Effective Money Laundering Prevention

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Effective Money Laundering Prevention

Money laundering describes the activity of concealing or disguising the identity of illegally obtained proceeds. This activity aims to make the illegally obtained proceeds appear to have originated from legitimate sources. Consequently, money laundering prevention has a high priority for many governments around the world.

The precise definition of money laundering varies slightly in each country where it is recognized in criminal law and varies according to relevant organizations and standard-setting bodies. For example, the German Criminal Code keeps it rather simple and describes money laundering as concealing unlawfully acquired assets. The Financial Action Task Force, or FATF, describes money laundering as processing criminal proceeds to disguise their illegal origin.

Elements of Money Laundering

Common between all definitions of money laundering is that they contain two key elements:

  • Funds or assets that were obtained through criminal or illegal activities
  • Disguising their illegal origin

For the first element, it is, therefore, necessary to conduct a crime first and to make money from it. These crimes that build the basis for money laundering are called predicate offenses.

Predicate offenses vary in each country and are usually codified in a country’s criminal code.

Exemplary predicate offenses may include narcotrafficking, tax evasion, murder, grievous bodily harm, corruption, fraud, smuggling, human trafficking, illegal wildlife trafficking, and forgery.

If one conducts such a predicate offense, makes money from it, and tries to hide the illegal origin of the funds, this makes for money laundering.

Effective Money Laundering Prevention

Stages of Money Laundering

Laundering money to make it appear legitimate involves three stages, which can occur simultaneously or separately.

Placement Stage

In this stage, the criminals would put their ill-gotten gains into the financial system, which can be as simple as depositing cash into a financial institution account. Sometimes they break down a large deposit into several smaller ones to avoid detection. For example, a criminal could deposit 5,000 US-Dollar into his personal account at financial institution branch A, another 2,000 US-Dollar to his joint account at financial institution branch B, and yet another 4,000 US-Dollar through an automated teller machine at financial institution branch C. Breaking up the deposit like this, to avoid having to report these deposit to the authorities, is called structuring, which is illegal in most countries.

Layering Stage

In this stage, the criminals try to cover their tracks by carrying out various transactions. Moving the money around makes following the trail back to the original source difficult. For example, a criminal could create phony companies and then transfer money between them to make the funds appear legitimate and simply as intercompany transfers.

Integration Stage

After the money has been deposited into the financial system and a series of transactions have clouded its origins, it might be considered clean. Now criminals use it to purchase material goods, such as a yacht and a vacation home, or invest it in further criminal activities.

Money laundering prevention is an important tool in the fight against money laundering and organized crime. Many countries’ anti-money laundering regulations oblige organizations, including financial institutions, insurance companies, and multinational corporations, to implement internal safeguards to prevent organizations from being abused for money laundering and criminal purposes. These organizations are commonly obliged to appoint a money laundering officer and sensitize employees to suspicious transactions. The tasks of the money laundering officer are observed and implemented in compliance management. These tasks may include performing a money laundering risk analysis, installing a risk management system, and identifying and filing suspicious activities.

Final Thoughts

Money laundering describes the activity of concealing or disguising the identity of illegally obtained proceeds. The precise definition of money laundering varies slightly in each country where it is recognized in criminal law and varies according to relevant organizations and standard-setting bodies. Money laundering involves three stages, which can occur simultaneously or separately. Money laundering prevention is an important tool in the fight against money laundering and organized crime.

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