How Does Money Laundering Work | AML Square
- 1. How Does Money Laundering Work?
- 2. What Is Money Laundering? • Before we explore more about how does money laundering work example? Let us first understand the concept of money laundering in detail. In simple words, Money Laundering is a process wherein criminals attempt to hide their illegal sources of income. By transferring money through complex transactions or through a series of businesses, they tend to make the money clean and make it difficult to trace the criminal origin and make these transactions appear as business profits. • To mitigate the attempts of money laundering, regulatory authorities worldwide have regulated entities like banks and other financial institutions to incorporate robust AML programs, and strategies to identify and prevent money laundering activities in real-time. According to research conducted by the United Nations Office on Drugs and Crime (UNODC), around 2 – 5% of global GDP is laundered annually with a sum amount of EUR 715 billion to EUR 1.85 trillion. • Yes, you heard it right! Hence, regulatory bodies like the Financial Conduct Authority (FCA) play an important role in mandating a range of stringent regulations on businesses to ensure financial integrity, and create a transparent ecosystem. In addition, money laundering is a serious financial crime that allows criminals to profit from their activities and get away easily without identification. Oftenly ML activities includes:
- 3. • Using cash intensive businesses for transfers • Bulk cash smuggling • Gambling and casino based transactions • Investing in commodities like gold, and more • Establishing shell companies • Governments and businesses have begun employing Anti-Money Laundering (AML) practices to prevent financial crimes. However, increasing demand for online banking, cryptocurrency, and other complex financial instruments or products simplifies the jobs of launderers and leads to rising crime rates. If you want to learn how does money laundering works? And how can your entity prevent potential criminal attempts? Get in touch with our experts today!
- 4. Three Stages of Money Laundering
- 5. 1. Placement • As the initial stage of the money laundering process includes money obtained from illegal activities are introduced into the financial system through varied methods. Ideally through transfers or transactions into smaller portions which usually does not raise any questions among authorities or entities on a regular basis, and hence in most cases it goes unnoticed. • However, one of the common methods used in this stage by launderers includes loan repayment schemes, gambling via casinos or betting agencies, smuggling currency exchanges, and more. How does money laundering work example? Let us have a closer look at a few ML tactics: • Depositing cash in smaller portions to avoiding ML identification • Purchasing monetary instruments like checks, or other money orders • Moreover, the goal in this stage is entering into financial systems, and reducing chances of getting detected as suspicious activities by financial institutions and avoiding STR reporting and more.
- 6. 2. Layering • Next stage of the money laundering journey occurs when successful layers of illegally obtained funds are placed until the source of income or criminal origin is disguised from authorities to be suspicious activity or illegal action. • Sounds confusing? Few common methods of layering stage include electronic transfers between varied countries, utilizing shell companies, transferring money between varied banks or accounts within one institution. However, if you are still wondering how does money laundering work example? Let us explore a few common tactics used in this stage by most launderers worldwide. • Utilizing shell companies and even trusts • Purchasing or selling investments • Disguising transactions as payment for goods or services • Transferring money across diverse accounts in different jurisdictions • In this stage, the goal of the launderers includes making it difficult for law enforcements, and varied regulatory bodies to trace the original source of the funds or initial point of the transfers.
- 7. 3. Integration • Ultimately, the last stage of money laundering journey is termed as Integration, wherein the launderers focus on retrieving their funds acquired through illicit activities – which are by now untraceable and unrecognized by varied authorities due to layers of transfers. • However, some of the common methods of integration stage include making legitimate investments in legal and financial sectors, selling or purchasing valuable items. Sounds perplexing? Are you concerned about how does money laundering work example? Don’t worry, let’s explore a few common ML tactics. • Investing in luxury assets, business ventures and real-estate • Issuing fake loans, or paying to non-existent employees • Purchasing high-value items like art or expensive jewelry • Paying dividends to shareholders to company managed by criminals • If this stage is successfully processed by launderers then the money would appear that it has moved or come from reliable sources and chances of getting these transactions detected as suspicious transactions are quite low.
