What is Money Laundering?
Money laundering, at its most basic level, is making money from a criminal source (e.g., kidnapping for ransom, drug trafficking, and weapon smuggling) seem like it is from a legitimate source (e.g., revenues from businesses and non-profit organizations). Criminals try to conceal the source of money earned through unlawful actions so that it appears to have come from legal sources. Otherwise, they wouldn't be able to use the money since it would be linked to illegal activity, and law enforcement would seize it.
Money laundering exists in practically every country on the planet, and a common technique involves passing funds through numerous countries to conceal their origins.
A good example is Franklin Jurado, a Harvard-educated economist, who managed a money-laundering operation for Colombian drug lord Jose Santacruz-Londoño in the late 1980s and early 1990s. His scheme was really sophisticated. The operation went like this:
Jurado deposited money from drug sales in the United States in Panama bank accounts. To escape suspicion, he transferred the money from Panama to over 100 bank accounts in 68 banks across nine European nations, always in transactions under $10,000. Bank accounts were opened in the names of Santacruz’s mistresses and family members, as well as made-up names. Jurado then established shell firms throughout Europe to document the funds as genuine earnings.
Santacruz-Londoño wanted the money to be shipped to Colombia, where he would use it to fund his several legitimate businesses. But Jurado was apprehended.
Jurado smuggled $36 million in drug money through legitimate financial institutions in total. Jurado's plan was discovered when a Monaco bank went bankrupt, and a subsequent investigation found many accounts linked to Jurado. Jurado's Luxembourg neighbor filed a noise complaint at about the same time because Jurado had a money-counting machine running all night. Local authorities investigated, and he was eventually convicted of money laundering by a Luxembourg court. After completing his sentence in Luxembourg, he was found guilty in the United States and sentenced to seven and a half years in jail.
Some Money-laundering Techniques
Financial experts are usually hired by someone with a lot of dirty money to conduct the money laundering process. The entire objective is to make it impossible for authorities to track dirty money while it's being cleaned, so it's complicated by necessity.
Authorities are aware of a number of money laundering strategies, and there are likely many more that have yet to be discovered. Here are a few of the most well-known:
- Foreign financial institutions: Money launderers often transmit money through numerous "offshore accounts" in countries that have bank secrecy regulations, which means that these countries allow anonymous financing. Hundreds of financial transactions to and from offshore banks can be involved in a complicated operation. The Bahamas, Bahrain, the Cayman Islands, Hong Kong, Panama, and Singapore are among the "main offshore centers," according to the International Monetary Fund.
- Shell companies: These are fictitious businesses that operate solely to launder money. They accept dirty money as "payment" for presumably provided goods or services, which they do not actually supply; instead, they use fraudulent invoices and balance sheets to provide the illusion of legal operations.
- Alternative/underground banking: Some Asian countries have well-established, legal substitute financial systems that provide undocumented deposits, withdrawals, and transfers. These are trust-based structures that function outside government authority and often have ancient roots. They leave no paper record. This includes Pakistan's and India's hawala systems, as well as China's fie chen system.
- Deposit structuring: often known as smurfing, entails dividing large sums of money into smaller, less suspicious quantities. In the United States, this lower sum must be less than $10,000, which is the threshold at which financial institutions must record transactions to the government. The money is then put into one or more accounts over time, either by a group of people (smurfs) or by a single person.
- Using legitimate businesses: Money launderers will occasionally invest dirty money in an otherwise legitimate company to clean it up. They may use huge organizations such as brokerage firms or casinos, which deal in such large sums of money that the dirty money blends in easily, or tiny, cash-intensive businesses such as pubs, car washes, strip clubs, or check-cashing establishments. These businesses could be "front companies" that provide a good or service but are really there to clean the money of the launderer.
Black Market Colombian Peso Exchange: It's a form of money laundering in which cash obtained from illegal drug trafficking is exchanged for Pesos. It was created to get past the US Bank Secrecy Act's (BSA) currency reporting rules, which prevent large-scale currency transactions in the US financial system.
The plan works after the most dangerous activity—smuggling narcotics into the United States and selling them there—has already taken place. However, the cartels, who are usually based in Colombia or Mexico, then face a problem: they have large sums of cash in the United States but no easy way to transit or deposit that cash, which would be more beneficial in pesos. This is where the money dealer enters the picture. They are mainly situated in Colombia and have agents throughout the United States. The cartel will give the money dealer's agent in the United States its US dollars. After that, the money dealer will provide the cartel with an equal amount in pesos (minus a commission). That's it as far as the cartel is concerned.
The cartel has avoided the costs and dangers of trying to smuggle U.S. cash across the border or making the structured deposits required to deposit that cash in a U.S. bank without triggering reports under the Bank Secrecy Act and related anti-money laundering laws in exchange for a commission to the money dealer. The cartel's money has also been converted into useful pesos.
Impact of Money Laundering
Money laundering is a regular occurrence. The United Nations Office on Drugs and Crime estimates that the money laundering cycle costs between $800 billion and $2 trillion per year. That's anywhere between 2% and 5% of the global GDP!
Regarding social, economic, and security consequences, the global impact is significant.
You might wonder what the real cost of money laundering is. It's obvious that it's "terrible." So, here are a few dangers associated with money laundering:
- Negative reputation: For businesses, reputation is crucial. When current and potential clients lose faith in a company, the company may lose business, and with lost business comes lost revenue. Unfortunately, this is rarely a one-time occurrence. When an institution has a negative reputation, it finds it difficult to stay afloat. Money laundering can have a detrimental impact on a company's reputation because it is quickly perceived as either careless or culpable if it occurs within the company.
- Economic chaos: Individuals and institutions are not the only ones affected by money laundering. It has the potential to harm society as a whole. Money laundering affects both exchange rates and interest rates because it helps criminals bypass economic institutions. When these rates are negatively influenced, inflation and unemployment rates can rise. As a result, an entire economy may become unstable.
- Criminal liability: A person or company can be held criminally liable if they are involved in money laundering, even if it is done inadvertently. For example, if a financial institution notices suspicious conduct from one of its account holders but fails to disclose it, they will be held liable in court. This can result in both income loss for the institution and lawsuits from other clients who may have been harmed as a result of the institution's failure to follow proper compliance procedures.
Can money laundering be solved realistically?
Individuals and financial institutions can be sufficiently educated and equipped to put a stop to money laundering by training personnel about the hazards of money laundering, as well as the advantages and obligations of proper anti-money laundering.
Employees who lack comprehensive anti-money laundering knowledge and abilities may dismiss the concept as merely a procedural issue. Do Y if X occurs. Checking a box and sending a form down the line rarely provides a complete picture of the risks associated with money laundering. There's no arguing that money laundering poses a substantial risk. It could threaten the economic stability of businesses and the economy of various countries.
Knowing particular money laundering threats and knowing what to do when those threats are recognized can save lives and defend the well-being and reputation of financial institutions and countries.
How can Flagright help fintechs curb money laundering?
We are a SOC 2 certified anti-money laundering compliance platform. Our services range from a transaction monitoring tool that supports risk-based thresholds, scoring compliance & fraud risks per customer, and validating your user & transaction data against all other fintechs in our network, all in real-time with usage-based pricing.
Contact us if you are a fintech or neobank in need of an AML solution.