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Money Laundering

Money Laundering

What is Money Laundering?

Money laundering is the process of concealing the origins of illegal money by passing it through a complex, illegal, obscure, and indirect sequence of transactions and returns the “clean” money to the launderer.

Through Money laundering, illegal money which generated by illegal activity, such as trafficking, terrorist funding, drug deals, money that comes from a legitimate source.

  • As the money from illegal activity is considered dirty money, and the process of cleaning it is called “Money laundering”.

Many financial companies have their own anti-money-laundering (AML) policies to detect and prevent this activity, as itt is a serious financial crime.

KEY TAKEAWAYS

  • Money laundering is the illegal process of converting”dirty money” to legal money generated from a legitimate source.
  • Street and white-collar criminals use a wide variety of techniques and roots to convert illegally obtained funds to clean money.
  • Cryptocurrencies have made it easier to transfer money without detection.
  • The prevention of money laundering includes terrorist funding, has become a necessity of the entire world.



3 step Process of money laundering?

The process of money laundering involves three typically steps:

  • Placement
  • Layering
  • Integration

Placement:

Puts all the “illegal money” into the legitimate financial system, through different channels.

Layering:

Process of conceals the original source of the money through a series of bookkeeping and transactions.

Integration:

In this process, laundered money is collected back/withdrawn for whatever purposes intend for, from the legitimate account

There are so many simples to very complex ways for money laundering. For example, if the organization owns a service-oriented business, a daily cash collection account can easily manipulate, funnel illegal cash into the business bank account. After that, the money can be withdrawn as needed from that account as legal. These types of business transactions simple and easily convert the illegal money into legal money.

Common methods used to launder money?

There are many methods commonly used for money laundering which can be categorized into one the methods “bank methods, currency exchanges, double-invoicing and smurfing. Here we are listing the most common simple to complex methodologies.

1. Structuring: 

Structuring is also known as smurfing. In this method of placement, cash is broken into smaller amounts and deposits in different accounts. It helps to defeat suspicion of money laundering. Also use these smaller amounts of cash to purchase financial instruments, such as money orders.

Finally, transfer or deposit all those small amounts into the required account as clean money.

2. Trade-based laundering:

Trade-based laundering is one of the most common forms of money laundering. It involves over-valuing or under-valuing invoices to disguise the movement of money. For example, real estate is an ideal vehicle for it due to the acceptance of buyer and seller to undervalue the price, and acceptance of hard cash for the extra amount, to save tax and other charges.

3. Service-Based or Cash-intensive businesses:

In service-based or cash-intensive businesses, a business typically expected to receive a large proportion of its revenue as cash, service business such as parking structures, sports clubs,  salons, bars, car washes, restaurants, etc uses its accounts to deposit illegal derived cash. These businesses often operate openly and generate cash revenue from their customers regularly and it will be difficult to track the customer counts.

Such business usually claims all cash received as legitimate earnings and makes it difficult for government authorities to detect discrepancies between revenues and costs. As it service-based business, the operational cost of these businesses will be lower, so someone can easily start and run this type of money laundering.

4. Shell companies and trusts:

Trusts and shell companies, many times disguise the true owners of the company and the money source. Depending on the jurisdiction, most of the trusts need not disclose their true owner.

Black money will use for the functioning of some of the trust and they will claim it is received from some anonymous donor. As part of the function, money will be transferred to the concerned person’s account and make it accountable as part of the operation.

5. Round-tripping:

In Round tripping money laundering, the first money will deposit into an offshore foreign corporation account, preferably in a tax haven where minimal records need to keep. Then later this amount will ship back as foreign direct investment, with tax exemption.

6. Casinos:

In this method, an individual or a group walks into a casino and buys chips with illegal money. Then, they play for a short time. Then later, when the person has cashed in the chips, they will take back the payment in a check, or they will get a receipt, and later they can claim the proceeds as gambling winnings.

7. Other gambling:

In high odds gambling games like a horse race, some people lose money and some will make the money. To minimize the risk with the gambling method is to bet on every possible outcome of the game. By doing it money launder will lose only a portion of his money and will have one or more winning bets, which can be shown as the source of money. The money lost on the bets will remain hidden.

8. Black Salaries:

Money launders will start a company and they will hire unregistered employees without written contracts along with the regular staff. Remuneration to those unregistered employees will pay in cash. Unregistered money will be used to pay to them and profit from their effort will be the part of companies business and it becomes legal money.

9. Bank capture:

This is a process of really capturing a bank, in a country with preferably weak jurisdiction on money laundering. Money launderers buy a controlling interest (ownership interest in a bank with enough voting power) in a bank, and deposit money in that bank and later move the money through the bank without scrutiny.

10. Tax amnesties: `

Money launders use the illegal money to pay for the Tax amnesties to legalize unreported assets. Tax amnesty is a limited-time opportunity provided by the respective government for a specified group of taxpayers or a person to pay a defined amount as tax, including interest and penalties in exchange for forgiveness, for the previous period pending tax liability or periods, without fear of criminal prosecution. 

11. Bulk cash smuggling:

Bulk cash smuggling is the process of physically carry the cash to another country or jurisdiction and depositing it in a financial institution. These offshore bank or financial institutions offers greater secrecy or lower money laundering enforcement, hence this money will be safe.

