What is Money Laundering?

Introduction

Many crimes are committed with the intent of making money for the person or group who commits the crime. The process of these criminally obtained funds to conceal their illicit source is known as money laundering. This procedure is crucial because it allows the offender to benefit from the income without endangering their source. The ultimate consequence of it is that “dirty” money seems “clean,” which can thwart efforts by law enforcement to apprehend criminals.

Money laundering comprises gathering funds obtained through criminal activity, combining them with cash obtained lawfully, and then returning the combined assets to their original source. This implies that offenders can easily “pay out” money that has been laundered without worrying about being caught.

These Laundered funds are frequently also used to maintain the functioning of the criminal organizations. The “Financial Action Task Force on Money Laundering (FATF)” was constituted by the G-7 Summit in the year 1989 to create a globally coordinated response to rising issue over money laundering. The FATF’s primary responsibility was to give Recommendations, a total of 40 in number, outlining the steps the central agencies should follow to build successful anti-money laundering initiatives. Every year, the laundering activities engage with billions and billions of dollars on a global scale; as a result, these transactions have a significant effect on the economies of various countries.

Since the other option is to maintain substantial sums of money, concealing the source of illegal earnings is crucial for offenders. Additionally, money laundering renders it much more challenging for law enforcement to properly prosecute offenders and recover illegal criminal proceeds under the “Proceeds of Crime Act.”

One popular method of laundering in the casinos is purchasing chips with cash from the casino and collecting checks in exchange for the chips, frequently without engaging in any betting or putting even small wagers.

Need for Money Laundering

Structured criminal organizations, like drug smuggling operations, frequently run into financial difficulties because they accumulate large sums of money that they must hide to avoid being subject to legal authorities’ scrutiny. The beneficiaries of such vast sums of money also don’t want to have to declare it as income and face astronomical tax obligations.

Criminal organizations devise methods of “laundering” the money to hide the fact that it was gained illegally in order to deal with the issue of possessing hundreds of billions of dollars in cash from unlawful activity. Tax Evasion, in essence, tries to conceal money obtained illegally by integrating it into a recognised financial system, for example a financial institution or a company.

How is money laundering done?

A bistro or another commercial establishment with a lots of cash transactions is among the most popular and straightforward ways to “wash” money. When we try looking at the facts, the practise of notorious mobster Al Capone, who used a network of Laundromats he controlled to launder large amounts of money, is where the expression “money laundering” originated.

Money laundering can happen anywhere in the world because it is a byproduct of almost all profit-making crimes. Result of poor or inadequate “Anti-money laundering Program”, money launderers typically go for nations or industries where there is minimal danger of being detected. They typically seek to move money via secure banking systems because the goal of the practise is to return the illegally obtained monies to the person who created them.

The money laundering process typically takes place in three phases:

  • Placement

A criminal organization owns a restaurant. A lawful restaurant is owned by a criminal or criminal group. Through the restaurant, money gained through unlawful means is gradually placed into a bank. The bistro advertises daily cash sales that are significantly larger than the actual amount it receives.

  • Layering the Money

Any place that has a sufficient financial or commercial infrastructure could be chosen for the layering phase, including an overseas financial hub, an important spatial business centre, or an international banking facility. At this point, the laundered money could also move through bank accounts in different places where it would be possible to conceal its origin and final destination.

  • Integration

Finally, if money were obtained from weak economies or places with few investment options, launderers can decide to invest them in still other places during this stage. 

Combating Money Laundering

The objective of “Anti-money laundering (AML)” is to strip offenders of the proceeds from the illicit businesses, removing their primary incentive to carry out such evil acts. Thousands of individuals worldwide are put in peril by immoral and illegal activities like people smuggling, financing terrorism etc.  These acts also have a significant negative socio – economic impact on society. Fighting money laundering may reduce illegal activity and, thus, have a substantial positive impact on society because it validates the proceeds of such actions.

Government’s Role

 These AML regimes seek to raise public and private sector awareness of the occurrence while also arming the authorities tasked with solving the issue with the required legal or regulatory powers. Making tax evasion a wrongdoing, granting investigatory organizations the power to locate, seize, and finally confiscate assets obtained through criminal activity, and creating the necessary infrastructure to allow the participating agencies to share information with contemporaries in other nations are a few of these methods.

Government must seriously consider all pertinent opinions when creating a national anti-money laundering programme. To provide money lenders a chance to participate in solving the issue, they should, for instance, bring law enforcement and banking regulatory agencies and the finance companies together. This entails, among many other factors, working with the appropriate authorities to create systems for documenting banking transactions, identifying customers, setting standards for having a logbook, and developing ways to ensure compliance. A nationwide system needs to be adaptable enough to recognize new money laundering tactics and take appropriate action.

Lastly, the governments must cooperate with other countries to make sure that embezzlers cannot simply relocate to a different country where money laundering is accepted in order to continue their business.

References

https://www.fatf-gafi.org/faq/moneylaundering/

https://corporatefinanceinstitute.com/resources/knowledge/finance/money-laundering/

https://www.redflagalert.com/articles/compliance/what-is-money-laundering-and-how-does-it-work

https://www.investopedia.com/terms/m/moneylaundering.asp

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