Commercial Director Identity at GBG and, Member of Project Financial Crime, Emerging Payments Association
In financial circles there is much discussion around money laundering, but the forms which money laundering can take are very rarely explained.
So, what is money laundering? It’s the process of making illegally gained money, often known as dirty money, appear to be legal.
Money laundering usually involves three steps; surreptitiously getting the illegitimate money into the financial system, called placement; then moving it around the financial system through lots of accounts to obfuscate its origins, called layering; and finally it is consolidated into the financial system through additional transactions so it appears to be clean, called integration.
Money laundering can manifest itself in many different ways:
- Smurfing is a method of placement whereby cash is broken into smaller deposits of money to avoid suspicion of money laundering.
- Cash-intensive businesses co-mingle dirty money with legitimate cash income. The business will claim all cash received as legitimate earnings.
- Bulk cash smuggling involves physically smuggling cash to a jurisdiction with greater bank secrecy or less rigorous money laundering enforcement and depositing it in a financial institution, such as an offshore bank.
- Cash-intensive businesses co-mingle dirty money with legitimate cash income. The business will claim all cash received as legitimate earnings. Examples can be car washes, nail bars, arcades, bars and restaurants.
- Trade-based laundering involves under- or over-valuing invoices to disguise the movement of money. For example, the subjective value of art makes it a useful tool here.
- Shell companies and trusts can disguise the true owners of money in some jurisdictions.
- Round-tripping involves depositing money in a controlled foreign corporation offshore, preferably in a tax haven where minimal records are kept, and then shipped back as a foreign direct investment, exempt from taxation.
- Casinos where an individual buys chips with illicit cash, plays briefly and then cashes in the remaining chips for ‘legitimate’ funds.
- Gambling in high odds games. One way to minimise risk is to bet on every possible outcome of an event, so no outcomes have short odds, and the bettor will have one or more winning bets that can be shown as the source of money.
- Black salaries where a company has unregistered employees without written contracts and pays them cash with dirty money.
Finally, money laundering does not need a cash element. It can also be the benefit from any proceeds of crime, including high-value goods, without money ever changing hands.