Later some time money will transfer to the concerned person’s bank account, in small amounts to avoid suspicion. 

12. Transaction Laundering:

Transaction Laundering happening when a merchant unknowingly processes the payment transactions for another business.  Transaction Laundering is distinct from traditional money laundering by hiding the transaction using the payments ecosystem. Transaction laundering is a criminal activity through which entities, process their payments to the known merchant, using the facilities provided by the merchant acquirer, without the knowledge of the merchant acquirer.

Why is Money Laundering Illegal?

Money laundering is illegal and immoral as money used in it is often generated by criminal activity, such as funding associated with other crimes, drug trafficking, or terrorist.

  • Many nations have made money laundering a crime because the money used in it was illicit and the relationship of launders with another type of lucrative crimes.
  • Nations becoming international hot-spots for laundering schemes if they don’t try to stop it.
  • It may lead to decreased public safety and the entire economy of the country may get collapsed.

Moreover, money laundering may lead to diplomatic consequences as international law enforcement organizations may consider the nation as a money laundering hot spot and it may lead to damage the international traders and relations.

Anti-Money Laundering Initiatives:

The Money Laundering Control Act passed in 1986 in the United States Act of Congress made it is a federal crime.

As money laundering is a serious crime, many world nations, including intergovernmental organizations initiated major anti-money laundering initiatives, with a global reach to identify and control it.

  • Anti-money laundering initiative guide and recommends more effective laws reinforcements to member states and encourage them to comply with international agreements for the spotlight on abuses.

Anti-Money Laundering Initiatives encouraging, cooperation among member nations and place uncomfortable actions against the nations violates international standards.

Functions of Financial Action Task Force on Money Laundering (FATF):

The FATF is one of the anti-money laundering intergovernmental organizations that is directly concerned with money laundering and the financing of terror groups throughout the world.

  • The FATF is the combined effort by the G7 nations like Canada, France, UK, and the US, Germany, Italy, Japan to standardize anti-money-laundering laws for member nations.
  • Now the organization has grown with more than thirty-six member countries and a large number of international organizations and banks supported themselves to be observers of the FATFs mission.

In 1990, A set of 40 recommendations, which are published by FATF are widely considered as the global standard for effective anti-money laundering reforms. These recommendations made by FATF covered the investigative and enforcement practices, a member country needs to follow within their own borders. It lists a set of laws, which each country could need to add to their own laws for better enforcement.

The FATF regularly updated and publishes a list of blacklist countries that facilitating global money laundering. Countries are added to the list on the basis of evidence that they providing safe havens for launderers and institutions that enable them for money laundering.

What is International Money-Laundering Information Network (IMoLIN):

IMoLIN is an anti-money laundering research and resources developing, useful information collecting, statistics, and case studies organizing organization operated by the United Nations.

  • This network provides support to policy practitioners, law enforcement officers, and lawyers to improve the identification and prosecution of money laundering.

The research material of IMoLIN used by developing and established nations to develop effective reform measures against it and stopping the financing of terrorist organizations in the nation.

Main Laws Against Money Laundering

The United States has proven Laws Against Money Laundering and it is highly influential on other states. The Bank Secrecy Act (BSA) and Patriot Act are considered the most influential laws in the world.

The Bank Secrecy Act of 1970 (BSA)

The Bank Secrecy Act of 1970 was one of the major anti-money laundering (AML) laws in the US. The act requires 5 main types of reports to applying heavy fines and criminal penalties for money laundering. Those who fail to report can be prosecuted.

1. Currency Transaction Reports (CTR):

In the event of transactions exceed $10K in one day, CTRs must be filed by the banks.

2. Suspicious Activity Reports (SAR):

When the bank identifies that, customers are attempting to work around CTRs, Bank must file SARs, with or without the knowledge of the customer.

3. Foreign Bank Account Reports (FBAR):

If a citizen keeping more than $10,000 in foreign bank accounts, the bank must be filed FBAR.

4. Currency and Monetary Instrument Reports (CMIR):

When financial or non-financial institutions transport certain monetary instruments such as traveler’s check or currency, the bank must file CMIR.

5. Monetary Instrument Log:

whenever customers purchase cashier’s checks, money orders, or traveler’s checks above $3K in value, Bank must file MIL, and these logs must be maintained for several years to present to investigators on request.

Banks are obligated to create internal policies against anti-money laundering and assign permanent staff to monitor its compliance and enforce the policies through audits.

CONCLUSION:

Money Laundering is the process of converting illegally earned money by a person or an organization into legitimate money. As the government does not get any tax on the illegal money and this money may be generated through some criminal activities, hence money laundering is a crime.

In this article, we covered, what is money laundering, Different methods of money laundering, Low against Money Laundering. In addition, we covered, Functions of the financial action task force on Money Laundering and the Role of the International Money-Laundering Information Network (IMoLIN).

Becoming part of money laundering by knowing or unknowing is also a crime.

If you would like to improve your personal financial skills, we recommend reading the 7 best personal finance books.

Thanks and Regards

MyMoneyBooks

 

 

 

 

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Harry
Harry J P is a Business development and sales professional passionate about sharing knowledge in the domain of sales, and personal finance which helps in Personal financial learning for newbie earners. This blog came out of the experiences in the domain of personal finance, business development, and the share market.

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