When individuals commit criminal activities, such as theft, extortion, drug smuggling, or human trafficking, they generate an income. These financial proceeds are deemed as “black” or “dirty” money, as they have been acquired through criminal means and cannot be accounted for. For money to be usable and accepted in the general economy, it should trace back to a legitimate source. Hence, this “dirty” money requires “cleaning” to be of value in the mainstream. To do this, and conceal the source of their illegal funds, criminals use money laundering.
Money laundering refers to the illegal process of portraying the false notion that large amounts of money generated through a criminal activity have been earned through a legal source.
Money Laundering Regulations
Money laundering is regulated worldwide through national and international bodies. Intergovernmental organizations, like the Financial Action Task Force, (FATF) and the United Nations Office on Drugs and Crime (UNODC), set regulations and standards for anti-money laundering at a global level. These organizations work hard to curb money laundering, terrorist financing, and financial crime of any nature and monitor the finance industry around the world. Member nations of these bodies must be in total compliance with the regulations set up by these institutions. Indeed, if they fall short, they must pay large sums of money in fines and fees for non-compliance with AML regulations.
There are also money laundering acts and regulations on the national level in every country. Most nations have also appointed committees to monitor and regulate money laundering, terrorist financing, and other financial crimes.
The Process of Money Laundering
The means and techniques of laundering money are far too varied and complex to capture them all. But, in every case of money laundering, the process follows a similar flow. The details and context may differ, but the stages of money laundering remain more or less the same. With the digital world evolving at a rapid pace, this traditional framework of understanding money laundering stands the test of time despite new methods of money laundering emerging everywhere. However, at present, some of the below-mentioned stages may overlap or vary in the order of occurrence. Generally, when an individual desires to launder money that has been acquired through criminal activity, they need to go through three key stages:
This is the first step in the process. In this stage, criminally acquired funds are first introduced into the financial system.
At this stage, the illegal “dirty” money is “washed” through a web of complicated transactions: forged bookkeeping, multiple, overlapping transactions, or any other technique.
This is the final stage of the process. The “dirty” money has been successfully laundered and reintroduced into the legitimate, mainstream economy.
Variants of Money Laundering
Some individuals carry out the financial crime of money laundering through a process called ‘Smurfing’. Also known as structuring, this method involves breaking up a large amount of cash into smaller chunks and depositing them into many accounts over a period of time to avoid detection.
You may wonder, what is a financial crime like money laundering? Well, money laundering can also be carried out through currency exchanges, wire transfers, and cash smuggling “mules,” who sneak large sums of money across borders and deposit them into foreign accounts, typically in regions where financial monitoring is lax.
Other forms of money laundering can involve precious objects or commodities, such as jewellery with gemstones, expensive art, real estate, and so on. These valuable assets can easily be moved to other jurisdictions and sold discreetly when the time comes.
Using shell companies (a fake inactive corporation that exists only on paper) to make illegally sourced money seem legitimate is also a commonly seen method of money laundering.
How Much Money is Laundered Per Year?
The UNODC estimates that the amount of money laundered per year is “around 2-5% of the global GDP” which is between USD 800 billion and 2 trillion.
How Financial Institutions Prevent Money Laundering
Money laundering poses a significant threat to the global economy, as well as to financial institutions themselves. Indeed, if they are caught facilitating money laundering, terrorist financing, or any other financial crime, they are fined heavily by international or local financial regulatory bodies. This makes it extremely important for financial institutions to work hard to prevent money laundering. As such, they must draft and implement detailed anti-money laundering programs, hire a Compliance Officer to oversee everything to do with regulatory compliance, and install money laundering software to combat money laundering and other financial crime.
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