Money Laundering

Money laundering is the illicit practice of disguising huge sums of cash obtained through criminal activity, such as the financing of terrorism or drug trafficking, as coming from a legitimate source. The technique "launders" the money, which is thought to be dirty as a result of the illicit action, to make it appear clean. Both white-collar and low-level criminals use money laundering, a serious financial crime. Anti-money-laundering (AML) rules are in place at the majority of financial institutions today to identify and stop this behavior.

How Money Laundering Works

Money laundering typically occurs in three phases:

  1. First entry or placement refers to the first transfer of funds obtained through illicit conduct into a reputable financial network or institution.
  2. In order to make it nearly impossible to track the money back to its illicit source, money is continuously transferred through a variety of transactions, forms, investments, and business ventures.
  3. After the money is fully integrated, it can be used legally without having to be further hidden.

Example Of Money Laundering

A restaurant or other place of business with a lot of cash transactions is one of the most popular and straightforward ways to "wash" money. In truth, the practice of notorious mobster Al Capone, who used a network of launderettes he controlled to launder large sums of money, is where the term "money laundering" originated.

The Involvement of Banks in Money Laundering

Money laundering regularly occurs at important financial organizations like banks. The bank just has to relax its reporting policies a little bit. Due to lax enforcement of regulations, criminals are able to make substantial cash deposits without those deposits being reported to central bank authorities or other regulatory bodies.

Reputable banking firms have recently been found guilty of aiding or enabling money laundering by failing to properly record significant cash deposits, including Danske Bank and HSBC. Danske Bank branches were charged with receiving a staggering $200 billion in Russian mob money between 2007 and 2015, while HSBC was found to have assisted in the laundering of over $1 billion in 2012.

“Washing” Money through Investments

There are several ways for criminals to turn "dirty" money into "clean" money in the financial markets. One of the simplest and most common techniques is to use a foreign investor to transfer money gained illegally into the legal financial system.

Consider a scenario in which a criminal group needs to launder $1,000,000 in cash. The criminal group contacts a foreign investor and strikes a contract with them. Another strategy to hide the source of the funds is to use an investor from another nation.

The investors receives a million dollars in cash from the criminals. The foreign investor takes a portion of the funds as payment for his services and then invests the remaining sum in a respectable domestic company that is frequently a shell corporation and is owned by the criminal enterprise.

Authorities that Investigate Money Laundering

Regular investigations into alleged money laundering operations are conducted by numerous diverse legal bodies. The FBI and the IRS are the two main agencies in the US that manage investigations into money laundering..

International organizations have been established particularly to tackle money laundering because it has grown to be such a significant issue. The International Money-Laundering Information Network (IMoLIN), a research facility supported by the UN, was established to help law enforcement organizations around the world identify and investigate money laundering enterprises.

A G-7 attempt to promote more efficient financial regulations and anti-laundering laws led to the formation of the Financial Action Task Force on Money Laundering (FATF). The FATF was also tasked with directly battling to cut off unlawful financial flows to terrorists and terrorist organizations because money laundering is a crucial component of terrorist organizations that are typically supported through illegal businesses.

Why Is It Important to Combat Money Laundering?

In order to remove the primary incentive for criminals to engage in such nefarious operations, anti-money laundering (AML) aims to rob them of the earnings from their illicit businesses. Millions of individuals worldwide are put in danger by illegal and risky activities like drug trafficking, people smuggling, funding for terrorism, smuggling, extortion, and fraud. These activities also have a significant negative social and economic impact on society. Because money laundering helps to legalize the proceeds of these crimes, reducing money laundering may have a substantial positive impact on society by reducing criminal activity.

Get Fincent

Let's get your money right

  • Bookkeeping
  • Tax Prep and Filing
  • Invoicing and Payments