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What is money laundering? A simple guide

The goal of money laundering is to make the origin of illicit funds or goods appear legitimate in order to evade detection by authorities and financial watchdogs. Individuals, tax evaders, criminal organisations, corrupt government officials, and even the financiers of terrorism are all capable of engaging in money laundering because it conceals the true origins of the money or goods in question.

The Evolution of Illicit Financial Transactions

Earlier than the year 2000 B.C.

The historical record suggests that Chinese traders hid their profits out of fear of having them confiscated by the state.

‍1920s and '30s: ‍

During the 13 years that the United States banned all alcoholic beverages, organised crime groups (known as "syndicates") flourished in American cities thanks to the lucrative bootlegging trade. Additionally to 'cleaning' dirty money through gambling, these syndicates also engaged in legitimate business enterprises to conceal the origin of their wealth from authorities. Because of the prevalence of launderettes in this category, it's likely that this is where the term "money laundering" originated.

‍The 1970s:

The US Bank Secrecy Act (BSA) of 1970 mandated that businesses report cash transactions over a certain threshold to the US government. This irrevocably boosted the emphasis on tax evasion to a lower priority than the targeting of financial crime profits. The legislation recognises, emphasises, and attempts to curb money laundering in the illegal drug trade. The media first used the term "money laundering" when reporting on the Watergate scandal in 1973.

‍The 1980s:

During Reagan's presidency, the US government's War on Drugs placed a premium on seizing the fortunes of drug lords. Lawmakers in 1986 passed the Money Laundering Control Act (MCLA), which effectively threw down the gauntlet to drug cartels trying to legalise their profits. A number of other countries with close economic and cultural ties to the United States also followed suit, with their respective relevant agencies.

Money laundering is forbidden in relation to the drug trade, as stated in the Vienna Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances of 1988. As part of a formalised agreement, 171 nations committed to working together.

The following year, at the G-7 summit, a group dedicated to studying this type of financial crime, analysing its causes, and developing strategies to prevent or combat it was established: the Financial Action Task Force on Money Laundering (FATF). There are currently 39 people involved with this group.

‍The 1990s:

Money laundering for serious crimes was made illegal in Mexico in 1996, a significant development given Mexico's role as a source and transit point for drug cartels smuggling into the United States.

2000s:

The 9/11 terrorist attacks of 2001 had an impact on the global campaign against money laundering because of the role that terrorist financing played in those attacks. Expanding on the scope and strengthening the rules of the 1986 MLCA, the USA Patriot Act of 2001 stepped up the fight against terrorism and its financiers. There was a rise in the amount of information shared between government agencies, an increase in the amount of information shared between law enforcement and financial institutions, and a rise in the amount of information required of the latter regarding their international financial transactions.

‍2010s:

As international cooperation grew in its fight against money laundering, the rise of cryptocurrencies and online trading opened up new channels through which creative criminals could launder their illicit gains. As a result, governments around the world have passed new anti-money-laundering laws, increased the number of regulations that financial institutions must follow, and made the penalties for noncompliance extremely severe. The financial industry was dragged kicking and screaming into the front lines of the fight against money laundering.

‍2018/19:

Because of developments in technology, the anonymity of the internet, and criminal ingenuity, criminals have begun using interactive, multi-player internet games as a means of laundering money.

From 2020 onwards:

Worldwide, lockdowns and other restrictions have been implemented in response to the ongoing COVID-19 pandemic. Due to increased online activity, increased restrictions on human mobility, and vast improvements in online communication technology, savvy criminals have developed new and sophisticated methods of money laundering, often based on cryptocurrency trading. Practitioners of the field of anti-money laundering (AML) are fighting hard to keep up with and ultimately defeat this new type of financial criminal.

Money Laundering: An Explanation

Money laundering is practised by criminals because the proceeds of their illegal activities often amount to large sums of money that cannot be easily explained or concealed. In order for criminals to have access to these funds without drawing the attention of authorities, it is necessary to conceal their illegal origins.

Criminal Activities That Launder Money

Any number of people or any size of organisation, legitimate or otherwise, can be responsible for money laundering. Some types of people who might commit such a financial crime are:

Drug traffickers (People who deal drugs)

To ensure the safety of its kingpins, this cash-intensive, transnational, and illegal industry relies on a wide variety of methods for concealing the origin of its revenues.


Arms traffickers (Those who deal in arms)

Arms and ammunition trafficking is a global, cash-intensive industry not dissimilar to the narcotics trade. They bring in substantial profits, which must be laundered through lawful channels before being returned to the criminals.


Human traffickers (criminals who deal in human beings)

According to conservative estimates, this underground market generates $150 billion annually around the world. With its expansion came a rise in the use of front companies, exploitative employment practices, funnel accounts, and other payment alternatives, all of which served to meet the growing demand for a means by which violent, cynical criminals to wash the proceeds of their illicit activities.

Financiers for terrorist activities.

Terrorists need money whether they operate domestically or internationally, whether they are lone wolves or part of a larger cell. Terrorists can use either straightforward or intricate methods of money laundering to fund their operations. According to the FBI's investigation into the 9/11 attacks, Al Qaeda was able to finance the operation with less than US$400,000 by smuggling cash, making wire transfers overseas, and making debit and credit card purchases at foreign banks while in the United States. Neither U.S. nor any other government agencies uncovered these gradual money laundering techniques.

White collar criminals.

For the FBI, "characterised by deceit, concealment, or violation of trust and not dependent on the application or threat of physical force or violence," white collar crimes fall into this category. In contrast to the other categories, the threat of violence is not always present, and the source of the money is not necessarily illegal; however, money laundering services may still be necessary for the fraud, embezzlement, or investment scams that fall under this category.

Forms that money laundering can take

Though the variety of money-laundering schemes is growing, all of them follow the same three steps:

‍Placement.

Stage one of money laundering involves introducing the illegal proceeds into the legitimate financial system, typically by splitting them up into smaller amounts that will not immediately draw the attention of authorities. Loan repayment schemes, gambling at casinos or betting agencies, smuggling, currency exchanges, and blending funds are all common methods of placement used to avoid detection by reporting mechanisms.

‍Layering.

As a second step, money laundering involves placing the initial funds somewhere legitimate and then adding layers of legitimacy on top of that until the original illegal source of the funds is completely obscured. Electronic transfers between countries, the use of shell companies, and the movement of funds between different bank accounts or different accounts within the same bank are all examples of methods that fall into this category.

‍Integration.

This is the third and final phase of money laundering, and it consists of the criminal retrieving their illegally obtained funds, which have been so thoroughly legitimised that their original illegal origin is now nearly impossible to determine. Making legal investments in legitimate financial streams and buying and selling high-value items are two common methods used in the integration stage of money laundering.

Compliance with anti-money-laundering and anti-terrorist financing regulations

The above analysis of money laundering sheds light on its historical roots and subsequent development, as well as on the identities and motivations of the criminals who engage in it and the various steps involved in its illicit processing. In addition, we witnessed the part that banks played in the fight against the financiers of terrorism, white-collar criminals, and traffickers of narcotics, arms, and human beings.

There will be nearly $9 billion (£6.5 billion) in AML breach penalties issued worldwide by 2020, as regulators everywhere increase and strengthen the reporting requirements expected of financial institutions. Companies in this field must now more than ever evaluate, enhance, and maintain their AML infrastructure.

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