Key Elements Of Money Laundering

Posted in Anti-Money Laundering (AML) on February 13, 2024
Key Elements Of Money Laundering

The key elements of money laundering involve the acquisition of funds through criminal activities and the subsequent manipulation and integration of these illegally obtained assets into the legitimate financial system, often achieved through a complex process of placement, layering, and integration. The term 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.

The precise definition of money laundering varies slightly in each country where it is recognized in the criminal law. It varies according to relevant organizations and standard-setting bodies, which are covered later. To give you a few examples of different definitions of money laundering, the German Criminal Code keeps it relatively simple and describes money laundering as “concealing unlawfully acquired assets.”

Key Elements Of Money Laundering

Key Elements Of Money Laundering

The Financial Action Task Force describes money laundering “as the processing of […] criminal proceeds to disguise their illegal origin.”

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

  1. Fund or assets obtained through criminal or illegal activities
  2. Disguising the illegal origin of these funds are assets
  3. For the first element, it is therefore necessary to conduct a crime first and make money from it. These crimes that build the basis for money laundering are called predicate offenses.
  4. Predicate offenses vary in each country and are usually codified in a country’s criminal code.
  5. Exemplary predicate offenses may include narcotrafficking, tax evasion, murder, grievous bodily harm, corruption, fraud, smuggling, human trafficking, illegal wildlife trafficking, and forgery.
  6. 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.
  7. Criminals use crypto money laundering to hide funds’ illicit origin, using various methods. The most simplified form of bitcoin money laundering leans hard on the fact that transactions made in cryptocurrencies are pseudonymous.
Key Elements Of Money Laundering

How Money Laundering Works

Money laundering is essential for criminal organizations that want to effectively use illegally obtained funds. Large amounts of illegal cash are inefficient and dangerous to deal with. Criminals require a method to deposit money in legitimate financial institutions, but they can only do so if the money appears to be coming from legitimate sources.

Laundering money typically consists of three steps: placement, layering, and integration.

  • Placement sneakily introduces “dirty money” into the legitimate financial system.
  • Through a series of transactions and bookkeeping tricks, layering conceals the source of the money.
  • The now-laundered money is withdrawn from the legitimate account in the final step, integration, to be used for whatever purposes the criminals have in mind for it.

This template may differ in real-life situations. Money laundering may not involve all three stages, or some of them may be combined or repeated multiple times.

Final Thoughts

Money laundering is a multifaceted and complex process that essentially involves the disguising of assets acquired through illicit means to make them appear as if they have been obtained legally. These illegally obtained funds are introduced into the legal financial system through a meticulous process that involves placement, layering, and integration, effectively erasing their criminal origins. This process is critical for criminals who want to utilize their illicit gains effectively without raising suspicion.

The definition and understanding of money laundering vary across different jurisdictions and standard-setting bodies, but the common denominator lies in the concealment of the unlawful origin of assets. Predicate offenses, which form the basis for money laundering, are crimes that generate illicit proceeds, examples of which include corruption, narcotrafficking, fraud, human trafficking, and tax evasion. The advent of cryptocurrencies has presented a new frontier for money laundering, with transactions in cryptocurrencies being pseudonymous and hence offering an effective avenue for hiding the illicit origin of funds.