Somebody engaging in money laundering

What is Money Laundering?

When thinking of money laundering, you may think of the days of Al Capone and the New York gangsters. However, money laundering is a common and genuine threat in many instances in today’s world.

Simply put, the act of money laundering is the process by which the proceeds of criminal activities enter the financial system. Hence, the money appears ‘clean’ (or ‘laundered’) because it looks as though it has come from a legitimate source. While many people think money laundering is only undertaken by criminal masterminds, this isn’t the case. Money laundering is, however, normally tied to other criminal activities.

For example, a drug dealer may sell drugs for large amounts of cash, but they obviously can’t declare the source of their income. Commonly these individuals will spend their cash on day to day shopping, or bigger items like cars, where cash is taken as payment.

If they belong to a cartel or gang that is more sophisticated, they may operate ‘fronts’ that look like a legitimate business, but whose primary aim is to take cash and put it through the business’ books, thereby laundering it.

It’s difficult for each and every business to track where money has come from, which is why there are strict rules placed on financial and professional services, like law firms, to try to track and report instances of money laundering.

How Does Money Laundering Work?

Money laundering typically follows three stages, however the stages can look very different depending on the methods chosen:

  1. Placement: This is where the proceeds of crime are initially put into the financial system and where money laundering is easiest to detect.
  2. Layering: This is where the proceeds are moved around through various transactions to try and hide their origins, making them appear legitimate. An example may be somebody buying a house with illegitimate money and quickly selling it on. 
  3. Integration: This is when the sources of the proceeds have been successfully hidden, and have become available for use for legitimate reasons. Example of integration is putting the money back into the economy through setting up a company, buying property etc.

In all three stages, the further along the process a criminal can get their proceeds, the harder it is for the authorities to detect it as money laundering.

This is because the money has become more and more intertwined with legitimate cash. For example, a coffee shop earns £2 from a legitimate customer, and £2 from a criminal and then banks all £4. How can the bank tell which £2 came from the criminal, and even if it could, how does it know what the source of that £2 was?

Thus, it’s essential to catch suspicious activities as soon as possible.

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