Examples of money laundering and how to prevent it

Anti-money laundering best practices are not just in the best interest of every business, but also required by law. It’s essential for businesses to know who they are transacting with and where funds are coming from. This insight is especially essential for high-value transactions or customers at greater risk of corruption (such as elected officials). For financial institutions especially, there is a delicate balance between the due diligence of compliance and building mutual trust with customers. 

But before you can comply with anti money laundering standards and expectations, you want to understand what they are and why they exist. You might be looking for a clear answer on the most basic questions, like what is money laundering and why is it illegal? Or, you may be more curious about how to detect potential money launderers during your customer onboarding, without interrupting a transaction and alienating honest customers. In this piece, we’re covering it all from the basics forward. 

What is money laundering? 

Money laundering is the process criminals use to mask the source of illicit funds. The causes of money laundering are simple: people want to avoid being prosecuted or taxed on illegal income. Large criminal enterprises end up with cash generated from their bad actions like theft or trafficking. But these criminal organizations can’t spend or invest their funds unless it is integrated into the legitimate financial system. So, the money is disguised, or “cleaned,” by working it into a legitimate system like a business or a bank. 

What type of crime is money laundering?

Money laundering is a serious financial crime that itself facilitates many other types of crime, and is prosecuted at the highest national and international levels. Why is money laundering such a serious crime? The consequences of money laundering are extensive. Money laundering has a serious effect on the integrity of financial institutions and the world economy. This gets easier to understand as we dive deeper into some examples. 

What are 3 types of money laundering? 

Three common types of money laundering are conducted through cash businesses, real estate transactions, and gambling. Here’s a little more about how each one works.

• Cash Business Money Laundering. Some businesses like restaurants, laundromats, landscaping services, and delivery providers operate primarily through cash transactions. Criminal organizations can launder money through these entities by padding the amounts of the business’s daily bank deposits. A restaurant might bring in $2,000 in profits, but reflect $4,000 in the books and deposit $4,000 in the bank. This mixing of legitimate and illegitimate money gets the dirty funds into the financial system.
• Real Estate Money Laundering. Organized criminal groups can invest cash to buy real estate, thereby converting the illegal dollars into an asset they can then sell for legitimate money. This loophole has historically been exploited due to a lack of regulations and governance around cash transactions in real estate. Shell companies and transactions facilitated by third-party accomplices can lend these deals a further air of false legitimacy. Many nations have started to adopt regulations in recent years to combat this type of money laundering.  
• Gambling Money Laundering. Both in-person and online casinos can be used to launder money. A fraudster will buy chips or credits with dirty money, take some losses and wins, and then cash out. This gives the money a “rinse” through the casino and creates a plausible paper trail of how the money was obtained legally. Using different aliases/user names across transactions and visiting different sites or counters to cash chips in and out are some of the red flags around gambling money laundering. 

As you may notice from these examples, the entity through which money is being laundered is not always complicit in the transaction. A cash business may simply think someone wants to offer them an investment. A real estate broker might just want to sell a building to an international buyer. And a typical casino just wants to ensure its guests have a good time. But this is what makes anti-money laundering compliance protections so important — so that the honest businesses of the world don’t get inadvertently wrapped up in criminal activity . 

Examples of Money Laundering Offenses

Many national and international laws define what constitutes a money laundering offense under the law. For example, the Proceeds of Crime Act of 2002 in the United Kingdom defines three types of money laundering offenses:

• Concealing Offense. Any time someone hides, disguises, transfers, or removes criminal property from the country. 
• Arranging Offense. Any time someone enters into an arrangement which they know or suspect supports a criminal in the acquisition, use, or control of criminal property. 
• Acquisition, Use, or Possession Offense. Any time someone themselves acquires, uses, or possesses criminal property. 

Whether the individual knows or simply suspects that funds or other property have been gained through criminal activity, participating in the concealment, support, or use of the funds can constitute an offense. For more insight about the laws in your nation and industry, it’s best to seek specialized legal advice.

Effects Of money laundering

Money laundering has significant social and economic impacts. Here are just a few examples. 

• Money laundering erodes financial institutions through corruption and the loss of consumer trust. The presence of these activities within the institution also creates operational risks that the bank or lender itself will be defrauded. 
• Money laundering, when undetected, allows the underlying crimes to also continue. In the United States in 2017, two-thirds of underlying offenses were drug trafficking and nearly an additional third were theft, property destruction, and fraud.
• Money laundering distorts investment and depresses authentic economic growth by creating the illusion of investment in properties and businesses (sterile investments) that do not actually benefit the broader economy.

