What is Money Laundering?

Money laundering is the generic term used to describe the process by which criminals disguise the original ownership and control of the proceeds of criminal conduct by making such proceeds appear to have derived from a legitimate source.

The processes by which criminally derived property may be laundered are extensive. Though criminal money may be successfully laundered without the assistance of the financial sector, the reality is that hundreds of billions of dollars of criminally derived money is laundered through financial institutions, annually. The nature of the services and products offered by the financial services industry (namely managing, controlling and possessing money and property belonging to others) means that it is vulnerable to abuse by money launderers.

Money laundering offences have similar characteristics globally. There are two key elements to a money laundering offence:

  1. The necessary act of laundering itself i.e. the provision of financial services; and
  2. A requisite degree of knowledge or suspicion (either subjective or objective) relating to the source of the funds or the conduct of a client.

The act of laundering is committed in circumstances where a person is engaged in an arrangement (i.e. by providing a service or product) and that arrangement involves the proceeds of crime. These arrangements include a wide variety of business relationships e.g. banking, fiduciary and investment management.

Money Laundering Three-Step Process

Money laundering is a three-part process. Laundered funds aren’t considered “clean” until the integration step is completed.

1. Placement
First things first: “placing” ill-gotten gains into the financial system. Detection risk is greatest during the placement phase due to large-deposit reporting requirements and the questions that naturally arise when large sums of money appear out of the blue.

2. Layering

Layering involves complex (or, at least, confusing) financial maneuvers that slice and dice the initial placement. Common layering tactics include:

  • Wire transfers between bank accounts, often held in multiple names, at multiple banks, and in multiple countries
  • Property or service transactions with shell companies (legal business entities that exist only on paper and perform no legitimate economic function)
  • High-dollar purchases of tangible goods or commodities, such as yachts, luxury cars, and gold
  • Purchases of real estate investment properties, including luxury homes and condominiums

3. Integration
During the final step, integration, laundered funds become legitimate. Since it generally involves legal transactions, integration is regarded as the lowest-risk part of the laundering process – though it’s not immune to scrutiny.

Examples of integration include:

  • Sale or transfer of high-dollar items purchased with laundered funds
  • Sale or transfer of real estate purchased with laundered funds
  • Legitimate purchases of securities or other financial instruments in the launderer’s or launderer’s legitimate business entities’ name(s)
  • Legitimate transactions with legal entities controlled by the launderer or their associates.

Common Money Laundering Use Cases

We’ve seen how money laundering works. Simple enough. But why is it used? Here’s a look at several broad domains where money laundering is common.

1. Drug Trafficking

Drug trafficking is a cash-intensive business. Its supply chain is often formidably complex, crossing oceans and multiple international boundaries, and it’s usually illegal from start to finish.

2. International Terrorism

For ideologically motivated terrorist groups, money is a means to an end. Still, every terrorist organization – and lone wolves too – require some source of funds.

3. Embezzlement

embezzlement is “defined in most states as theft/larceny of assets (money or property) by a person in a position of trust or responsibility over those assets…[and] typically occurs in the employment and corporate settings.”

Whether you take cash directly out of the cash register or mastermind a complex scheme to relieve your bank’s clients of funds held in their accounts, you’re committing embezzlement. The “Office Space” guys’ ill-fated scheme is a perfect example. Since embezzled funds are by definition illicit, their source needs to be concealed before they’re safe to spend.

4. Arms Trafficking

Like drug traffickers, arms dealers trade in illegal, expensive products that need to be bought and sold off the books. But not all money laundering prosecutions arising out of arms trafficking investigations involve thousands of weapons and vast sums of money

5. Other Use Cases

For better or worse, there are lots of ways to make money illegally – and, it follows, a lot of reasons to launder money. Mana fort and Gates don’t fall neatly into these four buckets, for instance. Much of Mana fort’s illicit income came from unregistered, off-the-books political consulting for foreign governments and individuals, for instance – a crime in and of itself.