- 8. How Money Laundering Works? What are Money Laundering Techniques? • After discovering 3 significant stages of money laundering, you must be wondering – how money laundering works? The techniques basically fall into 4 main typologies like bank methods, smurfing, double invoice, and currency exchanges. • In addition, new technologies and varied approaches adopted by launderers in diverse areas worldwide add up challenges for entities to implement robust and accurate Anti- Money Laundering (AML) strategies. Why? Because new methods, regulations and new variations in technologies rise over time to detect emerging money laundering activities, however failing to stay updated to these aspects can cause you to face increasing financial crime rates. • To help you understand how does money laundering work? We are listing below a few critical money laundering techniques.
- 10. 1. Money Mulling • This technique includes varied participants transferring illicit funds via accounts or online transfer or even through courier services, on behalf of criminals – for stipend of the illicit funds involved. Recently Ireland’s Police Service conducted Fraud Week to educate businesses and private practitioners about the consequences of money muting, how does money laundering work? 2. Smurfing • Smurfing is also named as structuring, occurs when illicit funds are broken down into smaller portions or amounts. Then the funds are deposited into and moved between multiple accounts. This process can be followed within one or multiple institutions. However, the amounts are calculated to avoid triggering Suspicious Transaction Reports (STR). 3. Bulk Cash Smuggling • In this technique, the procedures of crime are physically transferred across international borders or from one jurisdiction to another – considering one that has less strict law and regulations. To learn how does money laundering work or how to combat such techniques – contact our team! 4. Trade Based Money Laundering • How does money laundering work? Trading is one of the common techniques or methods used by most money launderers to integrate financial crime into legitimate economies by purchasing goods at high or lower price internationally. Another method includes making investments in legal-financial streams like trading in bonds and stocks, purchasing interest in well-established company.
- 11. 5. Combining Funds • The technique includes investment in businesses with higher cash flows like laundromats, carwashes, casinos which combine illicit funds with legitimate money until the 2 income methods are inseparable. If you are wondering how does money laundering work? This technique is one of the widely opted by launderers. 6. Round Tripping • In this technique the funds are transferred to offshore enterprises or jurisdictions that tend to have weaker AML controls, before being return as direct foreign investment to specific tax obligations. One of the great examples of how does money laundering work with this technique includes the great fall of Fintech in Europe – Giant Wirecard. 7. Bank Capture • In this method, money launderers gain control of financial institutions. This means they move funds around without having to undergo scrutiny and transact with each other, and above board banks to legitimate their overall funds. However, this approach can cause several financial risks for partnering with legitimate institutions. 8. Transaction Laundering • In the evolving e-commerce landscape, when illicit businesses tend to hide their illegal online sales and purchases via legitimate merchants, who are unknowingly exploited – you are more likely to be exposed to transaction laundering. Sounds confusing? Explore more about electronic money laundering techniques and how does money laundering work (detailed process) with our experts.
- 12. The Fight Against Money Laundering • The International Monetary Fund (IMF): IMF contributes to shape robust AML policies internationally and focuses on maintaining financial stability worldwide. Furthermore, it focuses on illicit financial flows and highlights the significance of beneficial ownership transparency. • European Union (EU): The fight against money laundering has been a priority for 3 decades – starting the first directive for AML in 1991. The EU established a robust regulatory framework involving rules for financial institutions and even non-financial institutions to enhance enforcements for customer due diligence, define beneficial ownership transparency and prevent risk in high-risk sectors or profiles. • The Financial Task Force (FATF): Established in 1989, known for outlining international rules for AML measures, or policies to prevent potential ML attempts. It mandates businesses to combat ML attempts and terrorist financing with a stringent legal framework by focusing on maintaining transparency in financial transactions and identification process for beneficial owners of particular assets.
- 13. How to Fight Money Laundering with AML Square? • AML Square is one of the leading AML services, advanced software providers. Our expert team is dedicated to help businesses from diverse sectors to run operations risk-free, implement robust AML programs, policies, and strategies by meeting with regulatory compliance framework. • Our team will help you identify loopholes into your current strategy, highlight how does money laundering work and help you incorporate effective KYC procedures, customer due diligence, Transaction Monitoring, sanction screening, and reporting procedures to ensure you spot