6.4 Money laundering
10 min read•august 20, 2024
Money laundering, a critical component of organized crime, involves disguising illegal proceeds as legitimate funds. This process enables criminals to enjoy illicit profits without drawing attention from law enforcement. Understanding money laundering is crucial for combating financial crimes and maintaining the integrity of the global financial system.
The money laundering process consists of three stages: , , and . Various schemes, such as and , are employed to conceal the origin of funds. Anti-money laundering laws and reporting requirements aim to detect and prevent these activities, with significant penalties for violations.
Elements of money laundering
- Money laundering is the process of disguising the proceeds of illegal activities to make them appear legitimate
- Key elements include concealment of the source of funds, transfer of funds through multiple accounts or jurisdictions, and integration of laundered funds into the legitimate economy
- Money laundering is a critical component of organized crime and enables criminals to enjoy the profits of their illicit activities without drawing attention from law enforcement
Money laundering process
Placement stage
Top images from around the web for Placement stage
Black Dossier 2: HSBC & the Global Drug Trade View original
Is this image relevant?
Identifying Money Laundering in Business Operations as a Factor for Estimating Risk - Research leap View original
Is this image relevant?
Identifying Money Laundering in Business Operations as a Factor for Estimating Risk - Research leap View original
Is this image relevant?
Black Dossier 2: HSBC & the Global Drug Trade View original
Is this image relevant?
Identifying Money Laundering in Business Operations as a Factor for Estimating Risk - Research leap View original
Is this image relevant?
1 of 3
Top images from around the web for Placement stage
Black Dossier 2: HSBC & the Global Drug Trade View original
Is this image relevant?
Identifying Money Laundering in Business Operations as a Factor for Estimating Risk - Research leap View original
Is this image relevant?
Identifying Money Laundering in Business Operations as a Factor for Estimating Risk - Research leap View original
Is this image relevant?
Black Dossier 2: HSBC & the Global Drug Trade View original
Is this image relevant?
Identifying Money Laundering in Business Operations as a Factor for Estimating Risk - Research leap View original
Is this image relevant?
1 of 3
- Initial stage where illegally obtained funds are introduced into the financial system
- Methods include cash deposits to avoid reporting requirements (smurfing), commingling illicit funds with legitimate business revenue, and purchasing high-value assets like real estate or jewelry
- Placement is often the riskiest stage for money launderers as large cash transactions can trigger suspicion
- Examples: Depositing cash from drug sales into multiple bank accounts, using cash to purchase casino chips
Layering stage
- Complex series of financial transactions designed to obscure the origin of the funds and create a trail that is difficult to trace
- Techniques include transferring funds through multiple accounts, often in different jurisdictions (offshore banking), converting funds into different currencies or financial instruments, and using shell companies to hide ownership
- Goal is to create a convoluted paper trail that separates the funds from their illegal source
- Examples: Wiring funds through a series of offshore bank accounts, purchasing and reselling real estate to create a chain of transactions
Integration stage
- Final stage where laundered funds are reintroduced into the legitimate economy, appearing as legal profits from legitimate sources
- Methods include investing in real estate, luxury goods, or legitimate businesses, or simply spending the funds on personal expenses
- Integration allows criminals to enjoy their illicit profits without raising suspicion
- Examples: Purchasing a luxury car with funds from a shell company, investing in a legitimate business as a silent partner
Types of money laundering schemes
Smurfing
- Structuring cash deposits or transactions to avoid reporting requirements, often by using multiple individuals (smurfs) to make small transactions under the reporting threshold
- Smurfing allows large sums of illicit cash to be introduced into the financial system without triggering suspicious activity reports
- Example: Recruiting a group of individuals to make cash deposits of 10,000 reporting threshold
Trade-based laundering
- Using international trade transactions to disguise the movement of illicit funds, often by manipulating invoices or shipping documents
- Techniques include over- or under-invoicing, falsely describing goods, or using multiple invoices for the same shipment
- Trade-based laundering exploits the complexity of international trade and the difficulty of verifying the true value of goods
- Example: Exporting a shipment of electronics worth 10 million, allowing $9 million in illicit funds to be transferred as payment
Casino laundering
- Using casinos to disguise the origin of illicit funds by converting cash into chips, gambling, and then cashing out with a casino check or wire transfer
- Casinos offer a mix of cash-intensive transactions, entertainment, and financial services that can be exploited by money launderers
- Example: Purchasing $100,000 in casino chips with cash from drug sales, making a few small bets, and then cashing out the remaining chips as "winnings"
Real estate laundering
- Investing illicit funds in real estate, either through direct purchases or complex financing schemes
- Real estate provides a stable, high-value asset that can appreciate over time and generate a legitimate income stream
