Table of Contents
What Is Money Laundering?
Money laundering is both a process and a technique used by criminals to hide proceeds from their crimes. The dirty money passes through a couple of transactions to be “cleaned” without exposing the crime in question and jeopardizing the involved criminals’ freedom.
Criminal activities of money laundering include but not limited to drug trafficking, human trafficking, and financing terrorists.
How Does Money Laundering Work?
A criminal(s) makes proceeds from their crimes. They get money in the form of cash. Cash is preferred to avoid digital traces of money sources. The money is then used for a “legitimate” business transaction. It could be paying salaries, paying suppliers, buying assets, etc.
Money given to compromised third parties in terms of salaries, payment for suppliers or purchase of a real estate property is then used to transact with the criminal in question. The criminal get “paid” for the product or service they have sold. They pay applicable taxes on “profits” made, and the money is now considered clean.
What Are the 3 Stages of Money Laundering?
The three stages of money laundering are placement, layering and integration. Well, this is just mainly in theory. In reality, some steps are repeated a couple of times.
1. Placement stage
Placement is the first stage of money laundering. Here, criminals are most vulnerable and risk being caught. They release vast volumes of dirty cash into the financial system. It serves two purposes; to help the criminal release his holding on a huge amount of cash and to attach money to legitimate business proceeds.
To avoid getting caught in this vulnerable situation, the criminals employ some of the following tactics to avoid suspicion:
- Creating offshore companies to hide the real identity of the owners benefiting from the money.
- Opening offshore bank accounts where they can physically take small amounts of cash to the bank account, and then from there, they can wire it back to their local accounts.
- Make up false invoices; this is done by creating dummy invoices that match the cash at hand to make it seem like they are a series of payments being made.
- They do smurfing, where they load their accounts with small amounts of money at a time that is below the anti-money laundering reporting threshold. It gives them the capacity and ability to move money freely.
- They create a situation where lawyers will abort transactions. It is done by getting a lawyer or an accountant to hold funds in the client’s account meant to settle a proposed transaction. However, the transactions are aborted after a while, and the money is paid back to the client from an unknown source.
2. Layering stage
This stage is known to be the most complex of the three stages. It often requires international wiring of funds, which would otherwise raise suspicion in home countries where the money laundering is happening. This stage makes it hard for the home country’s financial systems to detect a thing.
It involves breaking down large volumes of money into smaller, manageable transactions. The smaller transactions created are below the AML reporting threshold. It prevents raising any alarms from financial institutions. Some of the tactics involved in layering include:
- Trading foreign currencies
- Trading internationally
- Buying and selling expensive luxury assets
- Buying international money orders
3. Integration stage
At this stage, money is finally integrated into the criminal’s legal bank accounts. With all the other stages completed successfully, criminals pay tax in disguise of compliance.
Modern methods of money laundering are structuring, smuggling, use of casinos, international trading, cash payroll to fake employees and use of shell companies.
Structuring/smurfing is done by breaking down the bulk of the money into smaller transactions. It is done to remove and avoid alarms that may raise the anti-money laundering reporting threshold.
2. Smuggling cash in bulk
Smuggling involves physically moving funds from one financial institution to another financial institution. It can also be transporting these funds to another country and physically depositing them in foreign bank accounts.
3. Use of casinos to buy chips with illegal money
The playing individual will involve himself for a short time and then cash in his chips to obtain a cheque.
4. International trading
Trading luxury items is also another way to conduct money laundering. In addition, secret auction houses are made to buy and sell expensive assets, which aid in tax evasions.
5. Cash payrolls to fake employees
This is a common method to launder money. Here, a company employs many ghost daily waged workers and pays them in cash at the end of certain period.
6. Use of shell companies
Shell companies are created to hide the true owners and beneficiaries of the money.
Investment in high-value commodities such as gold and diamond is an effective method to get rid of cash and instead store assets inform of these commodities.
Consequences of money laundering are undermining the integrity of financial markets, loss of economic policy, loss of government revenue and interruption of socio-economic costs.
1. Undermining the integrity of financial markets
Integrity of financial markets is one of the most serious effects of money laundering in an economy. The financial institutions will have a difficult time managing their assets and liabilities if they rely on the funds from criminal activities. It can lead to liquidity challenges in banks.
2. Loss of economic policy
Money laundering can greatly and negatively affect currencies and interest rates when criminals decide to invest their funds in schemes that are less likely to be detected by the anti-money laundering (AML). It can also lead to monetary instability leading to unexpected inflation.
3. Loss of government revenue
Money launders are not likely to pay taxes despite the huge volumes of cash transferred from one financial institution to another. It will harm honest taxpayers by raising tax rates due to reduced tax proceeds.
4. Interruption of socio-economic costs
Money laundering may lead to the transfer of economic power from the market, the Government, and the citizens to criminals, increasing crimes and corruption.
Why Is It Important to Fight Against Money Laundering?
1. Its illegal by default
Money laundering involves converting illicit money into clean money. It enables criminals to continue to operate undetected. It allows them to continue committing crimes, such as fraud and theft, without being detected. The longer these criminals remain operational, the higher the number of unsuspecting victims.
2. It is an offense
Government should take action to stop criminals from hiding their money and using our banking system to launder it.
3. Promotes crime
Money laundering is a syndicate of criminals. Their unending greed for money results in more criminal activities to satisfy themselves. In some instances, they become criminals against each other through murder.
4. Cripples economic sustainability
Money laundering is a major threat to our economy and our way of life. It also allows criminals to launder the money they steal from other innocent people. It hurts our economy and our ability to provide for our families.