How Does Money Laundering Work?

Compliance Knowledge Base | Anti-Money Laundering (AML)

Posted by: India Wentworth Published: Tue, 28 Aug 2018 Last Reviewed: Tue, 28 Aug 2018
How Does Money Laundering Work?

Money laundering is the process of making money through a crime of some kind, and then trying to make the money appear legitimate to blend in and avoid suspicion. In other words, criminals make money from one source illegally, then go on to make it look like it came from a different, non-illegal source. Without laundering the money first, criminals would struggle to use it for large purchases without raising suspicion and alerting the authorities.

The term "laundering" refers to the fact that criminals 'clean' or disguise money gained from crime to make it seem like legitimate income. This is achieved in numerous ways, such as spreading the money throughout many bank accounts, investing in businesses, or transferring funds abroad. Laundering's aim is to make it difficult for the authorities to trace proceeds of crime back to the crime itself.

Money Laundering Steps

Criminals follow three stages in order to successfully launder money. Following them closely means that they can turn 'dirty' money 'clean' and get away with the profit of their crime without anyone taking any notice.

The Placement Stage:

Money laundering starts the moment that the money has been gained through the crime. This is when the placement stage takes place, as the proceeds of the crime make their initial entry into the financial system, the first step towards the money appearing to be clean.

This stage can occur in a number of ways, e.g.:

  • Cash could be smuggled into the country
  • Loans could be paid off with the illegal proceeds
  • The money could be used for gambling
  • Purchasing foreign money with the illegal funds
How Does Money Laundering Work?

The Layering Stage:

Sometimes referred to as 'structuring', this stage is the most complex, often involving international movement of the funds. This is the point when the criminal wants to cut off the links between the crime and the money. This works by layering financial transactions to obscure the trail that the authorities could follow to find the origin of the money.

Launderers do this by moving the funds around, more often than not between countries. As they do this, the money is split up into smaller amounts to invest into advanced financial options, constantly moving them as they go to exploit the loopholes in legislation before anyone realises to suspect anything.

The Integration Stage:

This is the final part of the process because this is when the illegally obtained money is returned to the criminal. Through following the previous two steps, they have taken the money on a journey with the intention of cutting ties it has with the crime, and now it is ready to come back to them.

Having been placed initially as cash and layered through a number of financial transactions, the proceeds of the crime are now fully integrated into the financial system and can be used for any purpose.

The criminals go about this carefully to avoid attracting the wrong attention. This can be by spending the money in common ways, enjoying their illegal profit without ever raising suspicions.

The Case of Sani Abacha

Abacha, a military dictator in Nigeria managed to transfer around £5 billion of national funds into foreign bank accounts, equating as much as 10% of Nigeria's national income.

His position of power meant that he was able to gain unauthorised access to large sums of money, and is now being named as one of the most corrupt leaders in recent history. Although some of the money was recovered, to this day the majority is still lost from Nigeria due to Abacha and his family.

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