6.4 Money laundering

Money laundering, a critical component of organized crime, involves disguising illegal proceeds as legitimate funds. This process enables criminals to enjoy illicit profits without drawing attention from law enforcement. Understanding money laundering is crucial for combating financial crimes and maintaining the integrity of the global financial system.

The money laundering process consists of three stages: placement, layering, and integration. Various schemes, such as smurfing and trade-based laundering, are employed to conceal the origin of funds. Anti-money laundering laws and reporting requirements aim to detect and prevent these activities, with significant penalties for violations.

Elements of money laundering

• Money laundering is the process of disguising the proceeds of illegal activities to make them appear legitimate
• Key elements include concealment of the source of funds, transfer of funds through multiple accounts or jurisdictions, and integration of laundered funds into the legitimate economy
• Money laundering is a critical component of organized crime and enables criminals to enjoy the profits of their illicit activities without drawing attention from law enforcement

Money laundering process

Placement stage

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• Initial stage where illegally obtained funds are introduced into the financial system
• Methods include structuring cash deposits to avoid reporting requirements (smurfing), commingling illicit funds with legitimate business revenue, and purchasing high-value assets like real estate or jewelry
• Placement is often the riskiest stage for money launderers as large cash transactions can trigger suspicion
• Examples: Depositing cash from drug sales into multiple bank accounts, using cash to purchase casino chips

Layering stage

• Complex series of financial transactions designed to obscure the origin of the funds and create a trail that is difficult to trace
• Techniques include transferring funds through multiple accounts, often in different jurisdictions (offshore banking), converting funds into different currencies or financial instruments, and using shell companies to hide ownership
• Goal is to create a convoluted paper trail that separates the funds from their illegal source
• Examples: Wiring funds through a series of offshore bank accounts, purchasing and reselling real estate to create a chain of transactions

Integration stage

• Final stage where laundered funds are reintroduced into the legitimate economy, appearing as legal profits from legitimate sources
• Methods include investing in real estate, luxury goods, or legitimate businesses, or simply spending the funds on personal expenses
• Integration allows criminals to enjoy their illicit profits without raising suspicion
• Examples: Purchasing a luxury car with funds from a shell company, investing in a legitimate business as a silent partner

Types of money laundering schemes

Smurfing

• Structuring cash deposits or transactions to avoid reporting requirements, often by using multiple individuals (smurfs) to make small transactions under the reporting threshold
• Smurfing allows large sums of illicit cash to be introduced into the financial system without triggering suspicious activity reports
• Example: Recruiting a group of individuals to make cash deposits of $9,000 each into different bank accounts to avoid the$10,000 reporting threshold

Trade-based laundering

• Using international trade transactions to disguise the movement of illicit funds, often by manipulating invoices or shipping documents
• Techniques include over- or under-invoicing, falsely describing goods, or using multiple invoices for the same shipment
• Trade-based laundering exploits the complexity of international trade and the difficulty of verifying the true value of goods
• Example: Exporting a shipment of electronics worth $1 million but creating an invoice for$10 million, allowing $9 million in illicit funds to be transferred as payment

Casino laundering

• Using casinos to disguise the origin of illicit funds by converting cash into chips, gambling, and then cashing out with a casino check or wire transfer
• Casinos offer a mix of cash-intensive transactions, entertainment, and financial services that can be exploited by money launderers
• Example: Purchasing $100,000 in casino chips with cash from drug sales, making a few small bets, and then cashing out the remaining chips as "winnings"

Real estate laundering

• Investing illicit funds in real estate, either through direct purchases or complex financing schemes
• Real estate provides a stable, high-value asset that can appreciate over time and generate a legitimate income stream
• Techniques include using shell companies to hide ownership, overvaluing properties to justify large transfers of funds, and using real estate transactions to commingle illicit and legitimate funds
• Example: Purchasing a $5 million apartment with funds from corruption, then selling it a year later and claiming the profits as legitimate investment income

Shell company laundering

• Using fictitious or front companies with no real business operations to hide ownership and disguise the movement of illicit funds
• Shell companies can be incorporated in jurisdictions with weak transparency requirements, making it difficult to identify the true owners or beneficiaries
• Illicit funds can be transferred between shell companies or used to purchase assets, creating a complex web of transactions to obscure the money trail
• Example: Creating a network of shell companies in different offshore jurisdictions, each owned by the other, to transfer funds from a fraud scheme and make it difficult for investigators to trace the money back to the perpetrators

