In the simplest terms, money laundering involves the transfer of illegally obtained money into a legal institution, i.e. a bank. Money is obtained from criminal activity and carefully channelled into legitimate organisations and businesses in order to disguise its true origin and avoid alerting the authorities. According to the law, money laundering occurs when someone attempts to conceal or disguise the nature, location, source, ownership, or control of the proceeds of crime. Money laundering usually involves two crimes: the initial crime from which criminals have profited, and the crime of trying to legitimise those proceeds by exploiting financial institutions.
We often see money laundering taking place on the big and small-screen. The 2008 TV-hit Breaking Bad saw drug manufacturer, Walter White, try to conceal his illegal earnings by buying a car wash and laundering money into it, under the pretence of real customers. The character also launders money by funnelling it into a charity website set up in his name, but ultimately has too much cash to conceal, leading to suspicion and paranoia. Just as washing machines clean clothes, then, money laundering 'cleans' the dirty origins of illegally-obtained cash. Tellingly, Walter White's laboratory in the show is hidden beneath an industrial laundrette – a subtle wink to the criminal act of money laundering taking place throughout.
Money Laundering: Whys and Hows
Money laundering is illegal because it allows criminals to profit from crime, and it usually involves more than one illegal step to take place:
- The Placement Stage is when the proceeds of the crime make their initial entry into the financial system. This could be by smuggling cash, loans being paid off with the illegal proceeds, or for use in casinos to gamble, etc.
- The Layering Stage is when criminals want to cut ties that could link the crime with the money. By layering financial transactions, they try to obscure any trail that the authorities could follow to find the origin of the money. They do this by moving funds around multiple accounts, splitting them into smaller amounts as they go, and transferring to many people and places.
- The Integration Stage is when the illegally obtained money is returned to the criminal. Having travelled 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.
Remember: whilst, the origin of the money is what makes money laundering illegal, the act of money laundering is also illegal.
If the proceeds of crime weren't laundered, it would be problematic for criminals to use them because they're unable to explain where such vast sums of money (or assets) would come from. HMRC would notice that tax hadn't been paid, or that the criminal in question was unemployed or on a low wage compared to his/her perceived wealth. These are red flags for authorities and would spark investigations that criminals want to avoid at all costs.
Money Laundering Legislation
Anti-Money Laundering (AML) refers to the rules and regulations designed to stop the practice of generating income through money laundering. For example, AML regulations require institutions to complete customer due-diligence checks to make sure they aren't aiding money laundering activities.
Global recognition around AML rules and regulations rose when the Financial Action Task Force (FATF) was formed because it set international standards in the fight against money laundering.
The UK's AML regime has stepped up recently, as 2018 saw a push to strengthen the defences against laundering and terrorist financing through a new watchdog body. The Office for Professional Body Anti-Money Laundering Supervision (OPBAS) is a group within the Financial Conduct Authority (FCA) that is working with AML supervisors and law enforcements to implement an improved level of cooperation.
The requirements of the UK AML regime are made up of 3 areas:
- 1. The Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017
- Changes the approaches to customer due diligence
- Seeks to prevent new means of terrorist financing, including e-money and prepaid cards
- Improves the transparency of the ownerships of companies and trusts
- Effectively enforces sanctions
- 2. The Proceeds of Crime Act 2002
- Allows for the confiscation or civil recovery of the proceeds from crime
- Contains the principal money laundering legislation in the UK
- The aim of the scheme is to deny criminals the use of their assets, recover the proceeds of crime and disrupt and deter criminality
- 3. The Terrorism Act 2000
- The first permanent counter-terrorist legislation in the UK
- Set prosecutions and punishments around certain offences to maintain peace and order