The State of Financial Crime 2022 - Read our global compliance survey

What is Money Laundering?

Financial Crime Knowledge & Training

Money laundering underpins most forms of organized crime by disguising illicitly-obtained financial assets as “clean” and allowing nefarious groups or individuals to profit from illegal activity. While the amount of money laundered globally in one year is estimated to equal between $800 million and $2 trillion, more than 90% of this amount goes undetected, jeopardizing the global economy and its security. 

What is money laundering?

The Financial Action Task Force (FATF) defines money laundering as “the processing of criminal proceeds to disguise their illegal origin”. Some of the major contributors to money laundering are organized crime, drug trafficking, and smuggling, all of which can generate a substantial amount of money that requires “cleaning” before the criminal can use it in a legitimate financial system without being detected.

Across the globe, financial services institutions such as banks, capital market firms, and insurers are some of the most favored channels used to launder illicit funds. One scheme typically involves transferring money through several countries to obscure its illegal origin and can involve multiple people as well as multiple bank accounts. 

 

What are the stages of money laundering?

While the ways criminals can launder money are diverse, the methodology remains generally consistent. The three stages of money laundering are:

Placement

The initial placement stage refers to the introduction of illegal cash or money obtained through illegal activity into a legitimate financial transaction system. Cash deposits, wire transfers, and other financial instruments are used at this stage to move the funds away from being directly associated with the crime.

Layering

The next stage is where legally sourced money is “layered” or entwined with the illegal funds that have been placed in the financial system. The intent at this stage is to obscure the audit trail of the financial sum involved, which can look like the criminal buying and selling stocks, commodities, and real estate, often across multiple borders. 

Integration

The final money laundering stage is reached when the “dirty” money and the “clean” money have been combined to the point that all of the funds appear legitimate. When the criminals have a seemingly legal explanation for the placed and layered financial assets, the funds can be received from their original illicit source through means that do not draw attention, allowing them to use the funds freely in the regular monetary system.

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Is money laundering illegal?

Whilst the illicit origins of the funds being laundered are what make money laundering schemes illegal, the act of money laundering is an offense in its own right. In addition to receiving a sentence for the predicate crime (a component of a larger crime that generates monetary proceeds), criminals can receive up to 14 years in custody for money laundering offenses, in addition to mandated fees and restrictions.  

However, some countries, including Germany, have made a legislative shift to separate money laundering from predicate offenses, thus expanding criminal liability beyond what was previously outlined in the country’s catalog of suitable predicate offenses.

How is money laundering prevented?

Anti-Money Laundering (AML) refers to the procedures, policies, programs, and technologies that financial institutions must put in place to monitor fraudulent activity. Some AML controls include Know Your Customer (KYC) policies, record management and software filtering, holding periods, and sophisticated new technologies such as AI to monitor financial risk in real-time. 

AML aims to deter and prevent criminals from placing their illicit assets into a legitimate financial system, as well as stopping the funds from being recycled into further criminal enterprises. 

In order to further mitigate the risk of money laundering, updated and enhanced AML regulations are due to continue throughout 2022.

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Originally published March 9, 2022, updated May 5, 2022

Disclaimer: This is for general information only. The information presented does not constitute legal advice. ComplyAdvantage accepts no responsibility for any information contained herein and disclaims and excludes any liability in respect of the contents or for action taken based on this information.

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