to keep track of the identity of their customers, a record of their transaction amounts must be ostensibly accepted as prima facie evidence of actual financial activity. Service-related businesses have the advantage of anonymity of resources. A business that sells computers has to account for where it actually got the computers, whereas a plumbing company merely has to account for labour, which can be falsified. Reasonably accepting cash means the business must regularly perform services that total less than $500 on average, since above that amount most people pay with a check, credit card, or another traceable payment method. The company should actually function on a legitimate level. In the plumbing company example, it is perfectly reasonable for a lot of the business to involve only labour (no parts) and for some business to be paid for in cash, but it is unreasonable for all of their business to involve no parts and only cash payment. Therefore, the legitimate business will generate a legitimate level of parts usage as well as enough traceable transactions to mask the illegitimate ones.

Corrupt politicians and lobbyists also launder money by setting up personal non-profits to move money between trusted organisations, so that donations from inappropriate sources may be illegally used for personal gain.

Legal Considerations

Many jurisdictions adopt a list of specific predicate crimes for money laundering prosecutions as “self-launderers” (the UK has an “all-crimes” regime). In addition, AML/CFT laws typically have other offences such as “tipping off,” “willful blindness,” not reporting suspicious activity, and conscious facilitation of a money launderer/terrorist financier to move his/her monies.

UK Legislation

The “money laundering” legislation in the United Kingdom, under Sections 327 to 340 of the Proceeds of Crime Act 2002 (PoCA) and all of the Money Laundering Regulations 2003 & 2007, is wide-ranging and encompasses mere possession of criminal or terrorist property as well as its acquisition, transfer, removal, use, conversion, concealment, or disguise.

In the UK, “money laundering” need not involve money (it relates to assets of any kind, both tangible and intangible, and to the avoidance of a liability) and need not involve laundering either (a thief’s possession of the assets he himself stole is included). There is no lower limit to what has to be reported; a suspicious transaction involving a single £5 note may be required to be reported. All persons (not just financial services employees and firms) are technically required to report and obtain consent for their own involvement in crime or suspicious activities involving money or assets of any kind. So in the UK, a thief who steals a vest from a clothes store commits a “money laundering” offence because he has possession of an asset derived from crime. He is technically required to seek consent from law enforcement for his continued possession of the vest if he is to avoid the risk of prosecution for “money laundering.

The UK legislation also creates a money laundering offence where a person enters into, or becomes concerned in, an arrangement which facilitates (by whatever means) the acquisition, retention, use, or control of criminal property by another person. This has impacted upon lawyers and other professional advisers in the UK who act for a client whom they suspect may possess criminal property of any kind.

Because the UK legislation is wide-ranging, the UK FIU authority, the Serious Organised Crime Agency, receives a large volume of suspicious activity reports (SARs); in 2005, just under 200,000 SARs were received. The number of SARs received appears to be growing by almost 50% each year.

The UK legislation was relaxed slightly in 2005 to allow banks and financial institutions to proceed with low-value transactions involving suspected criminal property without requiring specific consent for every transaction (but the reporting of all transactions is still required).

American Legislation

The Bank Secrecy Act of 1970 requires banks to report cash transactions of $10,000.01 or more. The Money Laundering Control Act of 1986 further defined money laundering as a federal crime. The USA PATRIOT Act of 2001 expanded the scope of prior laws to more types of financial institutions, added a focus on terrorist financing, and specified that financial institutions take specific actions to “know your customer” (KYC).

In the United States, Federal law provides (in part): “Whoever . . . knowing[ly] . . . conducts or attempts to conduct . . . a financial transaction which in fact involves the proceeds of specified unlawful activity . . . with the intent to promote the carrying on of specified unlawful activity . . . shall be sentenced to a fine of not more than $500,000 or twice the value of the property involved in the transaction, whichever is greater, or imprisonment for not more than twenty years, or both.

While money laundering typically involves the flow of “dirty money” (criminal proceeds) into a “clean” bank account or negotiable instrument, terrorist financing frequently involves the reverse flow: apparently clean funds converted to “dirty” purposes. A hawala may launder drug proceeds and help fund a terrorist, netting the incoming and outgoing funds with only occasional small net settlement transactions.

Fighting Money Laundering

The prime method of anti-money laundering is the requirement for financial intermediaries to know their customers, usually termed KYC (know your customer) requirements. With good knowledge of their customers, financial intermediaries will often be able to identify unusual or suspicious behaviour, including false identities, unusual transactions, changing behaviour, or other indicators that laundering may be occurring. But for institutions with millions of customers and thousands of customer-contact employees, traditional ways of knowing their customers must be supplemented by technology.

Using Information Technology

Information technology can never be a replacement for a well-trained investigator, but as money laundering techniques become more sophisticated, so too is the technology used to fight it. Early anti-money laundering programmes flagged cash transactions exceeding a certain amount ($10,000.01 in the U.S. would trigger the need for a Currency Transaction Report). This proved to be ineffective because money launderers soon adjusted their schemes to avoid detection.

Current Anti-money laundering software packages include capabilities of name analysis, rules-based systems, statistical and profiling engines, neural networks, link analysis, peer group analysis, and time sequence matching. In addition, there are specific KYC solutions that offer case-based account documentation acceptance and rectification, as well as automatic risk scoring of the customer (taking account of country, business, entity, product, and transaction risks) that can be reviewed intelligently. Other elements of AML technology include portals to share knowledge and e-learning for training and awareness.

Financial Crimes Enforcement Network (FinCEN) is an organisation created by the United States Department of Treasury. FinCEN receives Suspicious Activity Reports from financial institutions, analyses them, and shares their data with U.S. law enforcement agencies and equivalent Financial Intelligence Units (FIUs) of other countries. One of its strategic goals is to improve information sharing through e-government. It offers training and advice to organisations of foreign governments to help improve the efficacy of their anti-money laundering programmes.

September 11, 2001, And The International Response To The Underground Economy

After September 11, 2001, money laundering became a major concern of the United States’s war on terror, although critics argue that it has become less and less an important matter for the White House. Based in Luxembourg, Clearstream International, a central securities depository and clearing house, or “bank of banks,” which practices “financial clearing,” centralising debit and credit operations for hundreds of banks, was accused of being a major operator of the underground economy via a system of unpublished accounts; Bahrain International Bank, owned by Osama bin Laden, would have profited from these transfer facilities. The scandal prompted André Lussi, Clearstream’s CEO, to resign on December 31, 2001; several judicial investigations were opened; and the European Commission was interpellated by Members of the European Parliament (MEPs) Harlem Désir, Glyn Ford, and Francis Wurtz, who asked the Commission to investigate the accusations and to ensure that the June 10, 1990, directive (91/308 CE) on control of financial establishment was applied in all member states, including Luxembourg, in an effective way.

The international response to the underground economy has been coordinated by the Financial Action Task Force on Money Laundering (“FATF,” also known by its French acronym of “GAFI”), whose original 40 principles form the basis of most international responses to money laundering activity. A further 8 principles, designed to counteract funding to terrorist organisations, were added on June 30, 2003, in response to September 11, 2001, with another added on October 22, 2004, to form what is now known as the “40 + 9” principles of anti-money laundering and combating the financing of terrorism (AML/CFT). Compliance with, or a movement towards compliance with, these principles is now seen as a requirement of an internationally active bank or other financial service entity.

Disclaimer

This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

This glossary post was last updated: 9th April, 2024.