Money laundering is a term used to describe a scheme in which criminals try to disguise the identity, original ownership, and destination of money that they have obtained through criminal conduct. The laundering is done with the intention of making it seem that the proceeds have come from a legitimate source. A simpler definition of money laundering would be a series of financial transactions that are intended to transform ill-gotten gains into legitimate money or other assets. To explore this concept, consider the following money laundering definition.
Definition of Money Laundering
- The act of disguising the source or true nature of money obtained through illegal means.
1300-1350 Middle English Launder: to wash
1970-1975 Term first applied to legal concept of money laundering
What is Money Laundering
When money is obtained from criminal acts such as drug trafficking or illegal gambling, the money is considered “dirty” in that it may seem suspicious if deposited directly into a bank or other financial institution. Because the money’s owner needs to create financial records ostensibly showing where the money came from, the money must be “cleaned,” by running it through a number of legitimate businesses before depositing it, hence the term “money laundering.” Because the act is specifically used to hide illegally obtained money, it too is unlawful.
Different jurisdictions, both foreign and domestic, have their own specific definitions of what acts constitute the crime of money laundering. Which enforcement agency has the authority to investigate money laundering, as well as punishments for the crime, are outlined in the statutes of each jurisdiction.
It has been estimated that at least $300 billion is laundered each year in the United States alone. According to a 2009 study published by the United States Sentencing Commission, more than 81,000 people are convicted of money laundering on some level each year in the United States.
Steps in Money Laundering
Money laundering is accomplished in many ways, though most include three common steps, including
- Obtaining the money or introducing it into the financial system in some way
- Transferring or concealing the source of the money through complex or multiple transactions
- Returning the money back into the financial world so that it appears legitimate.
Of these steps, placement of the money into financial institutions is the most difficult. This is because the Bank Secrecy Act of 1970 requires financial institutions to report deposits over $10,000 in a single day. To circumvent this step then, launderers funnel cash through a legitimate high-cash business, such as a check cashing service, bar, nightclub, or convenience store.
Ways Criminals Avoid Detection
Large scale criminal groups may use complex money laundering techniques in order to avoid detection. However, smaller scale criminals or first time offenders often use simpler methods in their attempt avoid detection. Such money laundering techniques may include:
- Transferring money from bank to bank or from account to account
- Breaking up large amounts into smaller bank deposits
- Purchasing money orders in smaller money amounts
- Breaking the cash into small amounts and purchasing cashier’s checks
For example, Sally steals a large amount of cash from her business. She wants the money to go undetected, so instead of making one large deposit into her savings or banking account, she breaks the money up and deposits one small amount each week. This ensures the bank does not look at her transaction suspiciously since it is uncommon for her to deposit large sums of money.
Money Laundering Techniques
There are many forms of money laundering though some are more common and profitable than others. Some of the more popular money laundering techniques include:
- Bulk cash smuggling involves literally smuggling cash into another country for deposit into offshore banks or other type of financial institutions that honor client secrecy.
- Structuring, also referred to as “smurfing,” is a method in which cash is broken down into smaller amount, which are then used to purchase money orders or other instruments to avoid detection or suspicion.
- Trade-based laundering is similar to embezzlement in that invoices are altered to show a higher or lower amount in order to disguise the movement of money.
- Cash-intensive business occurs when a business that legitimately deals with large amounts of cash uses its accounts to deposit money obtained from both everyday business proceeds and money obtained through illegal means. Businesses able to claim all of these proceeds as legitimate income include those that provide services rather than goods, such as strip clubs, car washes, parking buildings or lots, and other businesses with low variable costs.
- Shell companies and trusts are used to disguise the true owner or agent of a large amount of money.
- Bank capture refers to the use of a bank owned by money launderers or criminals, who then move funds through the bank without fear of investigation.
- Real estate laundering occurs when someone purchases real estate with money obtained illegally, then sells the property. This makes it seem as if the profits are legitimate.
- Casino laundering involves an individual going into a casino with illegally obtained money. The individual purchases chips with the cash, plays for a while, then cashes out the chips, and claims the money as gambling winnings.
Anti-Money Laundering Laws
Anti-money laundering laws reflect an effort made the government to stop money laundering methods that involve financial institutions. Under the guidelines set forth by anti-money laundering, or “AML” financial institutions are required to verify large sums of money passing through the institution, and they are required to report suspicious transactions. It is estimated that money laundering is so prominent globally, that it is impossible for the Financial Action Task Force to produce estimates or figures as to its scope.
