Saturday, September 19, 2020

What is Money Laundering

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The concept of money laundering is as simple as hiding the source of wealth gained through illegal activities. Criminal activities such as drug trafficking, illegal arms sales, smuggling, embezzlement, insider trading, fraud and cybercrime are sources of illegal financial gains.

The process of money laundering allows criminals to enjoy proceeds from criminal activities without jeopardizing the source of their finances.

Traditionally, money laundering covers only financial crimes.  However, it includes terrorism financing, evasion of international sanctions, drug trafficking, illegal arms sales, smuggling, embezzlement, insider trading and online fraud.

Many countries have introduced anti-money laundering regulations to combat different forms of money laundering and to prevent businesses from being used for money laundering.  Different countries define money laundering in different forms such as hiding the source of money irrespective of intentions or money derived from a country where financial sanctions already apply.

Stages of Money Laundering

There are millions of ways, criminals can launder proceed of crimes.  Some money laundering activities are conventional, through financial institutions. While others occur without converting illegal financial gains to other assets to avoid detection.  In general, it is widely accepted that money laundering occurs in three stages;

What is Money Laundering 1

Placement – This is the first stage of money laundering “dirty money cleansing”. Criminals introduce gains from their activities into the financial systems via cash deposits, currency exchange, note exchange and cross-border cash movement.

Money launderers are using complex and sophisticated methods to inject cash into the financial and economic system.  New methods such as smurfing; depositing a large amount of money in smaller transactions below the reporting threshold and purchase of prepaid and gift cards in bulk, which is then sold for cash.

The advancement of technology such as cryptocurrency, sophisticated financial instruments has opened new opportunities for criminals to convert illegal gains into legal tender notes.

Layering – This is the actual stage of money cleansing, whereby the money is separated from its source and ownership. Layering is a very important stage in money laundering because it begins the legitimacy of the money.  Layering can occur via complex financial transactions, investment schemes, and financial products.

Shell companies have become very popular for money laundering, tax evasion and tax avoidance.  The anonymity of shell companies in addition to ease of moving cash across jurisdiction provides launderers with a vehicle for money laundering used for purchasing luxury goods in a different jurisdiction from where the criminal activity occurred.

Layering doesn’t have to be complex, it can be as simple as purchasing luxury goods, properties in the name of a nominee such as friends and families.

Integration – Integration is the final stage whereby laundered funds are re-introduced into the economy as a legitimate fund. These funds can then be used to buy properties, businesses or luxury goods.

Criminals use different methods to integrate the newly acquired clean money into the economy such as raising invoices for non-existing goods and services, over-inflated invoices, creating fictitious loans and third-party transactions.

Each of these stages can be repeated multiple times until the source of the funds can no longer be associated with the laundered funds.  The main aim of money launderers is to make it difficult to differentiate between proceeds of crimes and legitimate funds, as such undertake the money laundering process as much as required till the final assets can no longer be traced to their criminal activities.

Global Effort Against Money Laundering

The global menace of money laundering requires a global coordination of efforts, expertise and knowledge sharing.

The fight against money laundering and terrorism financing has become a top agenda for governmental bodies, agencies, financial institutions and others.

To ensure countries apply a consistent approach in fighting against money laundering and terrorism financing, there are international standards set-out to help countries appropriate policies and controls.

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