Due diligence you can trust

What is Money Laundering?

Money laundering is a process that allows criminals to transfer or unload money while hiding details and information, usually because they’re getting the money through illegal situations. Money laundering disguises where the money has come from, who it belongs to, where it’s come from or where it’s going.

Money laundering is a type of financial crime that deliberately sets out to bring in and circulate money that’s often been generated illegally into financial and economic streams, like banks. From here, criminals can then legally use the money to buy goods and services. In the context of money laundering, ‘dirty' money refers to cash made illegally and ‘clean’ money is when it is cleared to be used freely. Money laundering deceives the system to make dirty money appear as clean money.

As we’ll go on to explore, money laundering has major negative effects on society. One of the main problems with it is that once clean, this money can go on to continue funding the criminal activity that makes the dirty money and makes the impact increasingly worse. Criminals launder money because otherwise, they would have to keep their large amounts of accumulated cash, which would give them much less freedom to make purchases.

In order to protect the economy and society from money laundering and reduce these illegal activities, anti-money laundering (AML) protocols require firms to follow particular controls. If you're a business working in a relevant market, you may be affected by these requirements. Learning about what money laundering is, how it’s bad for the economy and society, and the different types and the steps authorities take to prevent it can help you understand why it’s important to maintain your own internal controls like customer due diligence (CDD) and screening sanctions lists.

What Does Money Laundering Mean For You?

Numerous countries in the Middle East are looking to diversify their economies by reducing their reliance on oil and growing their financial sector by opening up to overseas trade and investment. Qatar hosting the World Cup in 2024 and Saudi Arabia’s current investment in global sport reflects this outward-looking trend. As a result, there has been a raft of recent legislation in Middle Eastern countries to strengthen their Anti-Money Laundering regimes.

While there are usually distinct stages of money laundering, there are many different ways that money laundering can occur and many sectors it can happen within. This makes it an ongoing challenge for authorities to combat the issue on a large scale, and as a result, bodies such as the FCA and regulations like AML ask financial institutions to maintain standards, policies and checks to prove they are preventing money laundering.

Criminals involved in these activities usually have to launder money because they can’t make the necessary deals that keep them running through cash. Cash is much more dangerous and inefficient, so if they can turn this cash into clean money within a legitimate financial system, they can protect themselves while growing their illegal activities. This is why financial institutions and banks are a target for money launderers and why the industry is heavily regulated to minimise its presence.

AML procedures help businesses reduce the risk of working with money launderers and protect themselves as well as society. For financial institutions, these involve Know Your Customer (KYC) processes that help you identify and verify potential customers and determine their level of risk. These actions help to highlight high-risk entities such as Politically Exposed People (PEP) and financial criminals.

What is the Money Laundering Process?

Money laundering criminals generally use a three-stage money laundering process. The first is the more obvious input of dirty money into a legitimate financial system, which might be the business transactions that a bank takes as cash and turns it into digital, clean money.

The second is a compounding of transactions which adds layers to the money going into the bank: complicating the disguise of the money source. Layering buries information about where the money came from and who it belongs to.

The final stage is the integration of the now clean money into society, where money launderers have access to funds seen as legitimate. What is tricky for law enforcement is that the illegal money is also often layered with legitimate money which makes it harder to both identify when it's happening as well as to determine its extent.

For example, many people are familiar with a well-known technique of money laundering where criminals buy a business that sells something and takes cash as a form of payment, like a restaurant or gift store. In this case, the owners would claim to have made more cash than they did, so they input the illegal cash into the revenue made from the business where it can be seen as legally made money. This business is often referred to as a ‘front’ for laundering activity. However, there are many other ways that people launder money, from this simple example to more complex structures.

Who Might Launder Money?

Unfortunately, money laundering schemes can benefit different forms of crimes, where criminals can be from white-collar, corporate backgrounds as well as street level. It can be performed by one perpetrator taking advantage of the whole business, or a group of perpetrators, who collaborate to launder money. If these criminals have been caught by the government before, they should be given sanctions and appear on a sanctions list. The process often comes from the following illegal activities.

Drug Traffickers

Drug trafficking is illegal so all of their buying and selling operates underground and out of sight of financial systems and tax authorities. It’s also cash-focused and operates across borders, which means that they can launder money to turn their cash into a more usable form of finance while hiding where it has come from. It also enables the leaders of the drug trafficking regime to safely access their money.

Human Traffickers

As part of another illegal industry, human traffickers use money laundering to turn funds they generate from an inhumane activity into safe and accessible money. Human trafficking is a global and cash-focused industry, which means that it provides criminals with the opportunity to use countries with more relaxed enforcement to legitimise their money. The same is true for weapon trafficking, which is again an international, cash-based and illegal market.

Terrorist Financing

Money is required for terrorists to perform their crimes and due to the illegal nature of terrorism, has to be funded privately. Terrorist financing is most often seen in cases linked to a wider organisation or group, because more money is needed and it usually has to travel internationally. Law enforcement often finds electronic money transfers, physical cash smuggling and foreign credit card purchases related to a terrorist organisation.

White-Collar Professionals

White-collar crimes are often focused on disguise and exploitation rather than violence, but even without this threat, they perform an illegal act for some kind of personal gain. Most of the time, this gain is financial, where white-collar perpetrators launder money to gain or avoid losing money, services or property.

While the source of money might not necessarily be illegal as the other types mentioned are, they avoid the financial and tax systems in the same way. This type of financial crime has negative economic consequences and often involves corruption, embezzlement and investment scams.

Examples of Money Laundering Methods

Money laundering is a broad term which encompasses many types of financial crime. We’ll explain some common types of money laundering below.

Smurfing

Smurfing, which is also known as ‘structuring’ occurs when a large sum of money is broken down and input into the financial system in multiple, smaller deposits. Criminals might spread the deposits over different accounts, through different electronic transfers to attract less attention than larger deposits would. Smurfing can involve sending cash ‘mules’ into different countries and depositing the money in accounts where anti-money laundering enforcement is less prominent: increasing the spread of the deposits.

Casinos

On a smaller scale, individuals or groups are known to use casinos to launder illegal funds into bank accounts. These people buy chips with their cash from the casino which they then claim for a check that they deposit into their bank account, turning the cash into clean money inside a financial system.

Real Estate Purchasing

Real estate transactions are often used in money laundering because of the large amount of money that these assets provide as a disguise for the crime. Criminals might quickly buy and sell several properties while under or overvaluing them as a way to funnel money into accounts while distancing themselves from the source of illegal funds. This also happens through other expensive assets, such as cars and yachts.

Cryptocurrency

Cryptocurrency has become the most popular currency for illegal activities, as it allows anonymous buyers and sellers to trade drugs and other goods and services online. They’re used to layer financial transactions: which makes it difficult for the source of the money to be traced back to criminal activity. Money laundering can break the connection between the buyer and seller, so the addresses are no longer linked and the transactions are much harder to trace.

Invoicing Fraud

Fraudsters may use a business to over or under charge on the invoice for goods or services they sell or even give the wrong details. This then allows criminals to provide cash, which they then receive back in electronic form, like through a bank transfer. It can also involve creating fake invoices without any goods or services to sell. Here, they have the chance to send dirty cash to bank accounts and make the money appear clean.

Shell or Fake Companies

Shell companies exist on paper, while being completely inactive. Money launderers use shell companies, or even operational ones like the restaurant example above, to disguise where the real source of the money came from. This allows the shell company to claim they've sold legal items, when in actual fact it’s their dirty cash that funds the sale. It’s difficult for anti money laundering bodies to detect this, as they cannot tell whether capital is from illegal activities or the products allegedly sold in the store.