Money Laundering & Combating the Financing of Terrorism

Money laundering, a term heard more and more in today’s financial world, is about hiding where illegally obtained money comes from.

Money Laundering

Usually, this involves a lot of complicated transactions. It’s a big problem for governments, banks, and cops everywhere because it lets criminals keep their illegal money and hide what they’ve done.

Figuring out how it works and what happens because of it is super important for stopping financial crimes and keeping the world’s money system fair and honest.

What is Money Laundering?

The goal of most criminal acts is to generate a profit for the individual or group that carries out the act. Money laundering is the processing of these criminal proceeds to disguise their illegal origin.

This process is of critical importance, as it enables the criminal to enjoy these profits without jeopardizing their source.

Illegal arms sales, smuggling, and the activities of organized crime can generate huge amounts of proceeds.

Also, embezzlement, bribery, and computer fraud can produce large profits and create the incentive to “legitimize” gains through money laundering.

How Do Criminals Launder Money? 

When a criminal activity generates substantial profits, they find ways to control the funds without attracting attention to the underlying activity.

So they disguise the source, change the form, or move funds to places where they won’t attract attention.

However, in response, the G-7 Summit in Paris in 1989 established FATF to create a coordinated international reaction.

The first task of FATF was to develop (40) Recommendations, which explain measures NGs should take to implement effective anti-money-laundering programs.

What is the Money Laundering Process?

A common method of “washing” money is funneling it through businesses that have a lot of cash transactions.

The money laundering process usually goes something like the following:

1. Initial placement

A criminal or criminal organization owns a legitimate business. Money from illegal activities slowly enters a bank through the business.

The business reports daily cash sales much higher than what it actually takes in. Say, for example, that the business takes in $2,000 in cash in one day.

An additional $2,000–which is money coming from illegal activities–will be added to that amount. Now, the business will falsely report that it took in $4,000 in cash sales for the day.

Now, the business puts the money into its real bank account, making it seem like the usual earnings from running its restaurant.

2. Layering the money

To deal with tax issues and further disguise the criminal source of the extra deposited funds, guess what? The business may invest the money in another legitimate business.

Criminals further obscure things from the authorities by using shell companies or holding companies that control several business enterprises through which the laundered money may be funneled.

The “layering” often involves passing the money through multiple transactions, accounts, and companies.

3. Final integration

This stage involves placing illegally obtained money into legitimate businesses or personal investments. It could be used to buy luxury items such as jewelry or cars.

Sometimes, it’s used to start a new business that will be used for laundering more illegal money in the future.

At this point, the money has usually been cleaned enough so that the criminal can use it without breaking any laws. They might invest in it or buy expensive things like property.

What’s the Impact of Money Laundering?

Money laundering poses significant risks to businesses and society. 

It leads to revenue loss and reputational harm for companies involved, while also fueling corruption and increasing crime rates. 

The concealment of illicit proceeds undermines trust in financial systems, discouraging foreign investment and slowing economic growth. 

Also, it widens the wealth gap by concentrating funds in the hands of criminals, exacerbating socioeconomic inequalities. 

To combat these impacts, we need concerted efforts to strengthen anti-money laundering measures and promote transparency in financial transactions.

Different Schemes of Money Laundering

Money laundering can take several forms, although most methodologies can be categorized into one of a few types.

1. Structuring: Often referred to as “smurfing,” structuring is a technique where cash is divided into smaller deposits, aiming to avoid suspicion of money laundering and evade anti-money laundering reporting rules.

2. Bulk Cash Smuggling: This involves physically smuggling cash to another jurisdiction and depositing it in a financial institution, such as an offshore bank.

3. Cash-intensive Businesses: A business is expected to receive a large proportion of its revenue as cash uses its accounts to deposit criminally derived cash.

4. Trade-based Laundering: This method is one of the newest and most complex forms of money laundering. This involves under or over-valuing invoices to disguise the movement of money.

5. Shell Companies and Trusts: Trusts and shell companies disguise the true owners of money. Trusts and corporate vehicles, depending on the jurisdiction, need not disclose their true owner.

6. Round-tripping: Money is put in an offshore controlled foreign firm, preferably in a tax haven with limited records, and then sent back as a tax-free foreign direct investment.

7. Invoice Fraud: An example is when a criminal contacts a company saying that the supplier payment details have changed. They then provide alternative, fraudulent details for you to pay them money.

8. Other Gambling: Money is spent on gambling, preferably on high-odds games.

Detection and Prevention of Money Laundering

Detection and Prevention of Money Laundering

To ensure businesses stay safe from money laundering, they need a robust Anti-Money Laundering (AML) program. 

This program should outline how the company finds, evaluates, and reports financial crimes. Here are the key steps:

1. Customer Checks: Before allowing a customer to use their service, companies must do a Customer Due Diligence (CDD) check.

2. Enhanced Checks: For higher money laundering risk cases, companies do Enhanced Due Diligence (EDD) to dig deeper.

3. Continuous Monitoring: Companies keep an eye on customers and their transactions to spot any unusual activity.

4. Independent Audits: Regular audits enable businesses to identify any flaws in their AML program, empowering them to address issues before regulators intervene.

5. Transaction Monitoring: Using specialized software, companies track transactions for any suspicious patterns, whether in digital or traditional currencies.

Money laundering hides illegally acquired money. 

Governments and financial institutions worldwide have measures to stop it. With online activity and digital money, laundering has become even more common.

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