What is money laundering?

Various crimes such as corruption, human trafficking, illegal arms sales, embezzlement, insider trading, cyber fraud schemes and illegal drug deals generate large amounts of money for wrongdoers. However, they need to disguise the dirty money’s illegal origin to use it for legitimate purposes. For the purpose, criminals put significant time and effort to devise and execute strategies to conceal the origins of illegally obtained money so that it can be used as they wish. Money laundering is this illegal process of disguising the source of ill-gotten money to make it legitimate. The United Nations Office on Drugs and Crime (UNDOC) defines money laundering as “the method by which criminals disguise the illegal origins of their wealth and protect their asset bases, so as to avoid the suspicion of law enforcement agencies and prevent leaving a trail of incriminating evidence.”

In most cases, criminals use a complex sequence of banking or commercial transactions to disguise the illegality of criminal profits so that criminal proceeds are accounted without being caught by law enforcement agencies. They spend time to devise and execute strategies for the purpose. The execution of such strategies is generally called money laundering activities. Criminals use successfully laundered money for legitimate purchases and investments. Sometimes, the end of goal of money laundering is to channel the money to terrorists and terrorist organisations to fund their criminal acts. Some countries consider obfuscation of money sources as money laundering. Here, the mere use of financial systems or services that do not identify or track sources or destinations can amount to the crime.

Available Statistics on Money Laundering

It is difficult to estimate the total amount of money being laundered because of the secretive nature of the crime. However, there are certain estimates that point to the grotesqueness of the crime. According to the UNDOC, the amount of money being laundered across the globe every year is equivalent to 2-5% of global GDP, or USD800 billion – USD2 trillion. It is important to note that there are multiple crimes that generate hundreds of billions of dollars every year for criminal enterprises. For example, drug trafficking is estimated to make between USD426 billion and USD652 billion in proceeds every year. Meanwhile, human trafficking is more than USD150-billion/year criminal business.

There have been attempts to measure the money laundering risk of countries. One such measure is the Basel AML Index which ranks 125 countries on five domains: quality of AML/CFT framework, bribery and corruption, financial transparency and standards, public transparency and accountability, and legal and political risks. The 10 countries with the highest money laundering risk according to the Basel AML Index 2019 are given in the table below.

Independent research within/about some countries also points out the seriousness of the crime.

• As estimated USD6 billion in drug profits is estimated to be laundered via the black-market peso exchange system in Colombia.
• In the UK, crime proceeds are estimated between £19 billion-£48 billion per year, according to customs authorities.
• In Bangkok, laundered criminal money is projected at 15% of the country’s GDP (USD28.5 billion), according to a 1996 report published by Chulalongkorn University.
• A conservative estimate of profits generated by Mexican drug cartels is about USD 9 billion per year.
• In Canada, Illicit funds generated and laundered amounted to USD5 billion to USD17 billion, according to a 1998 comment by the Canadian Solicitor General.
• According to the Swiss Finance Ministry’s estimates in 1998, the country was implicated in USD500 billion laundered money every year.
• In Indonesia, an amount of USD500,000 is washed per week by West Africans and Southeast Asians using West African Couriers, according to a US law enforcement agency.
• Money laundering activity in Italy totaled more than USD50 billion per year, according to informal estimates in 1997.

Stages of Money Laundering

The purpose of money laundering is to convert dirty money into clean money. In order to do that, criminals used to transact money across various financial institutions and countries in various forms of assets or investments, before the money reaches its intended destination. A typical money laundering activity involves three stages:

1. Placement: It is the first stage of money laundering and it involves the introduction of ill-gotten money into the financial system by some means. By doing this, the criminal is able to remove the money from the original location of acquisition to avoid detection by law enforcement authorities. For example, a criminal may purchase financial instruments such as cheques and money orders to be deposited into accounts in another location.
2. Layering: In the next stage, the criminal carries out complex financial transactions to camouflage the illegal source of the cash. Here, the money can be transferred across multiple institutions and jurisdictions and can also change its form. Money can be transformed into bonds, gold, luxury goods, real estate or even loan repayments. Criminals may also do multiple wire transfers between multiple accounts of different individuals to increase complexity. In order to avoid suspicion, they may break a large amount of money into small amounts. The method is known as smurfing.
3. Integration: It involves acquiring wealth or spending on legitimate business activities by using ‘now-laundered money’. At this stage, money reaches the intended destination in a legitimate form. Successful integration of criminal money into the economic or financial system means a successful money laundering attempt. Typically, it is very difficult to catch the criminal if the money reaches this stage.

The stages of money laundering are represented in the image below.

Please note that some of these steps may not be there in some money laundering cases. For example, non-cash proceeds that are already in the financial system need not be placed.