It is important to know that money laundering is not a fraud scheme. It is a crime that is committed to cover up other crimes, but it is not the same thing as fraud. The primary purpose of money laundering is to take money that has been received from criminal activities (dirty money) and make it appear legitimate (clean money).
Dirty money can come from illegal activities such as drug dealing, prostitution, robbery, bribery, illegal political contributions, tax evasion, or fraud. The laundering process hides the real origin of the money and makes it look like it came from a legitimate source.
Money laundering has three key stages:
Placement is the stage at which the criminal introduces the money into the financial system. This is the riskiest part of the scheme, because controls have been put in place to detect money laundering activities.
For example, banks that receive large cash deposits are required to report them to the federal government. That restricts the criminal’s ability to deposit the illegal proceeds. Criminals are therefore forced to find other ways to get their money into the financial system.
One way to legitimize dirty money is through a legitimate business, introducing the dirty money into the business as “revenue.” Cash-intensive businesses like restaurants and nightclubs are popular options for this scheme. Cash obtained illegally is added to deposits from the legitimate business, and upon being deposited to the bank, all of the money now appears to be legitimate.
Layering is the part of the process through which the criminal obscures the origin of funds and reduces the possibility of detection of that origin. Moving funds between accounts, banks, financial institutions, and countries can easily obscure the origin of funds. The more transfers are made, the harder it is to trace money back to its source.
Integration is the removal of the now legitimate money from the financial system so that it can be used by the criminal. It could be used for legitimate purchases and expenses, or it could be used to fund additional criminal activity.
Money laundering can be detected by looking for:
- Unexplained increases in cash deposits
- Increased deposits for which no customer is identified
- Unusual transfers out of a bank account, rather than typical use of funds to pay business expenses
- Frequent cash bank transactions just under the $10,000 limit for bank reporting on the Currency Transaction Report (CTR)