Money Laundering- Steps and Methods

Money Laundering- Steps and Methods

What is Money Laundering?

Criminals are generally motivated by profit, as greed drives the criminal and the end result is introduction of illegally-gained money into the nation’s legitimate financial systems.

Money laundering involves disguising financial assets so they can be used without detection of the illegal activity that produced them. Through money laundering, the criminal transforms the monetary proceeds derived  from criminal or illicit activities such as drug trafficking, corruption, gambling, into a legitimate source.

Money laundering provides the fuel for drug dealers, terrorists, arms dealers, and other criminals to operate and expand their criminal enterprises. As a result, this process has devastating social consequences.

In simple words, money laundering is conversion of black money or any monetary proceeds derived from criminal activities into white money or legal source. In other words, Money laundering is the process of making illegally-gained proceeds (i.e., “dirty money”) appear legal (i.e., “clean”). 

Steps of Money Laundering

Typically, it involves three steps:

  1. Placement: First, the illegitimate funds are furtively introduced into the legitimate financial system.
  2. Layering: the money is moved around to create confusion, sometimes by wiring or transferring through numerous accounts.
  3. Integration: Finally, it is integrated into the financial system through additional transactions until the “dirty money” appears “clean” (Integration).

Methods of Money Laundering (How money is laundered?)

Though, money laundering can take several forms, yet most used methodologies include “Bank methods, structuring, currency exchanges, and double-invoicing”.

  • Structuring or Smurfing: Smurfing is a method of placement whereby cash is broken into smaller deposits of money, used to hide suspicion of money laundering and to avoid anti-money laundering reporting requirements.
  • Cash smuggling: This involves physically smuggling cash to another jurisdiction and depositing it in a financial institution that offers greater bank secrecy or less rigorous money laundering enforcement.
  • Cash-intensive businesses: In this method, a business entity receives a large proportion of its revenue as cash uses its accounts to deposit criminally derived cash. This method of money laundering often causes organized crime and corporate crime to overlap. Such enterprises often operate openly and in doing so generate cash revenue from incidental legitimate business in addition to the illicit cash. In such cases the business will usually claim all cash received as legitimate earnings. Examples are parking structures, strip clubs, bars, restaurants, casinos, barber shops, DVD stores, movie theatres, and beach resorts.
  • Trade-based laundering: This method is one of the newest and most complex forms of money laundering. Under- or over-valuing invoices are used to disguise the movement of money. For example, the ‘art market’ wherein several unique aspects of art such as the subjective value of art works as well as the secrecy of auction houses about the identity of the buyer and seller.
  • Trusts & Shell companies: Trusts and shell companies disguise the true owners of money. Trusts and corporate vehicles, depending on the jurisdiction, need not disclose their true owner.
  • Round-tripping: Here, money is deposited in a controlled foreign corporation offshore, preferably in a tax haven where minimal records are kept, and then shipped back as a foreign direct investment, exempt from taxation.
  • Bank capture: In this case, criminals buy a controlling interest in a bank, preferably in a jurisdiction with weak money laundering controls, and then move money through the bank without scrutiny.
  • Invoice Fraud: An example is when a criminal contacts a company saying that the supplier payment details have changed. They then provide alternative, fraudulent details in order for you to pay them money.
  • Casinos: In this method, criminals or money launders walk into a casino and buys chips with illicit cash. They play for a relatively short time, cashes in the chips, and will expect to take payment in a check, or at least get a receipt so they can claim the proceeds as gambling winnings.
  • Gambling: Money is spent preferably on high odds games. One or more winning bets can be shown as the source of money. The losing bets will remain hidden.
  • Black salaries: Here a company may have unregistered employees without written contracts and pay them cash salaries. Dirty money can be used to pay them.
  • Transaction Laundering: When a merchant unknowingly processes illicit credit card transactions for another business. It is a growing problem and recognised as distinct from traditional money laundering in using the payments ecosystem to hide that the transaction even occurred (e.g. the use of fake front websites. Also known as “undisclosed aggregation” or “factoring”.

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