In summation, money laundering harms productive businesses and individuals while allowing criminal elements to flourish. 

Is there a global money laundering act?

The Financial Action Task Force (FATF) is an international anti-money laundering watchdog organization that works in close connection with the International Monetary Fund (IMF), World Bank, and more than 200 member nations and jurisdictions who have agreed to implement FATF standards.  These recommendations “set out a comprehensive and consistent framework of measures which countries should implement in order to combat money laundering and terrorist financing, as well as the financing of proliferation of weapons of mass destruction.”

While these recommendations set the standard, it is up to each nation or jurisdiction to implement the standards through laws and measures that make sense for its unique circumstances. This means that in many cases, money laundering investigations are subject to interpretation under diverse national and international laws.  Demonstrating compliance with these regulations during customer acquisition and onboarding processes can seem like a Herculean task, but software and third-party vendors can make this easier than you expect. 

What are the three stages involved in money laundering?

The three general stages involved in money laundering are placement, layering, and its ultimate integration into the market. We’ll summarize each, as well as highlight at which stage money laundering is easy to detect.

Money Laundering Stages

1. Placement. In this first stage of money laundering, the dirty cash needs to be introduced (“placed”) into the economic system. The three examples we shared earlier of cash business, real estate, and gambling are all examples of placement methods. Others include paying off debt with the cash, or using a foreign currency exchange to convert portions of the cash into another currency. Some money launderers might simply put the cash in a suitcase and take it to a country where there is less regulatory oversight. No matter how they attempt to place the cash, it is during this phase that money launderers are most likely to be caught. The sudden appearance of a large amount of cash to pay off debt, deposit as business profits, or otherwise place is going to attract the attention of authorities. This is especially true under national and international anti-money laundering (AML) regulations. 
2. Layering. Layering in money laundering is essentially the process of creating a paper trail that separates the funds from their criminal origin and protects the identities of the criminals. This might include using multiple banks or accounts, having individuals act as intermediaries, using shell corporations or legitimate businesses, and making investments in goods like art and jewelry. When funds pass through multiple accounts or have been converted and re-converted into different currencies, this is a clear sign to regulators and law enforcement that money laundering may be at work. Entities like banks and lenders also have an obligation to perform adequate due diligence and confirm customer identity to detect these kinds of activities. 
3. Integration. In the integration stage of money laundering, the money is reunited with the criminal or organization. By this time, the layering process makes it difficult to discern whether the wealth is illegal or not. Assets like the real estate, cars, artwork, or jewelry purchased in the layering stage can now be leveraged or re-sold by the criminal. Fraudulent invoices may also be sent to shell companies for payment when no services or goods have actually been rendered. 

In some cases, these stages may be combined, or repeated before moving onto the next. It can be very challenging to spot a money launderer without digging deep into their financial history and personal information.

How to spot a money laundering business or individual

For a financial institution, gaming organization, retailer, or many other businesses, spotting an unsavory customer or vendor is not just prudent, but essential under AML laws and regulations. Here are some of the main red flags that indicate additional due diligence is needed. 

1. Complicated business structures or the inability to identify the actual owner of a business. 
2. Unusual transaction history, including frequent high-volume transactions, short dwell times of money in a bank account, or selling assets below market value. 
3. Buying items with intangible values such as art, jewelry, databases, programs, and other assets.
4. Unusual monetary losses that are not questioned by investors, such as making the same investment in stock the next year after taking a loss the previous year. 
5. A high volume of cash transactions, including paying employee salaries in cash. 

Platforms like Onfido exist to help you catch these red flags during customer onboarding by analyzing user documents, biometrics, trusted data sources, and passive fraud signals.

How to prevent money laundering: know your customer with Onfido

As part of an anti-money laundering compliance process, know your customer (KYC) is a valuable first point of defense for any business. Onfido’s Real Identity Platform includes a library of award-winning identity verification and fraud prevention tools, such as:

• Document Verification. Create confidence in an online customer’s identity by verifying a photo ID. Our platform supports over 2,500 document types in 195 countries. 
• Biometric Verification. Protect your business from stolen identities and fraud by comparing a real-time photo or video to the ID on file. 
• Data Verification. Fulfill AML compliance by allowing our platform to automatically compare the customer ID against national and international databases along with real-time location data. 

These are just some of the anti-money laundering features we have built into our platform. This advanced functionality doesn’t translate to a more difficult experience for customers: 95% of users are verified within a matter of seconds, while we also help our clients increase their document fraud accuracy 54% year over year. 

AML compliance makes the world safer and more secure for everyone, but it doesn’t have to make life more difficult at the same time.