- Techniques include using shell companies to hide ownership, overvaluing properties to justify large transfers of funds, and using real estate transactions to commingle illicit and legitimate funds
- Example: Purchasing a $5 million apartment with funds from corruption, then selling it a year later and claiming the profits as legitimate investment income
Shell company laundering
- Using fictitious or front companies with no real business operations to hide ownership and disguise the movement of illicit funds
- Shell companies can be incorporated in jurisdictions with weak transparency requirements, making it difficult to identify the true owners or beneficiaries
- Illicit funds can be transferred between shell companies or used to purchase assets, creating a complex web of transactions to obscure the money trail
- Example: Creating a network of shell companies in different offshore jurisdictions, each owned by the other, to transfer funds from a fraud scheme and make it difficult for investigators to trace the money back to the perpetrators
Anti-money laundering laws
Bank Secrecy Act
- Requires financial institutions to assist U.S. government agencies in detecting and preventing money laundering
- Mandates reporting of cash transactions exceeding $10,000 and maintenance of records for certain financial activities
- Establishes customer identification and due diligence requirements for financial institutions
- Provides a framework for information sharing between financial institutions and law enforcement agencies
USA PATRIOT Act
- Expanded the scope of the in response to the 9/11 terrorist attacks
- Increased information sharing between law enforcement and intelligence agencies
- Strengthened customer identification procedures and due diligence requirements for financial institutions
- Expanded anti-money laundering requirements to new industries, such as insurance companies and securities firms
Financial Action Task Force (FATF) recommendations
- International standards for combating money laundering and terrorist financing developed by the FATF, an intergovernmental organization
- Provide a comprehensive framework for countries to implement effective anti-money laundering measures
- Cover areas such as customer due diligence, record-keeping, reporting of suspicious transactions, and international cooperation
- Countries are periodically assessed on their compliance with FATF recommendations and can face sanctions for non-compliance
Reporting requirements for financial institutions
Currency transaction reports (CTRs)
- Reports filed by financial institutions for cash transactions exceeding $10,000 in a single day
- Includes deposits, withdrawals, currency exchanges, and other cash transactions
- Helps identify individuals making large cash transactions and detect potential money laundering activities
- Example: A bank customer depositing $12,000 in cash would trigger a CTR filing
Suspicious activity reports (SARs)
- Reports filed by financial institutions for transactions that appear suspicious or have no apparent lawful purpose
- Includes transactions that deviate from a customer's normal activity, involve large amounts of cash, or have no clear economic rationale
- Provides valuable intelligence for law enforcement agencies investigating money laundering and other financial crimes
- Example: A customer with a modest income suddenly making large, frequent wire transfers to offshore accounts would trigger a SAR filing
Know your customer (KYC) rules
- Requirements for financial institutions to verify the identity of their customers and understand their financial activities
- Includes collecting and verifying identifying information, determining the purpose of the account, and assessing the risk of money laundering or terrorist financing
- Helps financial institutions detect and report suspicious activities and comply with anti-money laundering regulations
- Example: A bank requiring a new customer to provide a government-issued ID, proof of address, and information about their occupation and expected account activity
Penalties for money laundering
Criminal penalties
- Individuals convicted of money laundering can face significant prison sentences, often up to 20 years or more
- Penalties can be enhanced for aggravating factors, such as laundering funds from drug trafficking or terrorism, or for repeat offenders
- Example: In the United States, the maximum penalty for money laundering is 20 years in prison and a fine of up to $500,000 or twice the value of the laundered funds
Civil penalties
- Financial institutions and individuals can face substantial civil for violating anti-money laundering laws and regulations
- Penalties can be based on the value of the transactions involved, the severity of the violations, and the institution's history of compliance
- Example: In 2012, HSBC paid a record $1.9 billion in for failing to implement adequate anti-money laundering controls
Forfeiture of assets
- Assets involved in money laundering or purchased with laundered funds can be seized and forfeited by the government
- can be civil (against the property itself) or criminal (as part of a criminal prosecution)
- Forfeited assets can be used to compensate victims, fund law enforcement efforts, or be returned to the general treasury
- Example: In the 1MDB scandal, the U.S. Department of Justice seized over $1 billion in assets, including real estate, artwork, and a luxury yacht, that were purchased with funds stolen from the Malaysian sovereign wealth fund
International cooperation in combating money laundering
Mutual legal assistance treaties (MLATs)
- Agreements between countries to provide assistance in criminal investigations and prosecutions
- Allow for the exchange of evidence, witness testimony, and other legal cooperation across borders
- Critical for investigating money laundering cases that involve multiple jurisdictions and for tracing illicit funds through international financial systems
