Money Laundering

Money laundering is the process of making illegally obtained money appear legitimate. Criminal proceeds from activities such as drug trafficking, fraud, or terrorist financing are “cleaned” so they can be used without drawing suspicion. Financial institutions and regulators use anti‑money laundering (AML) programs to detect and prevent these schemes.

Key takeaways

• Money laundering disguises the origin of illicit funds and protects the criminal activity that produced them.
• The process commonly involves three stages: placement, layering, and integration.
• Digital channels — online banking, peer‑to‑peer transfers, and cryptocurrencies — have increased the complexity of detection.
• International cooperation and AML legislation target both money laundering and terrorist financing.

How money laundering works

Laundering typically unfolds in three steps, though stages may overlap or repeat:

1. Placement — Introducing “dirty” cash into the financial system (e.g., bank deposits, cash‑intensive businesses).
2. Layering — Breaking the audit trail through a series of transfers, purchases, or bookkeeping manipulations.
3. Integration — Reintroducing the funds into the economy as apparently legitimate assets or income.

Financial institutions in many countries must report suspicious activity and large cash transactions. For example, U.S. regulations require records and reporting of cash transactions over $10,000 and the filing of suspicious activity reports (SARs).

Common methods and schemes

Money can be laundered through many channels, including:
* Structuring (smurfing): splitting large cash amounts into smaller deposits to evade reporting thresholds.
Cash mules and cross‑border smuggling: moving cash across borders to foreign accounts.
Investing in portable valuables: gems, precious metals, or other commodities that cross jurisdictions easily.
Rapid buying and selling of assets: real estate, vehicles, boats, or other high‑value items.
Gambling and casinos: using gaming transactions to obscure the source of funds.
* Shell companies and front businesses: entities that exist primarily on paper or as cash‑intensive operations, like restaurants or laundromats.

Electronic laundering and cryptocurrencies

Online financial services, anonymous payment platforms, and mobile P2P transfers complicate detection. Techniques include:
* Using proxy servers, anonymizing tools, or offshore platforms to mask transaction origins.
Converting illicit funds into virtual gaming currency or auction credits, then cashing out.
Leveraging cryptocurrencies and mixer/tumbler services to obscure wallet provenance. While many cryptocurrencies are not fully anonymous, their design can make tracing more difficult and attractive for illicit uses.

Regulators have increasingly focused on virtual currency mixing and other crypto‑related risks, proposing rules to require reporting and monitoring of suspicious activity tied to convertible virtual currencies.

Prevention, oversight, and legislation

Money laundering is a global problem estimated at hundreds of billions to a few trillion dollars annually. Key international and national responses include:
* Financial Action Task Force (FATF): an international body that sets AML standards and monitors compliance; its mandate was later expanded to include terrorist financing.
Bank Secrecy Act (BSA) and related laws: require financial institutions to keep records, report large cash transactions, and file SARs. In the U.S., these reports are processed by the Financial Crimes Enforcement Network (FinCEN) and shared with investigators and international partners.
Criminalization and post‑9/11 expansions: many jurisdictions strengthened AML rules and enforcement, including laws that make laundering itself a crime and regulations that broaden reporting and surveillance powers.
* Professional AML qualifications: organizations and certifications (e.g., CAMS) train compliance officers, analysts, and investigators to identify and counter laundering activity.

Red flags and typical indicators

Common warning signs of money laundering include:
* Frequent large cash transactions or repeated transactions just below reporting thresholds.
Complex or unnecessarily opaque transaction chains.
Businesses that seem to have no legitimate commercial purpose or inconsistent income for their industry.
Use of multiple bank accounts, frequent transfers to unrelated third parties, or rapid resale of assets.
Attempts to distance the beneficial owner from the transaction (use of nominees, shell companies, or third‑party intermediaries).

Real estate and other high‑risk sectors

Real estate is often used to launder funds through over‑ or under‑valuations, quick resale, private sales, or layering via third parties and corporate entities. Other high‑risk sectors include casinos, luxury goods, and cross‑border commodity trade.

Example

A common scenario: drug proceeds are mixed with legitimate cash receipts at a cash‑intensive business (a “front”), then deposited into bank accounts and transferred through multiple entities before being invested in assets, appearing as lawful income.

Conclusion

Money laundering converts illicit proceeds into apparently legitimate assets, enabling criminal activity to continue. Combating it requires coordinated legal frameworks, vigilant financial institutions, specialized compliance professionals, and adaptive regulation to address evolving digital and cryptocurrency risks.

Sources

United Nations Office on Drugs and Crime; Financial Action Task Force (FATF); Financial Crimes Enforcement Network (FinCEN); U.S. Bank Secrecy Act and related AML legislation; Association of Certified Anti‑Money Laundering Specialists; national financial intelligence and regulatory agencies.