You may already have your own idea of an answer to ‘What is money laundering?, and, according to the verbatim, you might think about making something clean that was previously dirty. If you have something like that on your mind, you are not too far away from the actual explanation.
Simply spoken, the term money laundering describes the activity of concealing or disguising the identity of illegally obtained proceeds. This activity has the goal of making the illegally obtained proceeds appear to have originated from legitimate sources.
How Money Laundering works
Money laundering is an important way for criminal organizations to use illegally obtained money. Criminals need a way to deposit money in legitimate financial institutions, but they can only do so if it the money comes from legitimate sources. It is dangerous to deal with large amounts of illegal cash.
A common form of money laundering is the one called smurfing or ‘structuring’. Smurfing is where the criminal breaks a huge amount of cash into multiple small deposits, basically distributing those to many different accounts so that detection can be avoided. Money laundering can also be done through wire transfers, currency exchanges and cash smugglers, who sneak huge amounts of cash across different borders and deposit them in foreign accounts where money laundering enforcement is less strict.
In simple words, money laundering is the act of disguising the real or illegal origin of their cash. The process of money laundering is very important to these people, as it enables them to enjoy the profits without endangering their sources.
The precise definition of money laundering varies slightly in each country where it is recognized in the criminal law, and it varies according to relevant organizations and standard-setting bodies. Let’s make three examples.
- The U.S. Money Laundering Control Act describes money laundering as a crime committed by any person who (1) knowingly disguises or conceals the origin of the proceeds of specified unlawful activity or transfers or converts the proceeds of specified unlawful activity to help others avoid criminal prosecution; (2) disguises or conceals the true nature, source, movement, location, ownership, and the disposition or other rights of the proceeds of specified unlawful activity; or (3) accepts, obtains, possesses or uses the proceeds of specified unlawful activity committed by others.
- The German Criminal Code keeps it rather simple and describes money laundering as concealing unlawfully acquired assets.
- The Financial Action Task Force describes money laundering “as the processing of criminal proceeds to disguise their illegal origin.”
If one conducts an illegal activity, makes money from it, and tries to hide the illegal origin of the funds, this makes for money laundering.
Common between all definitions of money laundering is that they contain two key elements, which are that the funds or assets need to have been obtained through criminal or illegal activities and that the illegal origin of these funds or assets needs to be disguised.
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 crimes such as narcotrafficking, tax evasion, murder, and grievous bodily harm, corruption, fraud, smuggling, human trafficking, illegal wildlife trafficking, and forgery.
A predicate offense, or predicate crime, refers to a crime that is a component of a larger crime. In a financial context, the predicate crime would be any crime that generates monetary proceeds. The larger crime would be money laundering or financing of terrorism.
With respect to money laundering, in particular, a predicate offense that generates funds or assets is required as an entry condition. Predicate offenses vary in each country and are usually codified in a country’s criminal code. In the European Union, for example, the so-called Sixth European Union Anti-Money Laundering Directive defines and standardizes 22 predicate offenses for money laundering in all its member states.
Exemplary predicate offenses include crimes such as narcotrafficking, tax evasion, murder, and grievous bodily harm, corruption, fraud, smuggling, human trafficking, illegal wildlife trafficking, and forgery.
Money laundering describes the activity of concealing or disguising the identity of illegally obtained proceeds. If one conducts an illegal activity, makes money from it, and tries to hide the illegal origin of the funds, this makes for money laundering. This activity has the goal of making the illegally obtained proceeds appear to have originated from legitimate sources.