If you have ever watched a legal or crime drama, you may have heard the term money laundering bandied about frequently. Perhaps you recently finished watching a news story or reading an article about a criminal convicted of this offense who was handed a heavy sentence to spend years behind bars.
This may have piqued your curiosity as to what money laundering is, why it is illegal, and what this crime involves. Whether you would like to brush up on your legal knowledge when watching your next crime flick or are merely interested in learning more about this offense, our step-by-step analysis will make you an expert in no time.
What Is Money Laundering?
Money laundering occurs when anyone takes funds received from committing a crime and hides the origin of the "dirty" money by assimilating it into the lawful financial sector. This is usually accomplished by processing the illegally earned money through an authorized source like a banking institution, allowing it to transmit into the economy openly and free from suspicion.
The money gained from criminalized activities like drug trafficking or prostitution is substantial, but for obvious reasons cannot be spent like a legal source of income. This means that criminals must find alternatives to introduce the funds into the economy for their enjoyment without constantly looking over their shoulder for the long arm of the law. There are many methods and strategies used by criminals to engage in money laundering. Sometimes, criminals launder money behind the scenes without involving legitimate banking institutions.
Many times, however, criminals launder billions of dollars worth of funds through banking institutions and other financial establishments. They learn how to work the system and use it to their advantage. Unfortunately, the constant flux and fluidity of funds through banking institutions make them ripe for misuse by launderers who know how to find loopholes that will not set off alarm bells with regulatory agencies.
How It Works
While the act of money laundering differs considerably based on the strategy used, there are some distinct characteristics and approaches typically associated with this crime. For criminals to launder money, they must enact an agreement involving the funds gained from a crime. They may make this agreement with a banking institution, an investment firm, or fiduciary entity.
Common methods of laundering money include depositing quantities just under the $10,000 government-mandated reporting guidelines, or making combined deposits of illicit funds and legitimately earned money. This can make it very difficult for banks and other financial institutions to recognize that laundering is even taking place.
Only a minimal amount of suspicion is required by the financial institution to establish a need for action. If banks detect questionable deposit activity, this is a sufficient basis for them to report it. Even if someone did not commit the original crime, but is suspected of receiving benefits from illegally earned funds, this can lead to a charge of laundering.
It is important to realize that what constitutes money laundering depends on the legal jurisdiction involved. Sometimes, for a charge of laundering to stick, the action must be recognized as illegal by the respective laws of the country and the local jurisdiction where it took place. Other times, only the country's laws are necessary to establish a charge of laundering.
Each jurisdiction not only uses a different measuring stick to identify money laundering but also issues varying degrees of sentencing. For example, some courts would punish the crime of money laundering with 1 or more years in prison. Others would issue a greater sentence of 3 to 5 years.
Is Money Laundering Illegal?
A Comprehensive Breakdown
In the simplest of terms, money laundering is illegal because its main aim is for criminals to gain wealth from unlawful actions. If you commit a crime, you should not be able to reap the financial rewards from that offense. Where is the line drawn?
Well, let us say someone did not commit an actual crime or deposit the resulting funds themselves. However, that person helped the criminal to disguise the source of the funds and transition them into the legal financial sector. This would still suffice for that person to be charged with money laundering. Whether someone aids or abets the actual criminal or the "dirty" funds are cleaned by the individual who committed the original offense, the moral implications do not change.
It is important to realize that money laundering closely follows many other crimes like terrorism, drug trafficking, fraud, robbery, and prostitution. An individual must hide the source of the funds gained from such activities to use them. The only option to hide the source of these funds is to disguise them in legal channels. This creates a circular motion of criminal activities, which often forms a trail straight to the offender, resulting in a conviction.
How is Money Laundered?
While the strategies used to engage in money laundering diverge widely, there are three key stages that define the process. The following is a basic assessment of the stages involved, but it encompasses the standard operating procedures used by money launderers.
The first stage is known as placement. This is the point at which the illegal funds first contact the financial institution they are processed through. The second stage is called layering, when the funds are made to appear legitimate, hiding the owner and the origin of the money. Finally, there is the integration stage, where the now laundered money enters the legal economy looking like legitimate funds.
There are an endless amount of strategies and approaches used by criminals to engage in money laundering. However, some top techniques stand out above the rest and are worth mentioning. The first is structuring, which we briefly touched upon earlier. This occurs when illegal funds are deposited in small quantities over time, allowing the criminal to avoid financial institution reporting mandates and eradicate suspicion. Some criminals use the method of structuring to purchase smaller monetary instruments like money orders and deposit those over time in minute quantities.
Another common method is bulk cash smuggling, in which the funds are physically taken to another legal jurisdiction and placed in a banking institution. The money is usually transported to a foreign country and deposited in an offshore account that has enhanced security and less stringent reporting regulations.
The cash-intensive business method is when an entity places cash from both legal and illegal sources into its business accounts to blend them together. Businesses that carry this crime out with ease typically receive large quantities of ingoing funds anyway, making it much simpler to hide the origin of the money. Businesses ripe to engage in this method are strip clubs, casinos, and parking buildings, to name a few.
There are other money laundering techniques in which individuals or entities use invoices to inflate or reduce their financial activities. Shell companies or trusts are created to hide the fund's original owner. Some criminals use a method called bank capturing, by possessing a holding interest in a financial institution sufficient to allow them to move money around free of detection.
With the round-tripping strategy, the criminal places illegal money in an offshore account where tax records are few. He then transports the money back home under the category of a Foreign Direct Investment, making it free from taxation regulations. Some individuals even launder money by moving it to a legal firm or organization's account as proposed fees, then presenting the alleged trust money as the case proceeds when returned.
Criminals often use casinos as an institution to launder funds. This is done by entering the casino, buying chips with cash, and playing a few games. Eventually, the criminal cashes his chips and receives a check in return. The check is now a legitimate funding source which he can deposit into a bank without incident or fear of suspicion.
One final common strategy used by criminals to launder funds is to buy up real estate. In buying a piece of property with illegal funds, then turning around and selling it again, the money has suddenly become legitimized. Criminals also launder money through real estate endeavors by deflating the value of a property and agreeing to accept a contract for less than it is worth. The criminal uses the additional illegal funds to bulk up his earnings from the sale.
Without a doubt, money laundering involves a complicated series of techniques used by criminals around the world to hide the source of their illegal funds and attempt to legitimize them for profit. Criminals use strategies like structuring and bulk cash smuggling to dodge reporting requirements and gain access to the rewards of their illicit activities.
Banks and other financial institutions are often unwitting players in laundering schemes, easily taken advantage of by criminals skilled in the art of evasion. The next time your favorite legal drama comes on or you read another news story about an official being convicted of money laundering, you will have a far greater understanding of this crime and what makes these charges so serious.