Financial Action Task Force
The Financial Action Task Force (“FATF”) was formed in 1989 by a coalition of countries. This intergovernmental agency was designed to develop and promote international cooperation for combating money laundering. As of 2015, the FATF is comprised of 34 different countries, but the agency is always seeking to expand its membership to more regions. Headquartered in Paris, France, the FATF also works to combat the financing of terrorism. The FATF has developed recommendations to combat money laundering, and the agency has three functions in regards to this criminal activity:
- Monitoring the progress of member countries in their anti-money laundering measures
- Reviewing trends and techniques in money laundering, reporting these, as well as new countermeasures, to member countries
- Promoting FATF anti-money laundering measures and standards globally
Bank Secrecy Act
The Bank Secrecy Act (the “BSA”) was enacted by Congress in 1970, as an effort to combat the use of financial institutions in money laundering crimes. The Act contains laws that require financial institutions to report certain transactions to the United States Department of Treasury, including transactions in excess of $10,000. The institutions must also file a Suspicious Activity Report, or “SAR,” if they consider any financial transaction suspicious or believe the funds comes from unlawful activities. The Act is also responsible for the creation of the Financial Crimes Enforcement Network, which makes reports of money-laundering or suspicious activity available to criminal investigators around the world.
Other Anti-Money Laundering Regulations
Since the BSA was created, many other legislative acts and money laundering regulations have came about to strengthen the movement. These include:
- The Money Laundering Control Act of 1986, which prohibits engaging in any transactions involving proceeds generated from illegal activities.
- The 1988 Anti-Drug Abuse Act, which expanded the definition of “financial institution” to include car dealers and real estate personnel, requiring them to file reports on transactions involving large amounts of currency.
- The 1992 Annunzio-Wylie Anti-Money Laundering Act, which requires more strict sanctions for violations of the BSA, and requiring additional verifications, recordkeeping, and reporting for wire transfers.
- The Money Laundering Suppression Act of 1994 requires banks to develop and institute training in anti money laundering examination procedures.
- The Money Laundering and Financial Crimes Strategy Act of 1998 requires banking agencies to develop training for examiners.
Unfortunately, as these money laundering regulations are put into place, criminals work to find new methods to prevent their activity from becoming detected or considered suspicious.
The Role of Financial Institutions in Combating Money Laundering
In this age of electronic transactions to and from financial institutions around the globe, anti money laundering laws attempt to quell money laundering by requiring these institutions to identify and report suspicious activities. Technology has also paved the way for anti-money laundering software, detects large increases in account balances or large withdrawals, and which filters data and classifies it according to levels of suspicion. Software is also used to detect transactions with banking institutions in blacklisted or hostile countries. When such transactions are identified, the program alerts bank managers who then study the information and decide whether it should be reported to the government.
Penalties for Money Laundering
The penalties for money laundering vary greatly depending on the circumstance and the amount of funds involved. The penalties may also vary if the acts occurred in more than one jurisdiction. In addition to imprisonment, punishment for money laundering may include large fines, restitution, and community service. Typically, the more money involved, the harsher the punishment.
Money Laundering Example Cases
Money laundering is not uncommon, but some money laundering cases have met the spotlight due to the severity of the act, or the amount of money involved in the crime. Large-scale money laundering cases often involve global transactions. Below are some famous examples of money laundering cases.
- In 2012, HSBC Holdings, a London-based company, paid nearly $2 billion in fines after it was discovered that the financial institution laundered money for drug traffickers, terrorists, and other organized crime groups throughout Iran. The laundering went on for many years before the activity was detected.
- In 2014, BNP Paribas, a French bank with global headquarters in London, pled guilty to falsifying business records after it was discovered the institution violated U.S. sanctions against Cuba, Sudan, and Iran. As a result, BNP was forced to pay a fine of $8.9 billion which is the largest fine ever imposed for violating those sanctions.
- In the 1980s, the Bank of Credit and Commerce International, a bank registered in Luxembourg and with offices in London, was found guilty of laundering an amount of money estimated to be in the billions for drug traffickers.
Related Legal Terms and Issues
- Agent – A person authorized to act on behalf of someone else, such as an employee, broker, or sales representative.
- Asset – Any valuable thing or property owned by a person or entity, regarded as being of value.
- Embezzlement – The act of stealing or misappropriating funds.
- Intent – A resolve to perform an act for a specific purpose; a resolution to use a particular means to a specific end.
- Jurisdiction – The legal authority to hear legal cases and make judgments; the geographical region of authority to enforce justice.