Money laundering is a subject that often is misunderstood by the general public.
The goal of many criminal acts is to generate a profit for the individual or a group that carries out the crime. Money laundering is the processing of these criminal proceeds to disguise their illegal origin. Once successfully processed it enables the criminal to enjoy these ill-gotten gains without jeopardizing their source.
When a criminal activity generates substantial profits, the individual or group involved must find a way to maintain control the funds without attracting the attention to the underlying activity or the persons involved. Criminals do this by disguising the sources, changing the form, or moving the funds to a place where they are less likely to attract attention.
Through money laundering, these assets can be ‘washed’ so that they appear to have a legitimate origin enabling them to be retained permanently or recycled to fund further crimes.
Money laundering got its name from a string of laundries that the Mafia used in the United States as a front for their illegal business.
Just as soap and water are used for cleaning clothes money laundering uses a three phased process of ‘placement, layering and integration’ to ‘clean’ these illegal proceeds or ‘dirty money’.
Money laundering may look like a polite form of white collar crime, but it is the companion of brutality, deceit and corruption. The process deprives governments of tax revenues, thereby raising the relative burden of honest citizens. Because of rapid movements of large amounts of money, normally stable financial institutions can become undermined, threatening the savings and retirement funds of thousands of innocent people.
According to UNODC (United Nations Office for Drugs and Crime) it is estimated that the annual value of money that is laundered globally is between 2% and 5% of global GDP. In cold hard numbers this puts the amount at between US$800 billion and US$2 trillion. This is a really frightening set of numbers.
So how is money laundered? Well, generally a three stage process is used. These stages are called placement, layering and integration. We now look at these in a little greater detail.
Placement
Placement is the physical disposal of the initial proceeds derived from the illegal activity. The first step is to introduce cash into the financial system.
The money launderers use various vehicles to do this e.g. deposits, money transfers, purchases of monetary instruments such as travelers’ cheques, bank cheques or money orders, foreign currency conversions etc. They may also use insurance companies, brokerage accounts, credit cards and other financial services to achieve this.
Layering
Layering is the separating illicit proceeds from their source by creating complex layers of transactions designed to disguise the audit trail and provide anonymity.
Layering is like a shell game - many transactions and conversions take place to blur the trail back to the original crime. This may include investments, purchases of goods and services, cashing cheques, using several smaller cheques to purchase a bank transfer and so on.
Integration
Integration is the provision of apparent legitimacy to criminally derived wealth. The laundered proceeds re-enter the financial system, appearing as normal funds.
Integration is the final stage of the money laundering process. This is when the criminal re-introduces the funds into the legitimate economy with an apparently legitimate origin. Examples include investing in a company, purchasing real estate, luxury goods, etc.
The fight against money laundering
In recent year there have been a number of new developments in the global financial system that have made combating money laundering much more difficult.
These difficulties have been fueled by issues such as ‘dollarization’ (i.e. the use of the US dollar in transactions), black markets, the general trend towards financial deregulation, and the creation of new havens of financial secrecy (though the latter is today being shrunk by a huge international effort to curb tax evasion).