Money laundering of one sort or another was reported in 2020 to account for at least 2.5% of global GDP, a staggering amount of over $1.6 trillion. Yet, a great many people and far too many professionals are rather ignorant of what money laundering is and how it affects the lives of everyone on the planet. Money laundering may be designed to directly move funds from criminal activities into the pockets of the perpetrators. Equally, laundered money may be used to finance terrorist activities or other multinational crime, often funding even larger criminal pursuits. Why is money laundering necessary? How does it work? Let’s take a deeper look.
Making use of large amounts of cash that has come from illegal sources is both dangerous and inefficient for criminals, and so it is necessary to somehow deposit this money into legitimate institutions to be used in a normal manner. The ‘laundering’ of money, put simply, describes a process of taking this ‘dirty’ money and ‘cleaning’ it by putting it into the legitimate financial system without being detected. It takes place on a worldwide scale, typically appears as three steps, yet may contain any number of stages en route to its conclusion. This article outlines how money laundering functions, and begins to explore some of the crimes and processes that take place in the grey world at the sometimes porous boundaries of the world’s legal and illegal monetary systems.
Money that is legitimately generated through enterprise, business, charity or other means may, of course, be channeled directly into accounts in banks or into a plethora of other forms of financial instrument. No efforts are required to hide its origins, and organisations will generally report deposits, balances and costs in the normal manner, without any need for undue secrecy. In contrast, money that is gained through illegal, criminal activity needs to be ‘hidden’. This is in order to prevent its detection by law enforcement officers. It is essential to conceal its origins, prevent the user of the money from being ‘noticed’, ensure suspicions are not raised, and sometimes to hide the money from debt collectors.
The Three Main Steps to the Money Laundering Process
This ‘cleaning’ process is achieved by using the ‘dirty’ money carefully, in smaller amounts, potentially in widely differing locations, in legitimate trading or purchasing activity in order to quietly syphon funds into the mainstream without being noticed. In general, there are three main steps to the money laundering process, although there are often multiple stages to each of the steps, and sometimes all the steps may not be needed.
Placement: Firstly, the money is ‘placed’; the illegitimately earned money is slowly put into a perfectly legitimate commercial enterprise in a cash format. These ‘front’ businesses, which can take any number of forms, will report the cash as entering the business in the normal way, through transactions that would reasonably take place.
Layering: The money will be added in small amounts, using many perfectly legal transactions. This makes it very hard to trace.
Integration: Eventually, often through multiple stages, the now clean money will be returned to the hands of the owner so that it can be spent in the normal way without being noticed by any legal authority.
Prevalent Predicate Offences
As can be seen, there is always a legitimate business or businesses involved in the process. This makes it more difficult for any investigation to uncover the illegal source of the money. Further, by adding many small stages to the process, sometimes conducted over a long period of time, funds are moved without detection or suspicions being raised. There are any number of different crimes, mechanisms and methods that are used to accomplish these purposes, often with a predicate crime or offense taking place which is a component of a larger crime. However, three particular predicate offences are most prevalent – illegal wildlife trading, human trafficking, and corruption. Each of these has a devasting impact and very often these crimes are linked up in some way:
Illegal wildlife trading (IWT) and wider environmental crime have become increasingly significant in recent years. IWT can be defined as the “taking, trading, importing, exporting, processing, possessing, obtaining and consumption of wild flora and fauna…in contravention of national or international law” (The Convention on International Trade in Endangered Species of Wild Fauna and Flora – CITES). The 2020 report by the Financial Action Task Force considers it to be a “major transnational organised crime that fuels corruption, threatens biodiversity and can have significant public health impacts”. Since 2021, the UN has required member states to treat it as a predicate crime under domestic money laundering offences.
Human trafficking may well have over 40 million victims worldwide, including men, women and children who are trafficked for forced labour, sexual exploitation and forced marriage. It is thought to create profits of around $150bn per year and is reckoned to be one of the fastest growing crimes and one of the most significant generators of criminal proceeds. As a result of desperately poor levels of successful prosecutions, human trafficking is sadly a low-risk, high profit crime.
Corruption probably costs the governments of the world over $3 trillion annually, paid out in bribes or simply stolen. Corrupt methods used to hide dirty money, along with elaborate tax avoidance schemes – often reaching to the highest levels of leadership – remove large sums of money from public funds worldwide. Attempts to reduce this mean that the identification of ultimate beneficial owners (UBOs) and Politically Exposed Persons (PEPs) are now a standard part of customer onboarding processes, arising from legislation such as Anti-Money Laundering Directives in the EU and the Anti-Money Laundering Act of 2020 in the US.
It is important to point out that organised crime groups do not focus on single forms of offence, but constantly switch between different streams to avoid detection. Funds from one area of crime are spliced into other forms, and frequently crimes such as trafficking in narcotics, stolen goods and arms are interlaced into the web. For all of these areas to succeed, there is often also a network of corrupt relationships with public officials, which further adds to the impenetrable shield. Crime convergence inevitably makes it much harder to find and follow the links between money laundering and its predicate crimes.
The rapid rise of online banking, payment services and peer-to-peer (P2P) transfers has undoubtedly made detection of illegal money movements even more difficult. Electronic money laundering through proxy servers, anonymising software, online auction and gaming websites along with a multitude of other money movement possibilities have further increased the challenges faced by those seeking to track illegal activity. To add to this, the spread of cryptocurrency transactions has become the latest frontier in money laundering, as it allows for funds to not be traced back to their origin.
It is not hard to see why we should be concerned about money laundering and seek ways to combat it. Anti-money laundering attempts to remove the motivation for criminals to engage in the many criminal activities listed. The motivation is the proceeds from the crimes, which impose terrible social and economic costs on citizens and societies the world over. Eliminating the ‘benefits’ derived through money laundering can drastically reduce the criminal activities of smuggling, terrorism, extortion, trafficking and fraud that haunt the global community.
How to bring about the goal of eliminating money laundering will be the subject of ‘Money Laundering 2’, which follows shortly.