Anti-money laundering laws

Bank Secrecy Act

• Requires financial institutions to assist U.S. government agencies in detecting and preventing money laundering
• Mandates reporting of cash transactions exceeding $10,000 and maintenance of records for certain financial activities
• Establishes customer identification and due diligence requirements for financial institutions
• Provides a framework for information sharing between financial institutions and law enforcement agencies

USA PATRIOT Act

• Expanded the scope of the Bank Secrecy Act in response to the 9/11 terrorist attacks
• Increased information sharing between law enforcement and intelligence agencies
• Strengthened customer identification procedures and due diligence requirements for financial institutions
• Expanded anti-money laundering requirements to new industries, such as insurance companies and securities firms

Financial Action Task Force (FATF) recommendations

• International standards for combating money laundering and terrorist financing developed by the FATF, an intergovernmental organization
• Provide a comprehensive framework for countries to implement effective anti-money laundering measures
• Cover areas such as customer due diligence, record-keeping, reporting of suspicious transactions, and international cooperation
• Countries are periodically assessed on their compliance with FATF recommendations and can face sanctions for non-compliance

Reporting requirements for financial institutions

Currency transaction reports (CTRs)

• Reports filed by financial institutions for cash transactions exceeding $10,000 in a single day
• Includes deposits, withdrawals, currency exchanges, and other cash transactions
• Helps identify individuals making large cash transactions and detect potential money laundering activities
• Example: A bank customer depositing $12,000 in cash would trigger a CTR filing

Suspicious activity reports (SARs)

• Reports filed by financial institutions for transactions that appear suspicious or have no apparent lawful purpose
• Includes transactions that deviate from a customer's normal activity, involve large amounts of cash, or have no clear economic rationale
• Provides valuable intelligence for law enforcement agencies investigating money laundering and other financial crimes
• Example: A customer with a modest income suddenly making large, frequent wire transfers to offshore accounts would trigger a SAR filing

Know your customer (KYC) rules

• Requirements for financial institutions to verify the identity of their customers and understand their financial activities
• Includes collecting and verifying identifying information, determining the purpose of the account, and assessing the risk of money laundering or terrorist financing
• Helps financial institutions detect and report suspicious activities and comply with anti-money laundering regulations
• Example: A bank requiring a new customer to provide a government-issued ID, proof of address, and information about their occupation and expected account activity

Penalties for money laundering

Criminal penalties

• Individuals convicted of money laundering can face significant prison sentences, often up to 20 years or more
• Penalties can be enhanced for aggravating factors, such as laundering funds from drug trafficking or terrorism, or for repeat offenders
• Example: In the United States, the maximum penalty for money laundering is 20 years in prison and a fine of up to $500,000 or twice the value of the laundered funds

Civil penalties

• Financial institutions and individuals can face substantial civil fines for violating anti-money laundering laws and regulations
• Penalties can be based on the value of the transactions involved, the severity of the violations, and the institution's history of compliance
• Example: In 2012, HSBC paid a record $1.9 billion in civil penalties for failing to implement adequate anti-money laundering controls

Forfeiture of assets

• Assets involved in money laundering or purchased with laundered funds can be seized and forfeited by the government
• Forfeiture can be civil (against the property itself) or criminal (as part of a criminal prosecution)
• Forfeited assets can be used to compensate victims, fund law enforcement efforts, or be returned to the general treasury
• Example: In the 1MDB scandal, the U.S. Department of Justice seized over $1 billion in assets, including real estate, artwork, and a luxury yacht, that were purchased with funds stolen from the Malaysian sovereign wealth fund

International cooperation in combating money laundering

Mutual legal assistance treaties (MLATs)

• Agreements between countries to provide assistance in criminal investigations and prosecutions
• Allow for the exchange of evidence, witness testimony, and other legal cooperation across borders
• Critical for investigating money laundering cases that involve multiple jurisdictions and for tracing illicit funds through international financial systems
• Example: The United States has MLATs with over 60 countries, enabling law enforcement agencies to gather evidence and pursue money laundering cases across borders