- Example: The United States has MLATs with over 60 countries, enabling law enforcement agencies to gather evidence and pursue money laundering cases across borders
Extradition agreements
- Treaties between countries that allow for the transfer of individuals accused or convicted of crimes to face prosecution or serve sentences
- Important for bringing money launderers to justice when they have fled to other jurisdictions to avoid prosecution
- Extradition can be complex and politically sensitive, particularly when countries have different legal systems or diplomatic tensions
- Example: In 2020, the United Kingdom extradited a Pakistani businessman to the United States to face charges of laundering over $140 million in corrupt funds
Challenges in detecting and prosecuting money laundering
Complexity of financial transactions
- Money launderers often use sophisticated financial techniques and instruments to obscure the origin and ownership of illicit funds
- Tracing funds through multiple jurisdictions, shell companies, and complex transactions can be time-consuming and resource-intensive for investigators
- Example: The Panama Papers investigation revealed a complex web of offshore companies and trusts used to hide billions of dollars in illicit funds, requiring years of analysis by journalists and law enforcement agencies
Use of offshore jurisdictions
- Money launderers often exploit countries with weak anti-money laundering regulations, limited transparency, or strong financial secrecy laws
- Offshore jurisdictions can make it difficult for investigators to obtain information about beneficial owners, financial transactions, or assets held in the country
- Example: The Cayman Islands, a popular offshore financial center, has been criticized for its lack of transparency and its role in enabling money laundering and tax evasion
Rapidly evolving technology
- New financial technologies, such as cryptocurrencies and online payment systems, can be exploited by money launderers to move funds quickly and anonymously
- Investigators must continually adapt to new money laundering techniques and stay up-to-date with emerging technologies
- Example: The rise of Bitcoin and other cryptocurrencies has created new challenges for anti-money laundering efforts, as transactions can be difficult to trace and users can maintain a high degree of anonymity
Money laundering vs. terrorist financing
- Money laundering and terrorist financing are related but distinct financial crimes
- Money laundering involves disguising the proceeds of illegal activities to make them appear legitimate, while terrorist financing involves raising and moving funds to support terrorist activities
- Terrorist financing may involve legitimate funds (such as donations) as well as illicit funds, and often involves smaller amounts of money than typical money laundering schemes
- Anti-money laundering laws and regulations also apply to combating terrorist financing, but with additional focus on identifying and disrupting the flow of funds to terrorist organizations
Role of cryptocurrency in money laundering
- Cryptocurrencies, such as Bitcoin, offer a degree of anonymity and can be used to move funds quickly across borders without going through traditional financial institutions
- Money launderers can use cryptocurrencies to obscure the origin of illicit funds, layer transactions to create a complex trail, and convert funds back into traditional currencies
- Cryptocurrency exchanges and other service providers are increasingly subject to anti-money laundering regulations, such as customer identification and transaction reporting requirements
- Example: In 2013, the U.S. Department of Justice shut down Liberty Reserve, a digital currency platform that was used to launder over $6 billion in criminal proceeds
Famous money laundering cases
Bank of Credit and Commerce International (BCCI)
- BCCI was a international bank that was involved in widespread money laundering, fraud, and other illegal activities in the 1980s and early 1990s
- The bank was used by drug traffickers, dictators, and terrorists to launder billions of dollars in illicit funds
- BCCI's collapse in 1991 led to a global investigation and increased focus on anti-money laundering efforts in the financial industry
Operation Casablanca
- A U.S. Customs Service investigation in the late 1990s that uncovered a major money laundering operation involving Mexican and Colombian drug cartels
- The investigation led to the arrest of over 200 individuals and the seizure of over $100 million in illicit funds
- Operation Casablanca highlighted the role of U.S. banks in facilitating money laundering and led to increased scrutiny of the industry
Liberty Reserve
- A Costa Rica-based digital currency platform that was used to launder over $6 billion in criminal proceeds from 2006 to 2013
- Liberty Reserve allowed users to create accounts and transfer funds anonymously, making it attractive to money launderers and other criminals
- The U.S. Department of Justice shut down Liberty Reserve in 2013 and charged its founders with money laundering and operating an unlicensed money transmitting business
- The case highlighted the risks of virtual currencies and the need for effective regulation and enforcement in the digital financial space
Key Terms to Review (32)
Anti-money laundering (AML) laws: Anti-money laundering (AML) laws are regulations designed to prevent the practice of generating income through illegal activities and disguising it as legitimate funds. These laws impose obligations on financial institutions and other regulated entities to monitor and report suspicious activities that could indicate money laundering or related financial crimes. AML laws are essential in combating crime and promoting the integrity of financial systems globally.
