What is money laundering?

Money laundering underpins most forms of organized crime. By disguising illicitly obtained funds as legitimate income, criminal groups and individuals can profit from illegal activity without detection. The United Nations Office on Drugs and Crime (UNODC) estimates that 2-5% of global GDP – between $800 billion and $2 trillion – is laundered every year, and the true figure is difficult to establish because so much of it goes undetected. Nasdaq Verafin’s 2026 Global Financial Crime Report puts the scale of the problem even higher, estimating that $4.4 trillion in illicit funds flowed through the global financial system in 2025.

Because of this, money laundering remains a priority for regulators and legislators worldwide. Anti-money laundering (AML) frameworks continue to expand in scope, and the technology firms use to detect money laundering are developing quickly.

What is money laundering?

The Financial Action Task Force (FATF) defines money laundering as “the processing of criminal proceeds to disguise their illegal origin.” Organized crime, drug trafficking, and smuggling are among its largest sources – each generates substantial sums that need cleaning before criminals can use them in the legitimate financial system without being detected.

Financial institutions such as banks, capital market firms, and insurers are among the most favored channels for laundering illicit funds. Part of what makes money laundering difficult to detect is that it is tied to other crimes. Criminals often move money through several countries to obscure its origin, involving multiple people and multiple bank accounts along the way.

Money laundering also presupposes an underlying offense – the predicate crime that generated the funds in the first place. When laundering activity and its related offenses become interwoven across jurisdictions, the result is a network of illicit activity that is hard to trace and harder to dismantle.

How does money laundering work?

While criminals’ methods are diverse, the process tends to follow a similar pattern. The three stages of money laundering are:

• Placement: Illegal cash, or funds obtained through illegal activity, is introduced into the legitimate financial system. Cash deposits, wire transfers, and other financial instruments move the funds away from any direct association with the crime.
• Layering: The funds are then moved through a series of transactions designed to obscure the audit trail – often the buying and selling of stocks, commodities, or real estate, frequently across multiple borders.
• Integration: In the final stage, the “dirty” and “clean” money are combined until all funds appear legitimate. With a seemingly lawful explanation for the money’s origin, criminals can use it freely in the regular financial system without drawing attention.

What are examples of money laundering?

Criminals use a variety of methods, schemes, and techniques to move or conceal illicit funds. Compliance teams need to recognize these typologies to mitigate financial crime risk and meet their regulatory obligations. Common money laundering typologies include:

• Money mules: A “money mule” is an individual recruited by criminals – wittingly or unwittingly – to act as a proxy in the placement of criminal funds. Red flags include small transaction amounts and younger account holders, who may be less aware of the legal implications of their actions. Because money muling networks often involve large numbers of individuals across jurisdictions, firms that identify a suspected mule should try to build a picture of any relevant associates.
• Smurfing: “Smurfing” involves moving large amounts of illicit money through the financial system via smaller transactions. “Smurfs” typically spread these transactions across multiple bank accounts to stay under regulatory reporting thresholds and avoid detection. Because smurfing networks can move large sums quickly, the typology is often used in combination with money muling. To mitigate this risk, transaction monitoring thresholds should be calibrated to the firm’s risk-based approach.
• Virtual assets: Although most placement and layering still occur in fiat currencies, virtual assets – especially cryptocurrencies – are increasingly used for layering funds. Chainalysis’ 2026 Crypto Crime Report found that illicit cryptocurrency addresses received at least $154 billion in 2025, with stablecoins accounting for 84% of illicit transaction volume. A typical pattern: The proceeds of cyber fraud or blackmail are collected in Bitcoin, traded through several exchanges for other cryptocurrencies – including privacy coins – and then cashed out.

Is money laundering illegal?

Yes. While the illicit origin of the funds is what makes a laundering scheme possible, the act of money laundering is an offense in its own right. In the UK, for example, criminals can receive up to 14 years in custody for money laundering offenses under the Proceeds of Crime Act 2002, in addition to any sentence for the predicate crime and any associated fines and restrictions.

Some countries have gone further. Germany’s reform of Section 261 of its Criminal Code removed the catalog of qualifying predicate offenses entirely, meaning any unlawful act can now serve as a predicate for money laundering – a significant expansion of criminal liability.

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How is money laundering prevented?

Anti-money laundering (AML) refers to the policies, procedures, programs, and technologies that financial institutions implement to detect and report suspicious activity. Core AML controls include know your customer (KYC) checks, record management, transaction monitoring, and screening technologies that assess financial crime risk in real time.

Technology has made it substantially easier to detect financial system abuse and gather information about those responsible. Manual data searches and account reviews are slow and inefficient; screening and monitoring systems now enable firms to continuously assess customers and surface genuine risks faster.

Many governments also legally require financial institutions – banks, payment and insurance companies, casinos, money exchange businesses, and others – to file a suspicious activity report (SAR) when they identify potential money laundering among their customers. No government can detect laundering alone, and neither can individual firms. When the public and private sectors share information, detection rates improve markedly.

The stakes for firms are high. A company or financial institution that completes a transaction involving money laundering can face significant legal and financial consequences, even if the failure was accidental. Where employees actively assist launderers, individuals face prosecution, and the institution may still incur liability. For most firms, thorough customer and transaction monitoring is simply the cost of operating safely.

The regulatory bar continues to rise. The EU’s new Anti-Money Laundering Authority (AMLA) began operations in Frankfurt on July 1, 2025, and will directly supervise around 40 high-risk, cross-border financial institutions from January 1, 2028 – part of a wider EU AML package that harmonizes requirements across member states.