Money laundering is the process of creating the appearance that large amounts of money obtained from serious crimes, such as drug trafficking or terrorist activity, originated from a legitimate source. it can also be defined as the process of making illegally-gained proceeds (i.e. “dirty money”) appear legal (i.e. “clean”)
Process of money laundering
Money laundering process is accomplished in three stages. These stages may comprise numerous transactions by the persons engaged in money laundering that could alert an institution of the criminal activity.
- Placement-A person engaged in money laundering introduces his or her illegal profits into the financial system.
- Layering – In this phase, the person engaged in money laundering engages in a series of conversions or movements of the funds to distance them from their source. The funds might be channeled through the purchase and sales of investment instruments
- Integration – This is the provision of apparent legitimacy to criminally derived wealth. If the layering process has succeeded, an integration scheme places the laundered proceeds back into the legitimate economy in such a way that they re-enter the financial system appearing as normal business funds.
The three basic steps may occur as separate and distinct phases. Alternatively, they may occur simultaneously or, more commonly, they may overlap. How the basic steps are used depends on the available laundering mechanisms and the requirements of the criminal organizations.
Money laundering in the capital markets can take place in all the three stages, as capital markets are no longer predominantly cash based, they are more likely to be used in the layering stage rather than placement stage of money laundering. However, where the transactions are in cash, there is still the risk of capital markets being used at the placement stage. Capital markets offer a
vast array of opportunities for transforming money into a diverse range of assets. For liquid assets, they allow a high frequency of transactions which aids the layering process. Hence, capital markets are particularly attractive to persons engaged in money laundering for layering their illicit proceeds for eventual integration into the general economy.
Methods of placement
The process of placement can be carried out through many processes including:
1. Currency Smuggling — This is the physical illegal movement of currency and monetary instruments out of a country. The various methods of transport do not leave a discernible audit trail
2. Bank Complicity — This is when a financial institution, such as banks, is owned or controlled by unscrupulous individuals suspected of conniving with drug dealers and other organized crime groups. This makes the process easy for launderers. The complete
liberalization of the financial sector without adequate checks also provides leeway for laundering.
3. Currency Exchanges —In, a number of transitional economies the liberalization of foreign exchange markets provides room for currency movements and as such laundering schemes can benefit from such policies.
4. Securities Brokers — Brokers can facilitate the process of money laundering through structuring large deposit’s of cash in a way that disguises the original source of the funds.
5. Blending of Funds — The best place to hide cash is with a lot of other cash.. Therefore, financial institutions may be vehicles for laundering. The alternative is to use the money from illicit activities to set up front companies. This enables the funds from
illicit activities to be obscured in legal transactions:
6. Asset Purchase — The purchase of assets with cash is a classic money laundering method. The major purpose is to change the form of the proceeds from conspicuous bulk cash to some equally valuable but less conspicuous form.
Methods of Layering
1. Cash converted into Monetary Instruments — Once the placement is successful within the financial system by way of a bank or financial institution, the proceeds can then be converted into monetary instruments. This involves the use of banker’s drafts and
money orders.
2. Material assets bought with cash then sold — Assets that are bought through illicit funds can be resold locally or abroad and in such a case the assets become more difficult to trace and thus seize.
Methods of Integration
1. Property Dealing — The sale of property to integrate laundered money back into the economy is a common practice amongst criminals. For instance, many criminal groups use shell companies to buy property; hence proceeds from the sale would be considered
legitimate.
2. Front Companies and False Loans — Front companies that are incorporated in countries with corporate secrecy laws, in which criminals lend themselves their own laundered proceeds in an apparently legitimate transaction.
3. Foreign Bank Complicity — Money laundering using known foreign banks represents a higher order of sophistication and presents a very difficult target for law enforcement.
The willing assistance of the foreign banks is frequently protected against law enforcement scrutiny. This is not only through criminals, but also by banking laws and regulations of other sovereign countries.
False Import/Export Invoices — The use of false invoices by import/export companies has proven to be a very effective way of integrating illicit proceeds back into the economy. This involves the overvaluation of entry documents to justify the funds later deposited in domestic banks and/or the value of funds received from exports.
