A Guide to Understanding Money Laundering and Ways to Counter It

Crime has no limits. A criminal knows no boundaries; a cunning and devious plan is what a mastermind creates before the execution of a crime. Regardless of how ill their intentions are, criminals today are getting way more skillful and much more evil than their predecessors.  

The wit and wile that a criminal need is not limited to the execution of the crime only. You see, for a criminal, the implementation of a crime is a mixture of both valor and skill, you need to be brave and confident to pull out a successful house or store robbery. However, it is the cover-up of the crime where the real test lies for a criminal.

All crime gangs have a chain of command and a hierarchy. With the one lowest in the chain of command being the one to carry out the most challenging and daunting task, these are the people that are a source of revenue for a gang. A gang usually employs young fresh blood to carry out acts of robbery and theft; the people employed are often from underprivileged backgrounds with no sources of finance.  

However, as we move up the ladder, we notice that the more experienced heads and the opinion leaders of a gang occupy the senior and decision making positions in it. The experienced minds are the ones that come up with unique and creative ways to run the gang and stay safe from a cynical eye.

One method that protects gang leaders from the cynical eyes of law enforcement agencies is the process of money laundering.

Money laundering is a process that provides legitimacy to the money earned from nefarious designs. In layman terms, money laundering is the process to convert black money to white.

The Federal Criminal Law takes the act of money laundering quite seriously, and if proven guilty it can lead up to 99 years in prison.

Money Laundering

To help you understand the process of money laundering we have divided it into three steps. Each step of money laundering is carefully planned and leads to the next. The whole act starts with the crime.

• Step 1- Placement

The primary purpose of money laundering is to make the money that was earned from notorious designs part of the financial system. The money you deposit in the bank becomes part of the financial system and goes in the record. When opening an account the first question that a bank asks is the source of income; this is to ensure that the cash you deposit in the bank is consistent with your employment status.

A fruit vendor or a taxi driver will be alerting the bank if they deposit a million dollar in their account. Money launderers ensure that they don’t alert the bank by disguising or misrepresenting their source of income. A money launderer will not necessarily circulate the money through banks. Casinos and money exchange companies are other ways through which the money can go into circulation.

• Step 2- Layering

The second step is the main step in the process of money laundering. Layering allows the crime gang to make detection of their suspicious activities impossible to trace.  

The process of layering involves the conversion of cash into monetary instruments such as the demand draft or the pay order. Using the name of an existing business, the gang then proceeds to layer the money by transferring it to multiple accounts. The movement of funds to and from the bank account creates a money trail which legitimizes the activity.

The wisest criminals are the ones that purchase land or any other asset from the money and use the name of a business to justify the transaction.

The assets are then resold locally or abroad, making money pure and void of any suspicion.

• Step 3- Integration

The final step is the integration of the laundered money back in the financial system. The measure ensures that the laundered money looks like simple business transactions. You may think that both the layering and the integration stage are similar in nature, but it is in the final scene when the money reunites with the owner looking like a complete economic and business transaction.

The main objective at this stage is to ensure that the money reunites with its owners without attracting too much attention. Purchasing property or some other assets or depositing in a foreign bank are some ways that criminals integrate their money and make it part of the financial system successfully.

Looking at the steps of money laundering it may seem that the whole process is an intricate and well-designed one. However, tax officials and law enforcement agencies are diligent at all times and follow auditing steps that help them in identifying a suspicious transaction and then in finding out the source of the income.  

Countering Money Laundering

It is safe to say that all financial institutions and their subsidiaries are alert to any suspicious transaction. Any amount considerably large raises alarm bells and are an indication of something fishy.

If a bank account that has never had more than $5000 in it suddenly gets a transaction over $100000 all financial and transaction monitoring authorities will get alert and will take measures to ensure that the source of funds is legal.

Since money laundering is becoming extremely popular amongst significant criminal gangs, banks and all other financial institutions are becoming more and more diligent when processing transactions.

Customer due diligence (CDD) and enhanced due diligence (EDD) are techniques that a bank adopts to ensure that the transaction falls within the domain of the legal and financial barriers that the central bank of the county has set.

Both CDD and EDD are e-forms that the branch of a bank fills relating to the information gathered from the customer at the time of account opening. The report helps in assessing the risk a customer brings along, for example, risk of a housewife, NGO or any other account where the beneficiary of the account or the account holder is not responsible for generating funds in the account have a considerably higher risk attached.

Such accounts are vulnerable to money laundering as in the past many banned terrorist organizations have laundered money through NGO accounts.  

With time money laundering is gaining significance amongst crime circles, knowing of ways that money laundering takes place and the processes in place to counter it will help us in building a sound financial system devoid of money counterfeiting.