How Does Money Laundering Work?

Money Laundering is the act of hiding or disguising the origin of illegally obtained money, making it look legitimate. This allows individuals or organisations to put illegal money into the legal economy and make it look like legitimate earnings. Money laundering involves several complex stages and techniques to hide the source of the money and legitimise it.

Stages of Money Laundering

Money laundering happens in 3 stages: Placement, Layering, Integration. Each stage serves a purpose in turning illegal money into legitimate assets.

Placement

The first stage, Placement, is where illegally obtained money is introduced into the financial system. This is the most vulnerable stage of the money laundering process as the illegal money is exposed to the financial institutions. Criminals use various methods to place the money:

• Bank Deposits: Depositing large amounts of cash into bank accounts, often in smaller amounts (smurfing) to avoid suspicion.
• Currency Exchanges: Exchanging large sums of cash for foreign currency or traveller’s cheques.
• Purchasing Assets: Buying valuable assets such as real estate, luxury goods or high-end cars that can be sold later.

The goal during Placement is to get the illegal money into the financial system undetected.

Layering

Layering is the second stage where the objective is to hide the origin of the funds through a series of complex transactions. This stage is to distance the money from its criminal origins, making it harder to trace. Techniques used in layering:

• Complex Transactions: A series of financial transactions, such as transferring funds between multiple accounts or institutions, domestic and international.
• Shell Companies: Using fake or legitimate companies to funnel money through various business transactions, making it harder to trace the original source.
• Investment Vehicles: Investing in securities, bonds or other financial instruments to further disguise the money’s origin.

Layering creates a web of transactions that hides the paper trail, making it hard for investigators to connect the funds to its illegal source.

Integration

The final stage, Integration, is where the laundered money is reintroduced into the legal economy in a way that it looks legitimate. At this stage the funds are clean of its illegal origins and can be used for legal purposes. Methods used in Integration:

• Legitimate Investments: Investing in legitimate businesses or real estate to generate returns that look like it came from lawful sources.
• Luxury Purchases: Using the funds to buy luxury goods or services and then resell or enjoy, further integrating the money into the legal economy.
• Complex Financial Products: Using complex financial products or instruments that makes it hard to trace the money’s origin.

Integration completes the laundering process, making the previously illicit funds appear as if they are derived from legitimate activities.

Money Laundering Activities

Several activities are linked to money laundering, often involving the manipulation or concealment of funds from illegal sources. These are:

• Moving Money: Conducting financial transactions with money from criminal activity.
• Converting Funds: Changing the form or nature of money to hide its origins, e.g. cash to electronic transfers or investments.
• Holding Illegal Funds: Acquiring or using funds from criminal activity.
• Concealing Information: Hiding or misrepresenting the true nature, source or ownership of funds from illegal sources.
• Assisting Money Laundering: Providing assistance, advice or facilitation to money laundering activities.

Any of these activities can be part of the money laundering cycle, directly or indirectly.

FATF and Money Laundering

The Financial Action Task Force (FATF) is the key player in fighting money laundering and related financial crimes. Established in 1989 by the G7, FATF is an intergovernmental body that develops and promotes policies to combat money laundering and later terrorism financing. Its mandate has since expanded to cover a wide range of threats to the global financial system.

FATF Objectives

• Sets Standards: Develops and publishes international standards for money laundering, terrorist financing and other threats to the financial system.
• Promotes Implementation: Encourages countries to adopt and implement effective laws, regulations and operating procedures to prevent and combat these crimes.
• Monitors Progress: Reviews the implementation of its recommendations through peer reviews of its member countries.

FATF is a policy making body that generates the political will to drive national legislative and regulatory reforms. Through its standards and recommendations, FATF influences how countries develop their anti-money laundering (AML) and counter-terrorist financing (CTF) frameworks.

Peer Reviews

FATF conducts peer reviews to assess the AML and CTF measures of its member countries. These reviews evaluate how well countries implement FATF’s recommendations and their overall system. The outcome of these reviews helps identify strengths and weaknesses in national frameworks and provides a basis for improvement and cooperation among countries.

Conclusion

Money laundering is a multi-stage process to hide the illegal sources of funds and integrate them into the legal economy. Understanding the stages and activities of money laundering is key to effective prevention and enforcement. FATF is the key player in setting standards and monitoring the global fight against money laundering to keep the global financial system safe and secure.