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Money Laundering 101: What It Is and How Criminals Do It


Money Laundering 101: What It Is and How Criminals Do It

Money laundering is a big deal in the criminal world. It’s how crooks try to hide where their money came from and make it look legit. This article will explain what money laundering is, why criminals do it, and how they try to get away with it.

What is Money Laundering?

Money laundering is when criminals try to make dirty money look clean. They take money from illegal activities like drug dealing, human trafficking, or fraud schemes and then pass it through a cycle of transactions to make it seem like it came from a legal business[1].

The point is to hide where the money originally came from. If a drug dealer just deposited huge piles of cash in the bank all the time, it would be obvious what they’re up to. But if they run it through a bunch of different accounts, businesses, etc first it can disguise the source.

Some people say money laundering is like how regular laundering cleans dirty clothes – it tries to clean the “dirt” off dirty money.

Why Do Criminals Launder Money?

Criminals want to launder money for a few big reasons:

  • To hide criminal activity. If they can make illegal money look legit, it helps avoid getting caught.
  • To use the money more easily. It’s hard to spend piles of dirty cash without raising suspicion.
  • To reinvest in more criminal activity. Laundered money lets them fund bigger schemes.

According to the United Nations, criminals launder over $1 trillion every year[2]. That’s a lot of dirty money getting cleaned.

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How Money Laundering Works

Money laundering usually follows three basic steps:

  1. Placement – This is where criminals first introduce the illegal cash into the financial system. They deposit it into bank accounts, buy assets, etc. The goal is to just get the money in the system without getting caught.
  2. Layering – Next, they transfer or “layer” the money through a bunch of different accounts or businesses to disguise where it came from. There might be multiple banks, shell companies, offshore accounts, and other intermediaries involved.
  3. Integration – In the final step, the money re-enters the mainstream economy but now looks like the proceeds of legitimate business activities and investments. The criminal can now spend it freely without raising suspicion.

This cycle makes it really hard for investigators to link the money back to its criminal origins. Like a good laundry detergent, it helps criminals’ dirty money come out looking clean on the other end.

Examples of Money Laundering

Here are some common techniques criminals use to launder money:

  • Smurfing – This involves breaking up large amounts of cash into smaller deposits to avoid scrutiny. A criminal might deposit $9,000 in 10 different bank accounts instead of $90,000 all at once.
  • Trade-based laundering – Businesses disguise illegal cash as payments for imported goods or services. An invoice might make a shipment look way more valuable than it really is.
  • Shell companies – Setting up fake businesses to mix legal and illegal money through their accounts.
  • Casinos – Criminals can exchange cash for casino chips, gamble a bit, then cash the chips back in as “winnings.”
  • Real estate – Buying expensive properties through shell companies or under fake names.

These are just a few examples. Almost any kind of business can potentially be used to launder money in some way. The possibilities are endless for creative criminals!

Anti-Money Laundering Efforts

Fighting money laundering takes a lot of effort from law enforcement, regulators, financial institutions, and others. Some key ways they try to stop it include:

  • Know Your Customer (KYC) rules – Banks must verify the identity of customers to prevent anonymous accounts.
  • Monitoring transactions – Advanced software looks for suspicious patterns that could indicate laundering.
  • Reporting requirements – Banks must report high-value cash transactions, suspicious activity, etc.
  • International cooperation – Countries work together to track laundering across borders.
  • Investigations – Law enforcement agencies like the FBI follow the money trail to bust criminals.

Despite these efforts, a lot of laundering still slips through the cracks. But authorities around the world are constantly developing new tools and collaborating to close loopholes.

Consequences of Money Laundering

Money laundering doesn’t just enable drug lords to buy more yachts. It has some serious negative impacts on society[3]:

  • It funds criminal and terrorist activity – Laundered cash lets these groups operate at larger scales.
  • It undermines economies – It diverts money from legitimate businesses and can destabilize financial markets.
  • It corrupts professions – Accountants, lawyers, bankers etc. may get drawn into laundering schemes.
  • It affects government revenue – Laundering enables tax evasion, reducing public funds.

Trying to get a handle on money laundering isn’t just about stopping crooks from enjoying their ill-gotten gains. It’s about protecting society from the harmful effects of crime.

Money Laundering Laws and Regulations

The main U.S. laws aimed at fighting money laundering include[4]:

  • The Bank Secrecy Act – Requires banks to report suspicious activity and large cash transactions.
  • The Money Laundering Control Act – Made money laundering a federal crime for the first time.
  • The Patriot Act – Expanded the government’s anti-money laundering powers after 9/11.
  • The Anti-Money Laundering Act – Gave agencies more tools to detect laundering and investigate complex networks.

These laws make money laundering illegal and give authorities various means to monitor financial activities and catch launderers. Penalties can include massive fines and decades in prison.

Many other countries have passed similar laws making money laundering a crime. International organizations like the Financial Action Task Force (FATF) promote policies to combat laundering globally.

Red Flags for Money Laundering

How can you actually spot money laundering in practice? Here are some behaviors that should raise red flags[5]:

  • A customer who seems to have way more money than their job should provide.
  • Someone who is very reluctant to provide personal information.
  • Businesses with huge activity but not much by way of real products or services.
  • Purchasing lots of luxury goods or real estate with cash.
  • Trying to disguise the source of funds by layering many transfers between accounts.

There are many other signs of potential laundering like inconsistent information, unusual transactions, and strange requests. It’s a red flag anytime activity doesn’t match normal expectations.

How to Prevent Money Laundering

Here are some tips for businesses to avoid unknowingly facilitating money laundering:

  • Carefully verify the identity and background of all customers.
  • Keep records of transactions and report anything suspicious.
  • Train employees on warning signs and reporting procedures.
  • Use monitoring systems to detect red flags.
  • Perform due diligence on foreign accounts and high-risk industries.

Following anti-money laundering best practices is essential for any business that handles money. No one wants to become the next unknowing cog in a criminal scheme.

The Bottom Line

Money laundering allows criminals to hide and freely use the proceeds of their illegal activities. But with growing global efforts to “follow the money,” launderers have to get increasingly creative with their schemes. No matter the methods they use, authorities are watching transactions closer than ever to catch the crooks.

Stopping money laundering is an important fight. It not only cripples criminal enterprises but protects the integrity of the financial system. So next time you make a strange deposit or wire transfer, think twice – you never know if it could raise red flags!


[1] https://www.datavisor.com/wiki/money-laundering/

[2] https://www.datavisor.com/wiki/money-laundering/

[3] https://sevenpillarsinstitute.org/financial-ethics-101-money-laundering/

[4] https://www.everycrsreport.com/reports/RL33315.html

[5] https://www.complianceandethics.org/money-laundering-101/

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