Bank of Credit and Commerce International (BCCI): The Bank of Credit and Commerce International (BCCI) was an international bank founded in 1972 that became notorious for its involvement in money laundering, fraud, and various financial crimes. BCCI operated a network of banks worldwide, allowing it to facilitate illicit activities by exploiting regulatory loopholes and weak banking laws in different countries, which made it a central figure in discussions about money laundering and financial crime.
Bank Secrecy Act: The Bank Secrecy Act (BSA) is a U.S. law enacted in 1970 that requires financial institutions to assist government agencies in detecting and preventing money laundering and other financial crimes. By mandating the reporting of certain transactions and maintaining records, the BSA plays a critical role in the fight against money laundering by providing authorities with valuable information to track illicit activities.
Casino laundering: Casino laundering refers to the process of disguising illicitly obtained money by funneling it through casinos, where it can be exchanged for chips and then redeemed, giving it the appearance of legitimate gambling winnings. This technique is a method of money laundering that exploits the cash-heavy nature of casinos, allowing criminals to integrate illegal funds into the financial system. By using casinos, launderers can obscure the original source of their funds and make them appear clean.
Civil penalties: Civil penalties are non-criminal sanctions imposed by a regulatory body or court to punish unlawful behavior and deter future violations. These penalties often come in the form of fines or orders to comply with regulations, and they aim to promote adherence to laws without the stigma of a criminal conviction. Understanding civil penalties is essential when looking at issues like financial crimes and tax-related offenses, as they play a crucial role in holding individuals and organizations accountable.
Clean money: Clean money refers to funds that have been laundered to appear legitimate, free from any illegal origins. This process is crucial in money laundering, where illicit money is transformed to make it seem like it was acquired legally, allowing criminals to use it without raising suspicion. The importance of clean money lies in its ability to enable individuals and organizations to integrate their funds into the legitimate economy while evading law enforcement scrutiny.
Criminal penalties: Criminal penalties are the legal consequences imposed by a court on individuals who have been convicted of crimes. These penalties can include imprisonment, fines, community service, probation, and other forms of punishment intended to deter criminal behavior, rehabilitate offenders, and provide restitution to victims. Different types of crimes can result in varying degrees of penalties based on the severity of the offense and the impact on society.
Currency Transaction Reports (CTRs): Currency Transaction Reports (CTRs) are mandatory reports that financial institutions must file with the government for transactions involving more than $10,000 in cash. These reports serve as a key tool for detecting and preventing money laundering and other financial crimes, as they provide insights into large cash movements that could be indicative of illegal activity. By monitoring these transactions, authorities can investigate suspicious patterns and take appropriate action to combat financial crime.
Dirty money: Dirty money refers to funds obtained through illegal activities, such as drug trafficking, corruption, or fraud. These funds are often concealed to make them appear legitimate, creating a need for money laundering to integrate them into the financial system without attracting suspicion. Understanding dirty money is crucial in recognizing how illicit gains can undermine economies and lead to further criminal activities.
