Money laundering is the process of illegally concealing the origin of money obtained from illicit activities (often known as dirty money), and converting the funds into a seemingly legitimate source. As financial crime has become more complex and financial intelligence is more important in combating international crime and terrorism, money laundering has become a prominent political, economic, and legal debate. Most countries implement some anti-money-laundering measures.
In the past, the term "money laundering" was applied only to financial transactions related to organized crime. Today its definition is often expanded by government and international regulators such as the US Office of the Comptroller of the Currency to mean "any financial transaction which generates an asset or a value as the result of an illegal act", which may involve actions such as tax evasion or false accounting. In the UK, it does not need to involve money, but any economic good. Courts involve money laundering committed by private individuals, drug dealers, businesses, corrupt officials, members of criminal organizations such as the Mafia, and even states.
In United States law, money laundering is the practice of engaging in financial transactions to conceal the identity, source, or destination of illegally gained money. In United Kingdom law, the common law definition is wider. The act is defined as "the process by which the proceeds of crime are converted into assets which appear to have a legitimate origin, so that they can be retained permanently or recycled into further criminal enterprises".
Contents
Legislative history
While existing laws were used to fight money laundering during the period of Prohibition in the United States during the 1930s, dedicated anti-money laundering legislation was only implemented in the 1980s. Organized crime received a major boost from Prohibition and a large source of new funds that were obtained from illegal sales of alcohol. The successful prosecution of Al Capone on tax evasion brought in a new emphasis by the state and law enforcement agencies to track and confiscate money, but existing laws against tax evasion could not be used once gangsters started paying their taxes.
In the 1980s, the war on drugs led governments again to turn to money laundering rules in an attempt to track and seize the proceeds of drug crimes in order to catch the organizers and individuals running drug empires. It also had the benefit, from a law enforcement point of view, of turning rules of evidence "upside down". Law enforcers normally have to prove an individual is guilty to seize their property, but with civil forfeiture laws, money can be confiscated and it is up to the individual to prove that the source of funds is legitimate to get the money back. This makes it much easier for law enforcement agencies and provides for much lower burdens of proof.
However, this process has been abused by some law enforcement agencies to take and keep money without strong evidence of related criminal activity, to be used to supplement their own budgets. Civil asset forfeiture has been harshly criticized by civil liberties advocates for its greatly reduced standards for conviction, reverse onus, financial conflicts of interests arising when the law enforcement agencies who decide whether or not to seize assets stand to keep those assets for themselves, and violation of separation of powers and due process.
The 11 September attacks in 2001, which led to the Patriot Act in the U.S. and similar legislation worldwide, led to a new emphasis on money laundering laws to combat terrorism financing. The Group of Seven (G7) nations used the Financial Action Task Force on Money Laundering to put pressure on governments around the world to increase surveillance and monitoring of financial transactions and share this information between countries. Starting in 2002, governments around the world upgraded money laundering laws and surveillance and monitoring systems of financial transactions. Anti-money laundering regulations have become a much larger burden for financial institutions, and enforcement has stepped up significantly.
Features
Definition
Money laundering is the conversion or transfer of property; the concealment or disguising of the nature of the proceeds; the acquisition, possession or use of property, knowing that these are derived from criminal acts; the participating in or assisting the movement of funds to make the proceeds appear legitimate.
Money obtained from certain crimes, such as extortion, insider trading, drug trafficking, human trafficking, and illegal gambling is "dirty" and needs to be "cleaned" to appear to have been derived from legal activities, so that banks and other financial institutions will deal with it without suspicion. Money can be laundered by many methods that vary in complexity and sophistication.
Money laundering typically involves three steps: The first involves introducing cash into the financial system by some means ("placement"); the second involves carrying out complex financial transactions to camouflage the illegal source of the cash ("layering"); and finally, acquiring wealth generated from the transactions of the illicit funds ("integration"). Some of these steps may be omitted, depending on the circumstances. For example, non-cash proceeds that are already in the financial system would not need to be placed.
According to the United States Treasury Department:
Money laundering is the process of making illegally-gained proceeds (i.e., "dirty money") appear legal (i.e., "clean"). Typically, it involves three steps: placement, layering, and integration. First, the illegitimate funds are furtively introduced into the legitimate financial system. Then, the money is moved around to create confusion, sometimes by wiring or transferring through numerous accounts. Finally, it is integrated into the financial system through additional transactions until the "dirty money" appears "clean".
