Ever since money was invented, criminals have sought ways to disguise the proceeds of their illegal activities. Legend has it that the expression of ‘money laundering’ was coined during the rise of organised crime in the 1920s and in particular, the activities of the feared Chicago mob boss, Al Capone. Capone needed to find a way to disguise the vast sums of cash generated from his bootlegging activities and hit upon the idea of investing in laundromats – cheaply run businesses that were easy to maintain and difficult to police. As these were cash-based businesses, it was easy to ‘mingle’ illicit money with legitimate takings and bank them together, thus ‘laundering’ the illegal cash and getting it into the banking system.
Legend or not, the example clearly illustrates the problem that every money launderer faces and can be defined as:
‘The process of disguising the proceeds of crime and integrating illegally obtained assets into the legitimate financial system without detection.’
It’s easier to state it in a single sentence than execute it in practice. Yet, the global money laundering problem exists on a vast scale. The United Nations Office for Drugs and Crime (UNODC) estimates that the amount of money laundered globally in one year is between 2% and 5% of the global GDP, which would be $800bn – $2 trillion USD.
Money Laundering is an umbrella term covering a multitude of criminal activities, known as predicated offences ranging from all forms of trafficking, such as drugs, people, wildlife, arts and antiquities, arms dealing and more recently, cybercrime and fraud. It also covers so-called white collar crime such as intellectual property fraud, insider trading, investment scams, identity theft, bribery and corruption.
The three stages of Money Laundering:
Stage 1 – Placement:
This is often the most difficult stage. Criminals continuously evolve and find new ways of getting their money into the system from their cash-based business models, such as Al Capone’s Laundromats. Bad actors use numerous techniques to outsmart the authorities such as ‘smurfing’, by using unregistered money services businesses, ‘money mules’ and other third-party carriers. Proceeds of white-collar crimes are often already in the system and need to be moved swiftly using different techniques.
Stage 2 – Layering:
Once in the system, criminals use a variety of techniques to further separate the illegal money from its original source. This is known as layering and common methods involve splitting the money into smaller amounts and sending it electronically to multiple other accounts, often overseas. This process may be repeated several times and when other currencies, including crypto currencies are involved, tracing and detection to connect monies to their original illegal source is extremely difficult.
Stage 3 – Integration:
The purpose of stages 1 and 2 is to enable criminals to use their proceeds of crime for activities such as buying real estate, luxury goods of all kinds, art, other businesses and the key is that they all appear to be legitimate purchases. This may involve ‘spinning’ acquired assets for further gain.
Whilst it is useful to know what the various stages of money laundering entail, from an AML compliance perspective if the financial institution is handling these monies at any stage, the institution has an obligation to report it. On the other hand, regulated firms must ensure that they have effective AML controls and processes in place and they are designed to safeguard their organisation and customers from money laundering and other illegal forms of financial crime.
However, this is easier said than done. Criminal activity is constantly evolving, criminals are increasingly sophisticated and creative in developing new money laundering techniques to facilitate their primary objective to get their illegal proceeds of crime into the financial system without detection and convert them to legitimate use.
Criminals are smart, great story tellers and compliance teams need to be smarter and skilled at identifying possible suspicious activities.