Extradition agreements

• Treaties between countries that allow for the transfer of individuals accused or convicted of crimes to face prosecution or serve sentences
• Important for bringing money launderers to justice when they have fled to other jurisdictions to avoid prosecution
• Extradition can be complex and politically sensitive, particularly when countries have different legal systems or diplomatic tensions
• Example: In 2020, the United Kingdom extradited a Pakistani businessman to the United States to face charges of laundering over $140 million in corrupt funds

Challenges in detecting and prosecuting money laundering

Complexity of financial transactions

• Money launderers often use sophisticated financial techniques and instruments to obscure the origin and ownership of illicit funds
• Tracing funds through multiple jurisdictions, shell companies, and complex transactions can be time-consuming and resource-intensive for investigators
• Example: The Panama Papers investigation revealed a complex web of offshore companies and trusts used to hide billions of dollars in illicit funds, requiring years of analysis by journalists and law enforcement agencies

Use of offshore jurisdictions

• Money launderers often exploit countries with weak anti-money laundering regulations, limited transparency, or strong financial secrecy laws
• Offshore jurisdictions can make it difficult for investigators to obtain information about beneficial owners, financial transactions, or assets held in the country
• Example: The Cayman Islands, a popular offshore financial center, has been criticized for its lack of transparency and its role in enabling money laundering and tax evasion

Rapidly evolving technology

• New financial technologies, such as cryptocurrencies and online payment systems, can be exploited by money launderers to move funds quickly and anonymously
• Investigators must continually adapt to new money laundering techniques and stay up-to-date with emerging technologies
• Example: The rise of Bitcoin and other cryptocurrencies has created new challenges for anti-money laundering efforts, as transactions can be difficult to trace and users can maintain a high degree of anonymity

Money laundering vs. terrorist financing

• Money laundering and terrorist financing are related but distinct financial crimes
• Money laundering involves disguising the proceeds of illegal activities to make them appear legitimate, while terrorist financing involves raising and moving funds to support terrorist activities
• Terrorist financing may involve legitimate funds (such as donations) as well as illicit funds, and often involves smaller amounts of money than typical money laundering schemes
• Anti-money laundering laws and regulations also apply to combating terrorist financing, but with additional focus on identifying and disrupting the flow of funds to terrorist organizations

Role of cryptocurrency in money laundering

• Cryptocurrencies, such as Bitcoin, offer a degree of anonymity and can be used to move funds quickly across borders without going through traditional financial institutions
• Money launderers can use cryptocurrencies to obscure the origin of illicit funds, layer transactions to create a complex trail, and convert funds back into traditional currencies
• Cryptocurrency exchanges and other service providers are increasingly subject to anti-money laundering regulations, such as customer identification and transaction reporting requirements
• Example: In 2013, the U.S. Department of Justice shut down Liberty Reserve, a digital currency platform that was used to launder over $6 billion in criminal proceeds

Famous money laundering cases

Bank of Credit and Commerce International (BCCI)

• BCCI was a international bank that was involved in widespread money laundering, fraud, and other illegal activities in the 1980s and early 1990s
• The bank was used by drug traffickers, dictators, and terrorists to launder billions of dollars in illicit funds
• BCCI's collapse in 1991 led to a global investigation and increased focus on anti-money laundering efforts in the financial industry

Operation Casablanca

• A U.S. Customs Service investigation in the late 1990s that uncovered a major money laundering operation involving Mexican and Colombian drug cartels
• The investigation led to the arrest of over 200 individuals and the seizure of over $100 million in illicit funds
• Operation Casablanca highlighted the role of U.S. banks in facilitating money laundering and led to increased scrutiny of the industry

Liberty Reserve

• A Costa Rica-based digital currency platform that was used to launder over $6 billion in criminal proceeds from 2006 to 2013
• Liberty Reserve allowed users to create accounts and transfer funds anonymously, making it attractive to money launderers and other criminals
• The U.S. Department of Justice shut down Liberty Reserve in 2013 and charged its founders with money laundering and operating an unlicensed money transmitting business
• The case highlighted the risks of virtual currencies and the need for effective regulation and enforcement in the digital financial space