What is money laundering?
Money laundering is a process that criminals use to make their money appear as though it has been earned legitimately. The term ‘laundering’ comes from the appearance of taking ‘dirty’ money and ‘cleaning’ it for use in the wider world, masking its origin.
When they come into large sums of money, it isn’t possible for criminals to use it without questions being asked. As such, they need to disguise how and why it came to them through finding a fictional legal explanation.
How does money laundering work?
Money laundering is most easily explained in three steps, but it is often much more complicated, especially considering some of the sums involved.
The idea behind laundering money is to make it as difficult as possible for authorities to uncover and understand the deceit. As such, many examples of money laundering reveal a diverse web of transactions and accounts so that it is never easy to trace everything back to one starting point.
The more complex the money laundering, the less likely the criminals are to be caught.
- Placement: The first objective in laundering money is to move it into the real world. This is often the riskiest action of the entire operation for a criminal because of the vast amount of physical money that is often involved. Wishing to leave no trace of their actions when trafficking, drug smuggling or selling weapons (for example), criminals rarely do transactions with cards. Since nobody wants large amounts of cash on hand for obvious reasons, this money needs to be moved as quickly as possible. Most often this occurs by ‘placing’ the cash into legitimate areas of the economy where questions are least likely to be asked – repaying or giving someone a loan, turning it into chips at a casino and making a safe bet, or putting the money into a cash-only business. Other methods include investing in cars or property or exchanging the money into a foreign currency. Often a criminal will accept losing a few percent of their total in return for the legitimacy that their actions bring.
- Layering: Layering refers to moving the money around as much as possible to make it difficult to see its origins. It jumps between various people, businesses, and accounts in differing amounts, often being sent overseas to further muddy the waters. Investments into companies or financial products is also not uncommon in this stage. In this stage, money is moved quickly and often, with criminals once again accepting losing a small percentage of their money in return for making it even harder to identify as being illegally obtained.
- Integration: The criminal receives their money back, which has now been legitimised by its trail through the economy. They may not receive the laundered money back in cash but in the form of a property or some expensive artwork, the sale of which can then be registered legally. Art and real estate are often chosen for money laundering because their value on the open market is subjective.
What is anti-money laundering?
Anti-money laundering (AML) refers to the laws, regulations, and processes designed to prevent, identify, and stop the transaction of illicit funds. These include customer due diligence (CDD) and know your customer (KYC) checks.
Why do banks need to do anti-money laundering checks?
All banks need to do anti-money laundering checks in order to ensure that the person depositing the money is who they say they are, and that the money was obtained legally.
Banks do this because they are heavily regulated. If they are seen to have been involved in money laundering, albeit unknowingly, they can still risk big fines. Not only does this affect the bank financially but it can also worsen their reputation.
AML checks can occur at any time, but are most likely to occur if you are depositing or sending large amounts of money. A check doesn’t mean that anyone is under suspicion; it’s purely a precautionary measure, and everyone sending large sums of money will be given one.
What are anti-money laundering checks?
Anti-money laundering checks are basic searches to ensure that the person depositing or investing money is doing so for themselves with legitimate funds, and not on behalf of someone else who has obtained the money illegally.
Checks often start with a simple KYC questionnaire that can be compared to an electoral register. Alternatively, a person may be asked for identification that proves their identity and their address. The following means are normally used:
For your identity
- Passport
- Driving licence
- Birth certificate
- National identity card
For your proof of address
- Driving licence
- Recent utility bill
- Recent bank statement
- National identity card
How big a problem is money laundering?
Because a lot of instances of money laundering are never discovered, it is difficult to accurately measure the true cost.
Even so, money laundering is a big problem globally with $800 billion to $2 trillion estimated to be laundered each year. This is 2-5% of annual global gross domestic product (GDP), a monetary measure of the market value of all goods and services produced each year.
