Understanding Money Laundering and the Legal Ramifications – Part 1

Money laundering is the practice in disguising the origins of money obtained illicitly. It is thus a method in which the proceeds of crime are made to appear legitimate. This stems from the long-standing collusion of the underground and official economy. The underground economy includes a spectrum of criminal activities which conflict with the legal system, such as organized crime, drug dealing, insider trading, fraud and tax evasion. Criminals, ever since the introduction of monetary systems, the evolution of the Mafia and organized crime, have been able to strategically and very cunningly intertwine their illicit activities with the legal financial system.

The fundamental goal of money laundering is to avoid the legal consequences of the crimes from which the funds originate, whilst enjoying the profits of such crimes. When criminal activities generate substantial profits, the individual or group involved works hard to find a way to control the funds without attracting attention to the underlying activity or the persons involved. Once profits emanating from illegal activities are converted into assets, especially when using layering, it becomes very difficult to trace these assets back to the crime from which they originated from.

Money that is ‘laundered’ is acquired by cleverly converting and concealing it:

What is Conversion?

Conversion occurs when a transfer of assets or property takes place by an enabler, all the while being aware that such assets or property were earned in the course of illicit activity. This allows for the transaction of assets or property to avoid detection from the authorities, and permitting the offender to evade the legal consequences thereof.

What is Concealment?

It is the act of purposely concealing or disguising the criminal offense’s origin, helping the offender in hiding their crimes. The enabler would purposely exclude information such as the source of the funds, location, disposition and the true ownership of the assets of property.

What is Acquisition?

The act of acquiring, possessing or using funds or property whilst knowing full well that these funds or properties were obtained through illegal means.

How Money is Laundered

So how does money, fraudulently or criminally-generated, pass through legal financial doorways? There are three steps or stages which criminals undertake in various forms, When they want to ‘wash’ or launder their dirty money and disguise its true source of origin:

Placement

The ‘Placement’ stage is whence illegally-obtained funds are placed into the financial system. The intention is to transform the funds as quickly as possible into other types of legal assets and thus avoid detection, with the use of banks or using legitimate businesses (airports, ship ports, casinos, shops, restaurants, exchange business, etc) to disguise the funds’ true origin. This can be done through:

The blending of funds: the amalgamation of illegitimate funds with legitimate funds. This is done by transferring the cash acquired from illegal narcotics sales (for example) into a cash-intensive, locally owned business.

Using foreign exchange: buying foreign money with illegitimate funds.

Breaking up amounts: dividing cash in small amounts and depositing them into numerous bank accounts in an attempt to evade reporting requirements.

Currency smuggling: physically moving cash or monetary instruments across borders physical

Loans: repaying legitimate loans using illegitimate cash

Layering

The next step is ‘layering’, in which money launderers obscure the source of the illicit funds. The aim is to make the source of the illicit money as untraceable as possible by diversifying the channels of money flow and through the use of ‘shell’ companies or various accounts within different jurisdictions and any other means possible to give the impression that the funds have originated from legitimate sources.

Integration

‘Integration’ occurs when the newly laundered funds are successfully integrated into legitimate business operations and/or assets. The money is now ‘clean’, ready to be used within the official economy.

The Concepts of Structuring and Smurfing.

Structuring is done when one obscures a financial transaction by transferring low amounts of money at incongruent times. In this way, the offender would avoid the detection of a large amount of money being transacted, circumventing the bank’s requirement to conduct a Currency Transaction Report (CTR) or a Suspicious Activity Report (SAR).

Smurfing is simply structuring with further steps – requiring the deposit and movement of funds into multiple geographically-disseminated accounts. The various transactions are usually executed by ‘smurfs’ (runners who knowingly concealing the funds), who transfer the amounts from an institution to another, ultimately veiling their source of origin, using the above-mentioned tools; such as placement and layering. This makes detection even harder, often including a longer series of transactions from one institution to another, as well as from one jurisdiction to another.

In part 2 of this series, we will explore the various anti-laundering laws and organizations across the world, and how effective their efforts are in the fight against financial crime.