Methods
Money laundering can take several forms, although most methodologies can be categorized into one of a few types. These include "bank methods, smurfing [also known as structuring], currency exchanges, and double-invoicing".
Structuring: Often known as smurfing, is a method of placement whereby cash is broken into smaller deposits of money, used to defeat suspicion of money laundering and to avoid anti-money laundering reporting requirements. A sub-component of this is to use smaller amounts of cash to purchase bearer instruments, such as money orders, and then ultimately deposit those, again in small amounts.
Bulk cash smuggling: This involves physically smuggling cash to another jurisdiction and depositing it in a financial institution, such as an offshore bank, that offers greater bank secrecy or less rigorous money laundering enforcement.
Cash-intensive businesses: In this method, a business that is typically expected to receive a large proportion of its revenue as cash uses its accounts to deposit criminally derived cash. This method of money laundering often causes organized crime and corporate crime to overlap. Such enterprises often operate openly and in doing so generate cash revenue from incidental legitimate business in addition to the illicit cash. In such cases, the business will usually claim all cash received as legitimate earnings. Service businesses are best suited to this method, as such enterprises have little or no variable costs and/or a large ratio between revenue and variable costs, which makes it difficult to detect discrepancies between revenues and costs. Examples are parking structures, strip clubs, tanning salons, car washes, arcades, bars, restaurants, casinos, barber shops, DVD stores, movie theaters, and beach resorts.
Trade-based laundering: This method is one of the newest and most complex forms of money laundering. This involves under- or over-valuing invoices to disguise the movement of money. For example, the art market has been accused of being an ideal vehicle for money laundering due to several unique aspects of art such as the subjective value of artworks as well as the secrecy of auction houses about the identity of the buyer and seller. According to the National Crime Agency, one strategy that is favored by high-net-worth individuals is specialist storage facilities. Art kept in these spaces has been used by individuals to evade sanctions and launder the proceeds of crime.
Magnitude
Many regulatory and governmental authorities issue estimates each year for the amount of money laundered, either worldwide or within their national economy. In 1996, a spokesperson for the IMF estimated that 2–5% of the worldwide global economy involved laundered money. The Financial Action Task Force on Money Laundering (FATF), an intergovernmental body set up to combat money laundering, stated, "Due to the illegal nature of the transactions, precise statistics are not available and it is therefore impossible to produce a definitive estimate of the amount of money that is globally laundered every year. The FATF therefore does not publish any figures in this regard." Academic commentators have likewise been unable to estimate the volume of money with any degree of assurance. Various estimates of the scale of global money laundering are sometimes repeated often enough to make some people regard them as factual—but no researcher has overcome the inherent difficulty of measuring an actively concealed practice.
Regardless of the difficulty in measurement, the amount of money laundered each year is in the billions of US dollars and poses a significant policy concern for governments. As a result, governments and international bodies have undertaken efforts to deter, prevent, and apprehend money launderers. Financial institutions have likewise undertaken efforts to prevent and detect transactions involving dirty money, both as a result of government requirements and to avoid the reputational risk involved. Issues relating to money laundering have existed as long as there have been large-scale criminal enterprises. Modern anti-money laundering laws have developed along with the modern war on drugs. In more recent times anti-money laundering legislation is seen as an adjunct to the financial crime of terrorist financing in that both crimes usually involve the transmission of funds through the financial system (although money laundering relates to where the money has come from, and terrorist financing relating to where the money is going to). Finally, people, vessels, organisations and governments can be sanctioned due to international law-breaking, war (and of course tit-for-tat sanctions), and still want to move funds into markets where they are persona non grata.
Transaction laundering is a massive and growing problem. Finextra estimated that transaction laundering accounted for over $200 billion in the US in 2017 alone, with over $6 billion of these sales involving illicit goods or services, sold by nearly 335,000 unregistered merchants. Money laundering can erode democracy.
Notable cases
Bank of Credit and Commerce International: Unknown amount, estimated in billions, of criminal proceeds, including drug trafficking money, laundered during the mid-1980s.
Bank of New York: US$7 billion of Russian capital flight laundered through accounts controlled by bank executives, the late 1990s.
BNP Paribas, in June 2014, pleaded guilty to falsifying business records and conspiracy, having violated U.S. sanctions against Cuba, Iran, and Sudan. It agreed to pay an $8.9 billion fine, the largest ever for violating U.S. sanctions.
