Introduction to Money Laundering
Money laundering is an illegal practice of making the illegitimately obtained money into legitimate money, typically through complex financial transactions. Money laundering hides the true source of money. The main purpose of money laundering is to create a veil of legitimacy around the illicit funds.
Money laundering involves taking money or assets that were obtained through criminal activities like drug trafficking, corruption, fraud or other illegal activities and presenting them in most lawful means. For money laundering, methods like complex financial transactions, shell companies, offshore accounts, real estate transactions, and other means.
Ways of Money Laundering
There are multiple ways and areas from where criminals and involved individuals legitimize the illegal funds. Some of such ways are:
- Money launderers use financial institutions and services provided to legitimize the illegal funds. They deposit, transfer or exchange the money through complex transactions like using multiple accounts or entities.
- Real estate industry is supposed to have a big investment of such illegitimate money. Such illegal money is used to purchase properties and other real estate assets.
- There are various businesses like restaurants, casinos, hospitals which are medium to commingle illicit funds with legitimate business revenue.
- Criminals and launderers invest the illicit funds in stocks, bonds, mutual funds, and other different investment instruments to make their funds white. For this, they use nominee accounts, proxy accounts, offshore investments and other complex structures and processes to hide the true ownership.
- Launderers use the illegal money to buy art, antiques, precious gems, luxury goods. Such investments have high appreciation potential and are easy to transport across borders.
Money Laundering Cases
“Panama Papers” is a case of money laundering . In 2016, Panamanian Law Firm Mossack Fonesca exposed many wealthy businesses and individuals. In the leaked document, it is stated how wealthy businesses and individuals used their offshore companies to hide and to launder their money. This case “ Panama Papers” exposed a global network of tax evasion which included politicians, celebrities, business leaders and many business persons.
“Nawaz Sharif”, former Prime Minister of Pakistan, was heavily criticized for his involvement in a money laundering case. The leaked document revealed that Nawaz Sharif and his family members had established offshore companies in the British Virgin Islands. Those companies were responsible for buying expensive properties in London. Sharif allegedly purchased those properties through funds managed through corrupt practices and embezzlement of state funds.
Similarly, there are many other cases of money laundering. Some of the famous cases are:
- FIFA Corruption Scandal
- Danske Bank’s Money Laundering Scandal
- 1MDB (1Malaysia Development Berhad
- HSBC’s Money Laundering Scandal
- Bernard Madoff’s Ponzi Scheme
Types of Money Laundering Techniques
There are different investment horizons where illegal funds are invested and made legal money. There are various techniques to launder money. Some of such techniques are:
Smurfing is the technique of money laundering which involves breaking down large sums of money into smaller, less suspicious amounts and depositing them in multiple bank accounts. Such smurfing is difficult to trace and detect.
As the name suggests, cash smuggling involves physically transporting large amounts of cash across borders or jurisdictions. Funds are transported in luggage, vehicles and in other mediums.
Another type of money laundering is trade based laundering. Here, laundering takes place through trade transactions. In this laundering, over-invoicing and under-invoicing techniques are used to manage the illicit funds.
Companies establish fake companies or businesses i.e. businesses with no real activities and are present only in papers. Launderers conduct fake business operations and transacts forming a complex web of transactions. On paper, everything looks good but in reality illegitimate money is being injected as legit in the economy using such shell companies.
Hawala and Underground Banking
Hawala is a very informal system of transferring money. This system is operated outside the traditional banking system. Launderers use agents and brokers to transfer the funds from one place to another through a well coordinated network.
Underground Banking is a web of individuals/businesses working closely in different parts of the world to transfer illicit funds in small denominations. Such operators transfer the fund in the form of remittance, business payment or any personal or professional cause which again get transferred to the related party to get the legitimacy.
Launderers use their black money in casinos and make it legitimate. They buy chips, gamble, make bets, win and convert the illicit funds into winning bounty and it is harder to trace. Another technique in gambling is layering i.e.gaming, betting and gambling in small denominations multiple times.