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:
Methods List of 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. •
Shell companies and trusts: Trusts and shell companies disguise the true owners of money. Trusts and corporate vehicles, depending on the jurisdiction, need not disclose their true owner. Sometimes referred to by the slang term
rathole, though that term usually refers to a person acting as the fictitious owner rather than the business entity. •
Round-tripping: Here, money is deposited in a
controlled foreign corporation offshore, preferably in a
tax haven where minimal records are kept, and then shipped back as a
foreign direct investment, exempt from taxation. A variant of this is to transfer money to a law firm or similar organization as funds on account of fees, then to cancel the retainer and, when the money is remitted, represent the sums received from the lawyers as a legacy under a will or proceeds of litigation. • Bank capture: In this case, money launderers or criminals buy a controlling interest in a bank, preferably in a jurisdiction with weak money laundering controls, and then move money through the bank without scrutiny. •
Casinos: In this method, an individual walks into a casino and buys chips with illicit cash. The individual will then play for a relatively short time. When the person cashes in the chips, they will expect to take payment in a check, or at least get a receipt so they can claim the proceeds as
gambling winnings. •
Tax amnesties: For example, those that legalize unreported assets and cash in tax havens. • Transaction Laundering: When a merchant unknowingly processes illicit credit card transactions for another business. It is a growing problem and recognised as distinct from traditional money laundering in using the payments ecosystem to hide that the transaction even occurred (e.g. the use of fake front websites). Also known as "undisclosed aggregation" or "factoring". • Online job marketplaces such as
Freelancer.com and
Fiverr, which accept funds from clients and hold them in
escrow to pay freelancers. A money launderer can post a token job on one of these sites, and send the money for the site to hold in escrow. The launderer (or his associate) can then sign on as a freelancer (using a different account and IP address), accept and complete the job, and be paid the funds. • Through Sports: Investigation teams have identified sport profits as a common way to launder money. In Latin America, in particular, drug traffickers are frequently found to own Soccer Clubs, and to launder money through their intermediate, by buying and selling players, selling tickets and merchandise.
Digital electronic money In theory,
electronic money should provide as easy a method of transferring value without revealing identity as untracked banknotes, especially wire transfers involving anonymity-protecting numbered bank accounts. In practice, however, the record-keeping capabilities of Internet service providers and other network resource maintainers tend to frustrate that intention. While some
cryptocurrencies under recent development have aimed to provide more possibilities of transaction anonymity for various reasons, the degree to which they succeed — and, in consequence, the degree to which they offer benefits for money laundering efforts — is controversial. Solutions such as
ZCash and
Monero ― known as
privacy coins ― are examples of cryptocurrencies that provide unlinkable anonymity via proofs and/or obfuscation of information (
ring signatures). While not suitable for large-scale crimes, privacy coins like Monero are suitable for laundering money made through small-scale crimes. Apart from traditional cryptocurrencies,
Non-Fungible Tokens (NFTs) are also commonly used in connection with money laundering activities. NFTs are often used to perform
Wash Trading by creating several different
wallets for one individual, generating several fictitious sales and consequently selling the respective NFT to a third party. According to a report by
Chainalysis, these types of wash trades are becoming increasingly popular among money launderers especially due to the largely anonymous nature of transactions on NFT marketplaces. Auction platforms for NFT sales may face regulatory pressure to comply with anti-money laundering legislation. Additionally,
cryptocurrency mixers have been increasingly used by cybercriminals over the past decade to launder funds. A mixer blends the cryptocurrencies of many users together to obfuscate the origins and owners of funds, enabling a greater degree of privacy on public blockchains like
Bitcoin and
Ethereum. Although not explicitly illegal in many jurisdictions, the legality of mixers is controversial. The use of the mixer
Tornado Cash in the laundering of funds stolen by the
DPRK-associated
Lazarus Group led the
Office of Foreign Assets Control to sanction it, prompting some users to sue the Treasury Department. Proponents have argued mixers allow users to protect their privacy and that the government lacks the authority to restrict access to decentralized software. In the United States,
FinCEN requires mixers to register as money service businesses. In 2013,
Jean-Loup Richet, a research fellow at
ESSEC ISIS, surveyed new techniques that cybercriminals were using in a report written for the
United Nations Office on Drugs and Crime. A common approach was to use a
digital currency exchanger service which converted dollars into a digital currency called
Liberty Reserve, and could be sent and received anonymously. The receiver could convert the Liberty Reserve currency back into cash for a small fee. In May 2013, the US authorities shut down Liberty Reserve, charging its founder and various others with money laundering. Another increasingly common way of laundering money is to use online gaming. In a growing number of online games, such as
Second Life and
World of Warcraft, it is possible to
convert money into virtual goods, services, or virtual cash that can later be converted back into money. The characteristics of Bitcoin—it is completely deterministic, protocol-based and can be difficult to censor—make it possible to circumvent national laws using services like
Tor to obfuscate transaction origins. Bitcoin relies completely on cryptography, not on a central entity running under a
KYC framework. There are several cases in which criminals have cashed out a significant amount of
Bitcoin after ransomware attacks, drug dealings, cyber fraud and gunrunning. However, many digital currency exchanges are now operating KYC programs under threat of regulation from the jurisdictions they operate.
Reverse money laundering Reverse money laundering is a process that disguises a legitimate source of funds that are to be used for illegal purposes. It is usually perpetrated for the purpose of financing terrorism but can be also used by criminal organizations that have invested in legal businesses and would like to withdraw legitimate funds from official circulation. Unaccounted cash received via disguising financial transactions is not included in official financial reporting and could be used to evade taxes, hand in bribes and pay "under-the-table" salaries. For example, in an
affidavit filed on 24 March 2014 in
United States District Court, Northern California, San Francisco Division, FBI special agent Emmanuel V. Pascua alleged that several people associated with the
Chee Kung Tong organization, and California State Senator
Leland Yee, engaged in reverse money laundering activities. The problem of such fraudulent encashment practices (
obnalichka in Russian) has become acute in Russia and other countries of the former Soviet Union. The Eurasian Group on Combating Money Laundering and Financing of Terrorism (EAG) reported that the Russian Federation, Ukraine, Turkey, Serbia, Kyrgyzstan, Uzbekistan, Armenia and Kazakhstan have encountered a substantial shrinkage of tax base and shifting money supply balance in favor of cash. These processes have complicated the planning and management of the economy and contributed to the growth of the
shadow economy.
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. 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==