Introduction
What is Money Laundering?
Money laundering is the illegal process of making large amounts of money generated by a criminal activity, such as drug trafficking or terrorist funding, appear to have come from a legitimate source. The money from the criminal activity is considered dirty, and the process “launders” it to make it look clean.
How Money Laundering Works
Money laundering is essential for criminal organizations that wish to use illegally obtained money effectively. Dealing in large amounts of illegal cash is inefficient and dangerous. Criminals need a way to deposit the money in legitimate financial institutions, yet they can only do so if it appears to come from legitimate sources.
The process of laundering money typically involves three steps: placement, layering, and integration.
- Placement puts the “dirty money” into the legitimate financial system.
- Layering conceals the source of the money through a series of transactions and bookkeeping tricks.
- In the final step, integration, the now-laundered money is withdrawn from the legitimate account to be used for whatever purposes the criminals have in mind for it.
There are many ways to launder money, from the simple to the very complex. One of the most common techniques is to use a legitimate, cash-based business owned by a criminal organization. For example, if the organization owns a restaurant, it might inflate the daily cash receipts to funnel illegal cash through the restaurant and into the restaurant’s bank account. After that, the funds can be withdrawn as needed. These types of businesses are often referred to as “fronts.”
Money Laundering Variants
In one common form of money laundering, called smurfing (also known as “structuring”), the criminal breaks up large chunks of cash into multiple small deposits, often spreading them over many different accounts, to avoid detection. Money laundering can also be accomplished through the use of currency exchanges, wire transfers, and “mules”—cash smugglers, who sneak large amounts of cash across borders and deposit them in foreign accounts, where money-laundering enforcement is less strict.
Other money-laundering methods involve investing in commodities such as gems and gold that can easily be moved to other jurisdictions, discreetly investing in and selling valuable assets such as real estate, gambling, counterfeiting; and using shell companies (inactive companies or corporations that essentially exist on paper only).
Electronic Money Laundering
The Internet has put a new spin on the old crime. The rise of online banking institutions, anonymous online payment services and peer-to-peer (P2P) transfers with mobile phones have made detecting the illegal transfer of money even more difficult. Moreover, the use of proxy servers and anonymizing software makes the third component of money laundering, integration, almost impossible to detect—money can be transferred or withdrawn leaving little or no trace of an IP address.
Money can also be laundered through online auctions and sales, gambling websites, and virtual gaming sites, where ill-gotten money is converted into gaming currency, then back into real, usable, and untraceable “clean” money.
The newest frontier of money laundering involves crypto currencies, such as Bitcoin. While not totally anonymous, they are increasingly being used in blackmail schemes, the drug trade, and other criminal activities due to their relative anonymity compared with more conventional forms of currency.
Anti-money-laundering laws (AML) have been slow to catch up to these types of cybercrimes, since most of the laws are still based on detecting dirty money as it passes through traditional banking institutions.
CASE LAW
HSBC Holdings PLC
In 2012, HSBC was one of the largest banks in Europe and an important part of one of the largest money-laundering schemes of the century. While bank leaders were not directly implicated in facilitating the scheme, it was discovered that the bank’s lax security and reporting policies allowed for massive amounts of money to move without detection.
Altogether, HSBC networks were used to launder nearly $900 million dollars for the Sinaloa cartel and other criminal organizations. Much of this money was believed to have come from drug trafficking enterprises.
Though adequate monitoring systems for money laundering are required by law, none of the executives of the bank were charged over the lax security measures. However, the bank was ordered to pay nearly $2 billion dollars in fines to the US and to submit to a series of restructuring requirements.
Danske Bank
The Danish Danske Bank scandal is one of the most recent major money laundering cases and perhaps one of the biggest in world history. More than $200 Billion in suspicious transactions moved through the bank between the years of 2007 and 2015. Most of these transactions were processed through the bank’s Estonian branch and were initiated from Russians and Azerbaijani sources.
Leaders of the bank faced charges in several countries. The CEO was charged in Denmark, and several former employees were arrested by Estonian law enforcement to face charges. As of 2019, the bank’s employees continue to be charged.
The bank itself is facing billions in fines from the regulators of several of the nations involved. Denmark and other European nations have already moved toward fines. As of this time, the US financial investigation is still ongoing, with both the Department of Justice and the Securities and Exchange Commission examining the transactions.
Conclusion
Laundered money accounts for a statistically significant amount of all money in the world economy. This makes the issue a serious one for all types of businesses, and particularly those businesses involved in the financial sector.
Understanding the way these schemes work, how they’ve played out in history and how both international and US laws are used against them can help anyone understand how to detect when their organization may be involved.
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