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Money Laundering 101: Understanding the Basics

Kelley Foyle | November 19, 2019

Money laundering is an intricate process used to conceal the origin of illegally obtained funds. Through this system, criminals disguise the profits of illicit activities so they appear to be from a legal source. Simply stated, it is the act of integrating “dirty money” into the legitimate financial market so that is becomes a usable asset.

But how common is money laundering? Though most of us have enough integrity to avoid criminal activities, circumstances and the draw of easy money can lure others into a life of crime. Therefore, the numbers are significant. In fact, a study conducted by The United Nations Office on Drugs and Crime (UNODC) found that criminal proceeds account for more than 3.5% of global GDP, with nearly 3% being laundered — that’s $1.6 trillion USD in one year alone.

So, how is money laundered?

You’ve most likely heard of money laundering, but do you know how it works? The money laundering process has three stages: the placement stage, the layering stage and the integration stage.

The Placement Stage

In the placement stage, bad actors filter the money earned from illegal activity into the financial system. This process legitimizes the money and removes the risks associated with having large amounts of cash. However, this stage is risky for the criminals, because large transactions draw suspicion and may lead to investigation. Some examples of institutions used to “clean” money are casinos, stores, and banks.

The Layering Stage

In the next step, criminals continuously move their investments to change the form of their money and avoid detection. They use several methods to layer their funds, including dividing assets, making high-value purchases, and transfering money into numerous accounts in multiple countries. Money launderers also use illicit funds to purchase assets and resell them either locally or abroad. These transactions make the money more difficult to trace and disguise its criminal origin. The layering stage is the most complex portion of the entire process.

The Integration Stage

The final stage of the money laundering process is the integration stage. A legitimate source, such as a bank, filters the money back into the community during the last phase. The purpose of this step is to provide the criminal access to the funds without drawing suspicion to their illegal actions.

How is this accomplished? There are several ways to complete the final stage. Two of those methods of integration are:

  1. Falsified invoices: money launderers justify funds through overvaluation on import and export documentation.
  2. Property dealing: criminals purchase properties through shell companies, which legitimizes funds from the sale. 

Methods

Law enforcement is aware of several money laundering techniques. For example, the Black Market Colombian Peso Exchange is one of the largest trade-based money laundering systems. Criminals export drugs which are sold in a foreign currency. The criminals want the money in their own currency, but have to be careful about crossing borders and making suspicious amounts of currency exchanges. In the Black Market Colombian Peso Exchange, brokers use dirty money to purchase commodities from legitimate businesses and convert the currency for criminals.

This exchange provides a number of advantages:

  • Criminals do not need to transport suspicious quantities of cash across the border.
  • Criminals can avoid making large cash deposits, which helps avoid bank inquiries.
  • It provides criminals with quick and easy access to the correct currency.

Many consider the Black Market Colombian Peso Exchange a one-stop shop. After a peso broker receives the money, it become difficult to prove laundering or foul play. 

Money laundering is an established form of crime with a long history, so there are a lot of tools available to launderers. As with most types of fraud, it continues to evolve and as a result, it is difficult to detect.

Prevention

Since money laundering is difficult to detect, you may wonder if it can be prevented. Despite the challenge, legislative bodies are taking preventative steps to address money laundering and its underlying financial structures. The United States has enacted several laws in an attempt to eliminate money laundering. The Bank Secrecy Act of 1970, The Money Laundering Control Act of 1986, The Money Laundering Suppression Act of 1994, and the USA Patriot Act of 2001 are just a few examples of such legislation. In addition, the Drug Enforcement Administration (DEA), a federal law enforcement agency, is continuously investigating drug trafficking and its connection to money laundering. 

The government is not the only body who can prevent this crime. Though money laundering can be difficult to recognize, there are some steps that can be taken to stop it in its tracks at the social and cultural levels.

First, companies must collect customer data as a means of verification. Requiring the customer to provide valid personal information removes ambiguity from their relationship with the bank. 

Second, it is essential to ensure the traceability of all activity in financial markets. The paper trail created by financial transactions in each stage is the strongest connecting factor, depending on how the launderer structured their transactions. If the launderer has a seemingly legitimate front business for their crimes, they may be able to evade detection through the paper trail that accompanies the record-keeping process. 


In conclusion, money laundering conceals illegal activity, making it more difficult to catch criminals. However, we can work to prevent it. While it may seem obvious, one of the best ways to recognize and reduce the amount of money laundered annually is to maintain high levels of organization and use a consistent code of conduct across all accounts – both new and established.

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Kelley Foyle

Kelley Foyle

Kelley Foyle is an eager Fraud Specialist with an affinity for true crime podcasts. She recently earned her Master's degree in Criminology and Justice Studies with a concentration in Victimology from Kent State University. Her thesis focused on wrongful convictions and the systemic failures of our criminal justice system. When she's not searching for new fraud patterns, Kelley can be found crafting, spending time outside, or binging the latest Netflix series.