Money Laundering

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What is 'Money Laundering'

Money laundering is the process of creating the appearance that large amounts of money obtained from criminal activity, such as drug trafficking or terrorist activity, originated from a legitimate source. The money from the illicit activity is considered dirty, and the process "launders" the money to make it look clean.

BREAKING DOWN 'Money Laundering'

Illegally earned money needs laundering in order for criminal organization to use it effectively. Dealing in large amounts of illegal cash is inefficient and dangerous. The criminals need a way to deposit the money in financial institutions, yet they can only do so if the money appears to come from legitimate sources.

There are three steps involved in the process of laundering money: placement, layering and integration. Placement refers to the act of introducing "dirty money" (money obtained through illegitimate, criminal means) into the financial system in some way. Layering is the act of concealing the source of that money by way of a series of complex transactions and bookkeeping tricks. Integration refers to the act of acquiring that money in purportedly legitimate means.

Money-Laundering Tactics

There are many ways to launder money, ranging from simple to complex. One of the most common ways to launder money is through a legitimate cash-based business owned by a criminal organization. For instance, if the organization owns a restaurant, it might inflate the daily cash receipts to funnel its illegal cash through the restaurant and into the bank. Then they can distribute the funds to the owners out of the restaurant's bank account. These types of businesses are often referred to as "fronts."

Another common form of money laundering is called smurfing, where a person breaks up large chunks of cash into multiple small deposits, often spread out over many different accounts, to avoid detection. Money laundering can also be done through the use of currency exchanges, wire transfers, and "mules" or cash smugglers, who smuggle large amounts of cash across borders to deposit them in offshore accounts where money-laundering enforcement is less strict. Other money-laundering methods involve investing in commodities such as gems and gold that can be easily moved to other jurisdictions, discretely investing in and selling valuable assets such as real estate, gambling, counterfeiting and creating shell companies.

While traditional money-laundering methods are still used, the internet has put a new spin on an old crime. The use of the internet allows money launderers to easily avoid detection. The rise of online banking institutions, anonymous online payment services, peer-to-peer transfers using mobile phones and the use of virtual currencies such as Bitcoin have made detecting the illegal transfer of money even more difficult. Moreover, the use of proxy servers and anonymizing software makes the third component of money laundering, integration, almost impossible to detect, as money can be transferred or withdrawn leaving little or no trace of an IP address.

In many ways, the new frontier of money laundering and criminal activity lays in cryptocurrencies. While not totally anonymous, these forms of currencies are increasingly being used in currency blackmailing schemes, drug trade and other criminal activities due to their anonymity compared to other forms of currency.

Money can also be laundered through online auctions and sales, gambling websites and even virtual gaming sites, where ill-gotten money is converted into gaming currency, then transferred back into real, usable and untraceable "clean" money.

Anti-money-laundering laws (AML) have been slow to catch up to these types of cybercrimes, since most AML laws attempt to uncover dirty money as it passes through traditional banking institutions. As money launderers attempt to remain undetected by changing their approach, keeping one step ahead of law enforcement, international organizations and governments are working together to find new ways to detect them.

Combating Money Laundering

The government has become increasing vigilant in its efforts to combat money laundering over the years by passing anti-money-laundering regulations. These regulations require financial institutions to have systems in place to detect and report suspected money-laundering activities.

In 1989, the Group of Seven (G-7) formed an international committee called the Financial Action Task Force (FATF) in an attempt to fight money laundering on an international scale. In the early 2000s, its purview was expanded to combating the financing of terrorism.

The United States passed the Banking Security Act in 1970, requiring financial institutions to report certain transactions to the Department of the Treasury, such as cash transactions above $10,000 or any transactions they deem suspicious, on a suspicious activity report (SAR).

The information these banks provide to the Treasury Department is used by the Financial Crimes Enforcement Network (FinCEN), where it can then be sent to domestic criminal investigators, international bodies or foreign financial intelligence units.

While these laws were helpful in tracking criminal activity through financial transactions, money laundering itself wasn't made illegal in the United States until 1986, with the passage of the Money Laundering Control Act. This law removed limits on the amount of money involved and individual intent to give the federal government more room to prosecute money laundering.

Shortly after the 9/11 terrorist attacks, The USA Patriot Act strengthened money-laundering prevention by allowing the use of investigative tools designed for organized crime and drug trafficking prevention for terrorist investigations. Title III of the Patriot Act, called the "International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001," seeks to prevent the exploitation of the American financial system by parties suspected of terrorism, terrorist financing and money laundering. The law imposes strict bookkeeping requirements and also authorizes the Secretary of the U.S. Treasury to develop regulations that encourage better communication between financial institutions with the goal of making it more difficult for money launderers to hide their identities. The Treasury can also halt the merger of two banking institutions if both entities have a history of failing to put adequate anti-money-laundering procedures in place.

The Association of Certified Anti-Money Laundering Specialists (ACAMS) offers a professional designation known as a Certified Anti-Money Laundering Specialist (CAMS). Requirements to gain CAMS certification include obtaining 40 qualifying credits based on education, work experience and other professional certifications, and passing the CAMS examination. Professionals who earn CAMS certification may work as brokerage compliance managers, Bank Secrecy Act officers, financial intelligence unit managers, surveillance analysts and financial crimes investigative analysts.

Impact of Money Laundering

According to a 2016 survey from PwC, global money laundering transactions account for roughly 2% to 5% of global GDP, or roughly $1 trillion to $2 trillion annually.

Although the act of money laundering itself is a victimless, white-collar crime, it is often connected to serious and sometimes violent criminal activity. Being able to stop money laundering is, in effect, being able to stop the cash flows of criminals, including international organized crime.

Money laundering also impacts legitimate business interests by making it much more difficult for honest businesses to compete in the market since money launderers often provide products or services at less than market value. Where a financial institution or business is also regulated by the government, money laundering, or a failure to put reasonable anti-laundering policies in place, can result in a revocation of a business charter or government licenses.

Businesses that associate with people, countries or entities that launder money face the possibility of fines. Deutsche Bank, ING, the Royal Bank of Scotland, Barclays and Lloyds Banking Group are among institutions that have been fined for being involved with transactions associated with money-laundering activities in countries such as Iran, Libya, Sudan and Russia.

In one famous money-laundering case, international bank HSBC was fined for a failure to put proper anti-money laundering measures in place. According to the U.S. federal government, HSBC was guilty of little or no oversight of transactions by its Mexican unit that included providing money-laundering services to various drug cartels involving bulk movements of cash from HSBC's Mexican unit to the Unites States. The government said HSBC failed to maintain proper records as part of its AML measures. This included a huge backlog of unreviewed accounts and a failure by HSBC to file suspicious activity reports. After a year-long investigation, the federal government indicated HSBC had failed to comply with U.S. banking laws and consequently subjected the United States to Mexican drug money, suspicious traveler's checks and bearer share corporations. In 2012, the bank agreed to pay $1.92 billion in fines to U.S. authorities.