Money Laundering

Money laundering is the process of placing illegally earned money into the conventional financial system. Contrary to popular belief, money laundering is a large and all-accompanying crime that can range from drug trafficking to embezzlement to human trafficking. The process of making dirty money legal can be broken down to three steps: placement, layering, and integration.

• Placement involves depositing illegally-obtained funds into the conventional financial system so the monies can be used for legal purposes. Some of the placement techniques to avoid detection include smurfing (splitting large amounts of money into a series of small bank deposits), front business (buying a small legitimate business to mix illegally-earned money with legitimate business funds), and using a corrupt bank to launder dirty money (buying, creating, or bribing a bank).

• Layering means moving illegal money from one source to multiple places, often in a series of transactions, so that it cannot be easily tracked back to the initial source.  Techniques include off-shore bank accounts, informal value transfer systems, and anonymous trusts.

• Integration is activity making dirty funds available for use to the money launderer by moving the money into an apparent legal form. Examples of integrating money are legal gambling, use of debit and credit cards issued by off-shore institutions, and under-the-table cash to buy real property.

Anti-Money-Laundering (AML) laws are strong and widespread in much of the world due to global money laundering by both criminal and terrorist activities.  Further, more than 35 countries participate in the Financial Action Task Force on Money Laundering (FATF) to fight money laundering. In the United States, the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of Treasury, enforces AML laws. FinCEN requires all banks and other financial institutions to report any cash transactions over $10,000 and any suspicious transactions that might be money laundering.

In the United States, penalties for violating AML laws are severe: up to $500,000 and 20 years in prison per transaction.[1] In addition, all funds associated with the money laundering may be seized. Moreover, any financial institution with gaps in compliance can be punished severely. Financial institutions are also required to file reports with FinCEN and another federal agency as a way of making money laundering more difficult.

[1] Crain, M. A., Hopwood, W. S., Pacini, C., & Young, G. R. (2015). Essentials of Forensic Accounting (p. 263). New York, NY: American Institute of Certified Accountants, Inc.