The key elements of money laundering. 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
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:
- Fund or assets obtained through criminal or illegal activities
- Disguising the illegal origin of these funds are assets
- 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.
- 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.
- 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.
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 the illegal practice of making large sums of money generated by criminal activity, such as drug trafficking or terrorist funding, appear to have originated from a legitimate source. The money obtained through criminal activity is deemed dirty, and the process “launders” it to make it appear clean.
Money laundering is a serious financial crime perpetrated by both white-collar and street-level criminals. To detect and prevent this activity, most financial institutions now have anti-money-laundering (AML) policies in place.
