What is money laundering?

Money laundering is the term used to describe the act of disguising illegal money to make it seem like it came from a different – and legitimate – source. Criminals make the proceeds of crime appear to be legally obtained in order to get away with their crime and avoid raising suspicion. Without money laundering, criminals cannot bank large sums of money without the authorities tracing it back to the crime. Since buying expensive items in cash would also raise suspicion, it’s important for money to be laundered in order to be banked.

‘Proceeds of crime’ refers to any asset that is gained from criminal activity. An example of this could be a car bought with stolen money, this makes the car criminal property, and therefore a proceed of crime.

The term “laundering” comes from the fact that criminals attempt to ‘clean’ (or legitimise) money gained from crime, making it hard for authorities to trace its origin.

How does money laundering work?

Money laundering begins with a crime which generates profit. This could be credit card skimming, modern slavery, manufacturing/selling drugs, and so on. Let’s take a closer look at an example of cyber-crime, a fake website selling goods that don’t exist (usually high end goods for unbelievably low prices to lure customers in):

Money laundering in this example will attempt to confuse authorities by creating lots of fake paths and dead ends as to where payments have come from, and also where they were processed and what for. Goods may be bought legitimately (from unwitting real customers who will never receive their goods), or they may be purchased using stolen credit cards and fake identities.

Often, money laundering is all about speed and criminals making a quick buck. In the example of our online store, then, the website may only exist for a few days until it’s taken down and erased. Any money collected is then moved through different accounts before reaching its final destination. Again, this makes the money’s origin hard to trace since the receiver will appear to have no link to the crime whatsoever. They could even be in different countries.

Sometimes criminals will buy and sell assets in order to launder money. Using stolen bank accounts/identities to originally deposit money and purchase items, but then selling the property so that money returns to them from a legitimate buyer.

This example highlights how quickly criminals can work in order to reduce the chances that they will ever be caught because of how the money can be laundered into the system without anyone noticing, reducing the chance it will ever be retrieved again.

Remember: as well as hiding its origin, money laundering can also take place in order to disguise the destination of money. Examples of this include money spent organising terrorist activity or arranging up human trafficking.

Three stages of money laundering

1. Placement: This is the movement of the money from its original source. Once it is taken from the source, it is moved into circulation through different regulated sectors such as financial institutions or casinos.
2. Layering: This stage is when criminals are trying to make it more difficult for anyone to track the money back to the original source; techniques include moving the proceeds of crime through different accounts, institutions, and even overseas, all in the attempt of reducing the chances of the authorities ever suspecting them.
3. Integration: The final stage is when laundered money is moved into the economy through banking systems, completing the journey that the money goes on because now it appears to be regular income. The laundered money now appears completely ‘clean’.

The evolution of money laundering

The reality is that money laundering occurs in incredibly high volumes each year. The nature of the services and products offered by the financial services industry (namely managing, controlling and possessing money and property belonging to others) means that it is vulnerable to abuse by money launderers looking to ‘clean up’ criminal profits.

Criminal proceeds amount to 3.6% of global economy, and a whopping 2.7% of this is from laundering, coming to roughly £1.2 trillion! However, due to the surreptitious nature of the transactions, the exact amounts are unavailable, so the amount of money that is laundered every year can only ever be an estimate. However, the level we can estimate already shows that the frequency of the crime is high all over the world.

As soon as taxation started, money laundering became a loop hole that people took advantage of to make some extra money. Chinese merchants used to hide their wealth to avoid taxation and moving the money around to avoid being found out. In this case, the crime is tax avoidance, and the laundering comes into it by moving around the money in order to avoid it being detected by the authorities.

Over time, offshore banking and tax evasion has developed in its sophistication, but all with the intention of keeping money out of the eyes and hands of the authorities. The scale, velocity, and ease at which criminals can carry out money laundering means that the problem isn’t going away any time soon.

The rise of global financial markets now makes money laundering easier than ever because there are countries with bank-secrecy laws that are connected to countries that have bank-reporting laws. This means that you can anonymously deposit money made from crime into one country and then have it transferred to anywhere else for personal use. Transfers from these countries would be considered high risk for money laundering.

Complying with money laundering regulations

Complying with money laundering regulations involves several areas of operation and it’s important that employees are given the information they need to understand and comply with these responsibilities as far as they could impact their job role.

It’s important for organisations to carefully verify any customer’s identity, assess their risk, and understand their general financial habits as this makes it much more likely that any abnormalities and red flags will be identified. In turn, this allows organisations to act quickly and investigate any signs of money laundering (or other crimes) before the situation escalates.

Ensuring your staff are able to carry out effective customer due diligence goes a long way to ensuring your staff and clients are not are not facilitating money laundering. Such processes to be aware of and understand include submitting a suspicious activity report (SAR), understanding what is required to take a risk based approach and the supporting documents that should be requested from clients. Here is some guidance to carrying out customer due diligence and how to deal with potential red flags.

Prevent money laundering: VinciWorks training

Training your staff in anti-money laundering (AML) needs to be more than a tick-box exercise. Companies and law firms can easily fall out of compliance or get caught up in dirty money without a robust AML framework. Packed with realistic scenarios, real-life case studies and customisation options, our suite of AML courses will help you stay protected.