EU Anti-Money Laundering Directive: The EU Anti-Money Laundering Directive is a legislative framework established by the European Union aimed at combating money laundering and terrorist financing across member states. It sets out specific requirements for financial institutions and other obligated entities to detect, prevent, and report suspicious activities, ensuring a consistent approach to anti-money laundering efforts throughout Europe.
Extradition Agreements: Extradition agreements are treaties or legal arrangements between countries that outline the process by which one country can surrender a suspected or convicted criminal to another country for prosecution or punishment. These agreements are crucial for international cooperation in law enforcement, ensuring that individuals who commit crimes in one jurisdiction can be held accountable in another, particularly in cases like money laundering where offenders often exploit cross-border transactions to conceal illegal activities.
Financial Action Task Force (FATF): The Financial Action Task Force (FATF) is an intergovernmental organization founded in 1989 to combat money laundering and terrorist financing. It sets international standards and promotes measures to ensure that these financial crimes are effectively tackled by member countries. By providing a framework for countries to develop their own legal and regulatory frameworks, FATF plays a crucial role in the global fight against financial crime.
FinCEN: The Financial Crimes Enforcement Network (FinCEN) is a bureau of the U.S. Department of the Treasury that focuses on combating financial crimes, including money laundering and terrorist financing. By collecting and analyzing financial data, FinCEN plays a critical role in safeguarding the U.S. financial system from illegal activities, ensuring compliance with anti-money laundering (AML) laws and regulations.
Fines: Fines are monetary penalties imposed by a court or regulatory body as punishment for committing an offense. They serve as both a deterrent and a means of reparation, aiming to hold individuals accountable while also discouraging future unlawful behavior. The amount of a fine can vary significantly depending on the severity of the offense, the intent of the offender, and any previous convictions.
Forfeiture: Forfeiture refers to the legal process where individuals lose property or assets as a penalty for illegal activity or as a result of criminal convictions. This concept often applies in cases involving illicit gains from crimes, allowing law enforcement to seize items or money connected to offenses like theft or money laundering. The goal of forfeiture is not only to punish offenders but also to disrupt their financial incentives and deter future crime.
Forfeiture of assets: Forfeiture of assets refers to the legal process where the government takes ownership of property or money that is believed to be connected to criminal activity. This often occurs in cases involving financial crimes, such as money laundering, where illicit funds or properties are seized to prevent criminals from benefiting from their unlawful actions. The process serves as a deterrent and seeks to disrupt the financial networks that support criminal enterprises.
HSBC Money Laundering Scandal: The HSBC Money Laundering Scandal refers to a series of events where the global bank HSBC was implicated in facilitating money laundering activities for drug cartels and other criminal organizations from 2006 to 2010. The scandal highlighted significant failures in compliance and risk management practices, resulting in a landmark settlement with U.S. authorities in 2012, which exposed vulnerabilities in the banking system related to illicit financial flows.
Imprisonment: Imprisonment refers to the act of confining a person against their will, typically as a result of a legal judgment or as a consequence of criminal behavior. This confinement can occur in various forms, including jails, prisons, or detention facilities, and is often associated with the deprivation of personal liberty as a penalty for offenses. It plays a crucial role in the criminal justice system, reflecting society's response to crime and the protection of public safety.
Integration: Integration, in the context of money laundering, refers to the final stage where illicit funds are reintroduced into the legitimate economy, making it difficult to trace their criminal origins. This process often involves a series of complex financial transactions designed to disguise the source of the funds and establish them as legitimate income. Successful integration can make it challenging for law enforcement to connect the money back to its illegal origins, thus completing the money laundering cycle.
Know Your Customer (KYC) Rules: Know Your Customer (KYC) rules are regulatory requirements that financial institutions must follow to verify the identity of their clients. These rules are crucial in preventing fraud, money laundering, and other illicit activities by ensuring that institutions have a clear understanding of their customers' identities, financial activities, and risk profiles. KYC procedures are a key component of the broader effort to combat money laundering and protect the integrity of the financial system.
Layering: Layering is the second stage of money laundering, where illicit funds are separated from their source through a series of complex financial transactions. This stage aims to obscure the origin of the funds and make tracing them more difficult for law enforcement. By moving the money through various channels, such as banks, shell companies, and international transactions, criminals can further disguise the source of the money and integrate it into the legitimate financial system.
