Decoding Money Laundering Process, Key Components & Tools

COUNTRY NAME: International

Decoding Money Laundering: Process, Key Components & Tools

Money Laundering: The Mechanism and Actors Behind the Profits

Money laundering poses as a serious problem that the world currently has in store and, more importantly, poses a threat to the economy because of such crimes. In this piece, we will take a detailed look at how money laundering works, with a particular focus on its constituent parts, processes, and criminal instruments used to transfer such money. We will explore the precautionary measures that are set to help against such financial misconducts as well. At the end, you will know exactly how the laundering of money occurs and the preventative measures being put forth to contain such acts.

What is Money Laundering?

Money laundering is fundamentally the processes through which criminals seeks to legitimize illegally acquired money. Massive amounts of capital, that are often acquired through carrying out criminal acts that include but are not limited to; drug trafficking, scamming, malpractice such as tax avoidance, and so on, are classed as ‘dirty money’ in the trading world. The ultimate aim for money laundering is to be able to camouflage these illegal capital assets in order for them not to be flagged by law enforcement agencies when used by criminals.

There are three stages to the entire money laundering process. Firstly, there is placement, followed by layering, and finally, there is integration. This sequence is combined to conceal the source of the illegal money from whence the funds emerge and facilitate their entry into the legal economy.

When a person refers to money laundering, the first step ‘placement’ comes to mind after all ‘placement’ has so much to do with money laundering. During this phase, the illicit funds are injected into the financial system, and the goal is to move the money as far from its criminal origin a possible, most of the times by way of asset purchase or bank deposits. This stage is usually positioned as the most dangerous one since it contains a number of large cash amounts that may flag financial institutions or governance.

·       One of the major strategies used under ‘placement’ includes –

·       Investing a large amount of cash into a financial institution or a bank.

·       Purchasing real estate or any luxury items which are significantly expensive.

Moving money into foreign accounts.

Once the effort forms the very basis of segregation, they go to the trailing phase. If placement is turning money illicit, then layering is the hiding out part. This is the stage where the money is covered by investments in commercial activities, multiple transitions passed in order to disguise the fund into ducitness then making the fund untracable as possible to the authority in the best way possible.

Illustrations of Layering:

Transferring money among several bank accounts in various jurisdictions.

Putting the dirty money into a wide range of currencies, commodities, or investment options.

Utilizing offshore companies in order to make it even harder to trace the original owner of the funds.

Integration: The last step of the money laundering cycle is termed as integration. The funds in question here are not undergoing the scrutiny of placement and layering but after processes of those two, they are completely free to be put back into the legal economy. This means that the criminals will be able to spend the crime proceeds in legitimate ways without any suspicion from banks or other financial institutions in such activities as buying properties, investing, and starting up companies.

Illustrations of the Integration Stage:

·       Investing into real estate or an enterprise financed from profits.

·       Buying of expensive things or traveling on a holiday.

·       Debt repayments or loan servicing in relation to the amount of cleaned funds.

Common Methods and Instruments of Money Laundering :

There are numerous techniques and instruments that these criminals employ which aids them in laundering the money as per their plan. Such techniques are usually meant to take advantage of vulnerabilities within the financial system and services and subsequently hide them in the dark.

Shell Companies: Shell firms are legal entities that have no business presence and are a registered entity only on paper. Such firms serve to hide the real owner of assets and make it easier to wash the “dirty” money through the appearances of the businesses.

Offshore Accounts: Offshore bank accounts are mostly famous in jurisdictions that have fewer strict enforcement laws on the transfer of funds and assets ownership. These accounts are very private and because of that, the potential beneficiaries are extremely or almost impossible to trace.

Smurfing: Smurfing, otherwise known as ‘structuring’, is the process wherein a great deal of illegal finances is in some way converted into smaller, more ordinary, and less suspicious amounts in a bid to avoid reaching what would then cause them to trigger more reporting obligations. Such accounts then have transfers or deposits made throughout them irrespective of distance to mask the source of the money more.

Trade-Based Money Laundering: Trade-based money laundering entails the use of international trade invoices with the intention of either over or under stating the value being traded. With the wrong information in the invoices, criminals can carry out the cross border transaction without anyone noticing that it actually took place.

Cryptocurrencies: Cryptocurrencies, like Bitcoin and other forms of digital currencies, have a certain level of privacy as well as nd a number of features that make them not as supervised as other traditional financial institutions. It is quite common for criminals to utilize cross border transfer of funds that have been laundered using cryptocurrencies because they can go undetected as compared to the use of traditional financial transactions.

Legal and Regulatory Framework Advanced countries along with their economies are threatened by Money Laundering, which is disguised as a legal source of Money. US Treasury Department does warn All Financial Services throughout America about Money Laundering through different channels such as securities, loans etc.

Legal and regulatory framework is comprised of the following key features.

Customer Due Diligence (CDD) Establishes the customer’s identity, which is very important in stopping unfriendly forces from gaining access to the system.

Know Your Customer (KYC) It’s a customer evaluation process which seeks to understand the customer’s history and relationships to mitigate their risk of money laundering.

Suspicious Activity Reporting (SAR) All financial transactions that involve suspicious activities or those which endorse commission of money laundering crime should be compulsorily reported to authorized institutions to be dealt with appropriately.

Transaction Monitoring: Helps in tackling the money laundering risks by monitoring all transaction and able to spot any strange behavior that might indicate such practices.

Final Say:

As an intricate and multifaceted crime, money laundering is a threat that has remained relevant to the international economic development. Our conclusion states that if money laundering methods, instruments and their steps: placement, layering and integration are known, the feature of the criminal activity can be rendered to financial institutions and law enforcement. In spite of their inadequacy in terms of keeping all bad fund out of the honest financial purport, the AML rules and regulations had positive impact on the systems.

A joint effort by the governments and the financial institutions bounding themselves to the AML laws and remaining in the know can severely mitigate the risk of money laundering to the economy. If you found this piece of work useful, help the cause of fighting against financial crime by sharing this article.