BSI Bank, in May 2017, was shut down by the Monetary Authority of Singapore for serious breaches of anti-money laundering requirements, poor management oversight of the bank's operations, and gross misconduct of some of the bank's staff.
BTA Bank: $6 billion of bank funds embezzled or fraudulently loaned to shell companies and offshore holdings by the bank's former chairman and CEO Mukhtar Ablyazov.
Charter House Bank: Charter House Bank in Kenya was placed under statutory management in 2006 by the Central Bank of Kenya after it was discovered the bank was being used for money laundering activities by multiple accounts containing missing customer information. More than $1.5 billion had been laundered before the scam was uncovered.
Danske Bank + Swedbank: $30 billion – $230 billion US dollars laundered through its Estonian branch. This was revealed on 19 September 2018. Investigations by Denmark, Estonia, the U.K. and the U.S. were joined by France in February 2019. On 19 February 2019, Danske Bank announced that it would cease operating in Russia and the Baltic States. This statement came shortly after Estonia's banking regulator Finantsinspektsioon announced that they would close the Estonian branch of Danske Bank. The investigation has grown to include Swedbank, which may have laundered $4.3 billion. More at Danske Bank money laundering scandal.
Deutsche Bank was accused in a vast money laundering scheme, dubbed the Global Laundromat, involving secret Russian accounts that were transferred from European Union banks in Estonia, Latvia and Cyprus between 2010 and 2014. Newspaper sources estimated the total value of laundered currency to be as high as $80bn. The bank is also under investigation for its involvement in Europe's biggest banking scandal through Denmark's Danske Bank, which laundered €200bn, also from Russian sources.
Individuals
Jose Franklin Jurado-Rodriguez, a Harvard University and Columbia University Graduate School of Arts and Sciences Economics Department alumnus, was convicted in Luxembourg in June 1990 "in what was one of the largest drug money laundering cases ever brought in Europe" and the US in 1996 of money laundering for the Cali Cartel kingpin Jose Santacruz Londono. Jurado-Rodriguez specialized in "smurfing".
Ng Lap Seng: The Chinese billionaire real estate developer from Macau was sentenced to four years in prison in May 2018 for bribing two diplomats, including the former president of the United Nations General Assembly, John William Ashe, to help him build a conference center in Macau for the United Nations Office for South-South Cooperation (UNOSSC), headed by Director Yiping Zhou. The corruption case was the worst financial scandal for the United Nations since the abuse of the Iraqi oil-for-food program more than 20 years ago. Ng Lap Seng, 69, was convicted in Federal District Court in Manhattan on two counts of violating the Foreign Corrupt Practices Act, one count of paying bribes, one count of money laundering, and two counts of conspiracy.
Ferdinand Marcos: Unknown amount, estimated at US$10 billion of government assets laundered through banks and financial institutions in the United States, Liechtenstein, Austria, Panama, Netherlands Antilles, Cayman Islands, Vanuatu, Hong Kong, Singapore, Monaco, the Bahamas, the Vatican and Switzerland.
Prevention
Laws by country
India: The Prevention of Money Laundering Act of 2002, and the Bharatiya Nyaya Sanhita of 2023 make money-laundering a punishable offence.
Australia: Introduced the Anti-Money Laundering and Counter-Terrorism Financing Act (AML/CTF Act) to regulate financial transactions and enhance transparency.
Canada: In 2000, the Proceeds of Crime (Money Laundering) Act was enacted, which established the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).
United Kingdom: Implemented the Proceeds of Crime Act of 2002 (POCA) to establish money laundering offenses and facilitate asset recovery.
United States: Enacted the Corporate Transparency Act (CTA) requiring companies to disclose their beneficial owners to the Financial Crimes Enforcement Network (FinCEN), effectively reducing the number of shell corporations and enhancing transparency in corporate ownership.
Singapore: Established the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act to confiscate proceeds from serious crimes.
Switzerland: Strengthened its anti-money laundering framework through the Swiss Anti-Money Laundering Act (AMLA), which mandates due diligence and reporting requirements for financial institutions.
Statistics
Below table shows the annual reported money laundering cases per 100,000 population for individual countries for the last available year according to the United Nations Office on Drugs and Crime. Proportion of unreported money laundering and definition of money laundering might differ between countries.