Mutual Legal Assistance Treaties (MLATs): Mutual Legal Assistance Treaties (MLATs) are agreements between two or more countries that facilitate the exchange of information and evidence in criminal matters. These treaties help countries cooperate in investigating and prosecuting crimes, especially when those crimes cross international borders. MLATs are crucial in the fight against money laundering, as they enable nations to share financial data and other pertinent information necessary for tracking illicit financial flows and prosecuting offenders effectively.
Placement: Placement refers to the first stage of money laundering, where illicitly obtained funds are introduced into the financial system. This initial step is crucial as it aims to distance the money from its criminal origins and make it appear legitimate. Placement often involves methods such as depositing cash into banks, purchasing financial instruments, or making large cash purchases to integrate the dirty money into the economy without raising suspicion.
Proceeds of crime: Proceeds of crime refers to any property, assets, or money that is obtained directly or indirectly through illegal activities or criminal offenses. This concept is central to understanding how criminals profit from their actions and the subsequent efforts to trace and recover these ill-gotten gains. Recognizing the proceeds of crime is essential for effective law enforcement and combating money laundering, as it allows authorities to target the financial benefits derived from unlawful conduct.
Real Estate Laundering: Real estate laundering is the process of using real estate transactions to disguise the origins of illegally obtained money, making it appear legitimate. This method exploits the complex nature of real estate markets, where large sums of money change hands, allowing individuals to integrate illicit funds into the legitimate economy. It often involves over- or under-valuing properties, using shell companies, and employing various schemes to obscure the true ownership and source of funds.
Shell company laundering: Shell company laundering is a method of money laundering that involves creating or using a shell company—an entity that exists only on paper without significant operations or assets—to conceal the origins of illicit funds. This tactic allows criminals to obscure the trail of dirty money, making it appear as if it originates from legitimate business activities, thus facilitating its integration into the financial system without raising suspicion.
Smurfing: Smurfing is a money laundering technique that involves breaking down large amounts of illicit funds into smaller, less suspicious sums, which are then deposited into various bank accounts. This method aims to avoid detection by financial institutions and law enforcement agencies by making the transactions appear as legitimate, low-risk activities. Smurfing is commonly used in conjunction with other money laundering techniques to disguise the origin of illegally obtained money.
Structuring: Structuring is a method used to break down large amounts of cash into smaller, less suspicious amounts to evade detection by authorities, particularly in the context of money laundering. This technique helps individuals avoid triggering mandatory reporting thresholds that banks and financial institutions are required to report, which can reveal illicit activities. Structuring serves as a crucial step in the money laundering process, allowing criminals to make their illegal funds appear legitimate without drawing attention.
Suspicious Activity Reports (SARs): Suspicious Activity Reports (SARs) are documents that financial institutions and certain other entities must file with the government when they detect suspicious or potentially illegal activity. These reports play a crucial role in identifying and combating money laundering and other financial crimes, as they alert authorities to transactions that may indicate wrongdoing, enabling further investigation and action.
Trade-based laundering: Trade-based laundering is a method of money laundering that involves disguising the proceeds of crime by using international trade transactions to obscure the true origin of the funds. This technique exploits the complexities of trade regulations and pricing discrepancies to make illicit funds appear legitimate, often through over- or under-invoicing goods and services. By manipulating trade invoices, criminals can transfer value across borders without drawing attention from law enforcement.
United Nations Convention Against Corruption: The United Nations Convention Against Corruption is an international treaty aimed at combating corruption in both public and private sectors, adopted by the UN General Assembly in 2003. It establishes a comprehensive framework for countries to develop anti-corruption strategies, promote transparency, and enhance cooperation in the investigation and prosecution of corruption-related offenses. This convention plays a crucial role in addressing money laundering by promoting the adoption of effective measures to prevent and combat financial crimes linked to corrupt practices.
USA PATRIOT Act: The USA PATRIOT Act is a legislation enacted in response to the September 11, 2001 terrorist attacks aimed at enhancing national security by expanding the government's surveillance and investigative powers. This act allows for increased monitoring of financial transactions and data, which directly connects to efforts to combat money laundering and other financial crimes associated with terrorism financing.