Money Laundering

What is money laundering?

Money laundering is a process that criminals use to make their money appear as though it has been earned legitimately. A type of financial crime, the term ‘laundering’ comes from the appearance of taking ‘dirty’ money and ‘cleaning’ it for use in the wider world, masking its origin.

When they come into large sums of money, it isn’t possible for criminals to use it without questions being asked. As such, they need to disguise how and why it came to them through finding a fictional legal explanation.

Although laws have been in place since the 1930s to combat money laundering, it wasn’t until the 1980s that countries started passing dedicating anti-money laundering laws. The US passed the Money Laundering Control Act in 1986, Australia made money laundering illegal in The Criminal Code Act 1995, and the UK specifically mentioned money laundering in the Proceeds of Crime Act in 2002.

How does money laundering work?

The three stages of money laundering are placement, layering, and integration. The process involved is often complicated, especially considering some of the sums involved. Structuring and smurfing are two other methods used in laundering money.

The idea behind laundering money is to make it as difficult as possible for authorities to uncover and understand the deceit. As such, many examples of money laundering reveal a diverse web of transactions and accounts so that it is never easy to trace everything back to one starting point.

The more complex the money laundering, the less likely the criminals are to be caught.

What is placement in money laundering?

The first objective in laundering money is to move it into the real world. This is often the riskiest action of the entire operation for a financial criminal because of the vast amount of physical money that is often involved.

Wishing to leave no trace of their actions when trafficking, drug smuggling or selling weapons (for example), criminals rarely do transactions with cards. Since nobody wants large amounts of cash on hand for obvious reasons, this money needs to be moved as quickly as possible.

Most often this occurs by ‘placing’ the cash into legitimate areas of the economy where questions are least likely to be asked – repaying or giving someone a loan, turning it into chips at a casino and making a safe bet, or putting the money into a cash-only business.

Other methods include investing in cars or property or exchanging the money into a foreign currency. Often a criminal will accept losing a few percent of their total in return for the legitimacy that their actions bring.

What is layering in money laundering?

Layering occurs after placement and refers to moving the money around as much as possible to make it difficult for financial crime investigators to see its origins. It jumps between various people, businesses, and accounts in differing amounts, often being sent overseas to further muddy the waters. Investments into companies or financial products are also not uncommon.

In this stage, money is moved quickly and often, with criminals once again accepting losing a small percentage of their money in return for making it even harder to identify as being illegally obtained.

What is integration in money laundering?

Integration is the final stage of the money laundering process. The criminal receives their money back, which has now been legitimized by its trail through the economy. They may not receive the laundered money back in cash but in the form of a property or some expensive artwork, the sale of which can then be registered legally.

Within financial crime investigation, art and real estate are often chosen for money laundering because their value on the open market is subjective.

What is structuring in money laundering?

Illegal activities often leave criminals with vast amounts of cash, often in the form of bills. It isn’t easy to deposit bundles of cash at a bank without raising questions, which is where structuring comes in.

Structuring is when criminals break up large amounts of money into smaller transactions to evade law enforcement and financial crime investigators. These smaller purchases or transactions used to fall under a certain threshold so as not to create positive alerts. However more modern anti-financial crime software allows for multiple ways to catch structuring in action.

What is smurfing in money laundering?

In money laundering, smurfing is a specific type of structuring.

Structuring involves just one person making transactions in order to break down large amounts of money. Smurfing involves breaking down a large sum of cash and dividing it between multiple people. These lower-level criminals are known as ‘smurfs’, who then deposit the money into various accounts.

Because there are more people involved, smurfing is a lot harder to detect than structuring. However, it is also more complex for criminals as well. With more moving parts to the operation, things are more likely to go wrong within the money laundering operation.

Example of money laundering

Because a definition can be difficult to visualize, here is an example of money laundering in action.

Placement: Steve receives a large sum of money from illegal activities, such as drug trafficking. He deposits this money into a legitimate business, such as a restaurant, under the guise of normal business earnings.

Layering: To obscure the origin of the money, Steve transfers the funds through various financial transactions. This might involve wiring the money to different bank accounts, purchasing high-value items like real estate or luxury goods, or using offshore accounts.

Integration: Finally, the laundered money is reintroduced into the economy as legitimate funds. Steve might use the “clean” money to invest in more restaurants, pay for personal expenses, or make other legal financial transactions, thus completing the laundering process and making the funds appear legitimate.

What is anti-money laundering?

Anti-money laundering (AML) refers to the laws, regulations, and processes designed to prevent, identify, and stop the transaction of illicit funds. These include customer due diligence (CDD) and know your customer (KYC) checks.

What is reverse money laundering?

Reverse money laundering is the opposite of traditional money laundering, and refers to criminals taking legal money out of regular circulation and using the money to fund illegal activities such as terrorism or corruption.

Why do banks need to do anti-money laundering checks?

All banks need to do anti-money laundering checks to ensure that the person depositing the money is who they say they are, and that the money was obtained legally.

Banks do this because they are heavily regulated. If they are seen to have been involved in money laundering, albeit unknowingly, they can still risk big fines. Not only does this affect the bank financially but it can also worsen their reputation.

AML checks can occur at any time but are most likely to occur if you are depositing or sending large amounts of money. A check doesn’t mean that anyone is under suspicion; it’s purely a precautionary measure, and everyone sending large sums of money will be given one.

What are anti-money laundering checks?

Anti-money laundering software allows for basic searches to ensure that the person depositing or investing money is doing so for themselves with legitimate funds, and not on behalf of someone else who has obtained the money illegally.

These anti-money laundering checks often start with a simple KYC questionnaire that can be compared to an electoral register. Alternatively, a person may be asked for identification that proves their identity and their address. The following means are normally used:

For your identity

Passport
Driving license
Birth certificate
National identity card

For your proof of address

Driving license
Recent utility bill
Recent bank statement
National identity card

How big a problem is money laundering?

Because a lot of instances of money laundering are never discovered, it is difficult to accurately measure the true cost.

Even so, money laundering is a big problem globally with $800 billion to $2 trillion estimated to be laundered each year. This is 2-5% of annual global gross domestic product (GDP), a monetary measure of the market value of all goods and services produced each year.

How does SymphonyAI help combat money laundering?

SymphonyAI offers many anti-financial crime tools that help combat money laundering. The full anti-money laundering software offering includes NetReveal Transaction Monitoring, NetReveal Customer Due Diligence for KYC/CDD, and SensaAI for AML, which augments detection engines to immediately enhance a financial institution’s understanding of entities and risk detection.