Money Laundering – The Cleaning Process of Dirty Money

The Process

Can too much money actually be a problem? Yes, if we are talking about ill-gotten money.

Criminals cannot deal with large amounts of illegal cash since it’s inefficient and dangerous for them to get caught. Therefore, for criminal organizations it is necessary to find a process to make dirty money look legitimate. This process is called money laundering.

There is a common misconception that the majority of money laundered relates to illegal drug trade. This is not true; the size of the global illicit drug market is close to $300 billion per annum and the estimated amount of money laundered globally in one year approximates $1,6 trillion. If money laundering were a country it would easily make it to the top 10 richest countries in the world.

Money laundering is a necessary process for any crime that generates income, such as extortion, insider trading, drug trafficking etc.

There are three steps involved in the process of laundering money:

  1. Placement;
  2. Layering; and
  3. Integration.

Placement refers to the act of introducing “dirty money” into the financial system in some way. This is the riskiest phase of laundering money.

Layering is the act of concealing the source of that money by way of a series of complex transactions. This is the trickiest part of money laundering and the aim is to make dirty money impossible to trace.

Integration also known as “collecting your laundry”. At this point the money is seemingly legitimate and criminals can collect it in various ways such as dividends.

Now, let’s watch Saul Goodman from Breaking Bad explaining the 3 steps mentioned above!

Money laundering can take several forms, but some of the most common types are:

  • Breaking cash into smaller deposits of money. This method is called smurfing and is used to avoid anti-money laundering reporting requirements.
  • Physically smuggling cash to another jurisdiction and depositing it in a financial institution, such as an offshore bank with less rigorous money laundering enforcement.
  • Using cash-intensive businesses, such as restaurants, clubs, car washes, casinos etc. These businesses are also called fronts and effectively what they do is mixing up legitimate and ill-gotten cash in such a way that the 2 are almost inseparable.
  • In some other cases criminal organizations prefer eliminating the middle man, hence they buy a controlling interest in a bank, preferably in a jurisdiction with weak money laundering controls.
  • Other money laundering methods involve investing illicit cash in commodities such as gems and gold that can be easily moved to other jurisdictions.

Difficulties in detection

Detecting money laundering can be a very difficult task since criminal organizations go into great lengths to cover their tracks. In other words criminals are willing to pay on average up to 20%-25% (sometimes even more) of the dirty money to make it appear legitimate.

Banks globally have paid more than $320 billion in fines since 2008 for an abundance of regulatory failings in relation to money laundering, terrorist financing and market manipulation.

On top of that, virtual currencies and anonymity software have made detecting the illegal transfer of money even more difficult.

Why should I care?

At the end of the day you might ask yourselves “why should I care about criminals and money laundering?”

Well, the ethical side of it is fairly straightforward; successfully laundering money means that criminal activity actually does pay off. This will in turn encourage criminals to continue their illicit schemes.

Apart from an ethical point of view we have the financial perspective as well. Some of the economic effects are listed below:

  • Laundered money is usually untaxed, meaning that local governments are losing massive tax revenue. Hence, the rest of the population will be required to make good the loss in tax revenue.
  • Legitimate small businesses can’t compete with money-laundering front businesses, which could easily sell below cost since their primary purpose is to clean money and not to make a profit.