Money laundering is a process of converting ill-gotten money into legitimate. Money that is obtained from illegal means like corruption, drug business, weapons dealing, human trafficking, or smuggling is then given a legal source so that the criminals can use it easily in the financial system. Illegally earned money with no legitimate source is very difficult to use in the financial ecosystem because the law enforcement agencies demand the information of the source of it.
Stages of Money Laundering
The process of getting illegal cash and then giving it a legal source is divided into three stages for better understanding.
The purpose of this stage is to easily deposit the elicit money in the financial system. Financial institutions like banks or currency exchanges are used for placing the money. The businesses that can easily place money in their financial systems are those who do not have proper figures of profit and expenditures are used for placing money. Casinos and washing businesses are mostly used by anti-money laundering. The practice of the placement stage can be carried through many processes described below:
Although this is the toughest method to launder money because physical smudging of money is very difficult. Law enforcement agencies have strong security checks at airports and ports. This method was used by drug dealers decades ago when there was low-security strictness, but at present, this method is not commonly used. Only third world countries that do not have good security checks encounter this method
In this method, a financial institution like a bank is owned or controlled by some money launderer. Usually, this person is not UBO (Ultimate Beneficial Owner) but provides his assistance in money laundering. Illegal money is very easy to launder this way because there is no one asking the source of income. Criminals have complete freedom with no third-party interference.
The other case is when a bank is not involved in money laundering but has some executive employees that are directly or indirectly involved in the placement of illegal cash in the financial system. He gets his cut from the money. Businesses need to have Know Your Employee (KYE) verification services for it. KYE solution verifies the identity and background of an employee. His name is screened in the Politically Exposed Persons (PEPs) list, sanction lists, and other criminal lists.
From its emergence, the currency exchange market is used for money laundering. Through currency exchanges, the transfer of money from one state to another becomes easy because they access all the financial markets of the world.
Also, the source of the black money can easily be hidden because these businesses can easily manipulate their records. This becomes difficult for forces to point out money laundering in it.
Dividing heavy cash into smaller chunks
Banks are obliged to inform the local monitoring authorities if any huge transaction has carried through their channels. That’s why the division of heavy cash into small is done by money launderers. Heavy cash is deposited by doing numerous smaller transactions at different times. The other way is to do the same practice with different depositors with proper time intervals.
The expensive immovable asset purchases are a red flag of money laundering. By doing so criminals change the source of proceedings.
The purpose of this stage is to remove the connection with the original source of money and find a new legitimate one. The money placed in the financial system is then circulated by doing small and large transactions. Reselling of the assets purchased in the placement stage is a common example of layering.
In this stage, the money is given a legal source and now can be easily used without any risk of getting caught. The Ultimate Beneficial Owner gets the money at this stage. Extraction sometimes is known as the reversal of layering.
It is clear by the above discussion that money laundering is disrupting the financial systems. Also, it increases the number of illegal practices in society. All the financial institutions and governments must have Anti Money Laundering AML compliance to mitigate the risk of money laundering through their systems. AML solutions provide the best financial security by screening all the transactions and people associated with them.