What is Money Laundering:
Money laundering is the process of concealing the origin of money, obtained from illicit activities such as drug trafficking, corruption, embezzlement or gambling, by converting it into a legitimate source. It is a crime in many jurisdictions with varying definitions. It is usually a key operation of organized crime.
Three Steps of Money Laundring
When it comes to money laundering there are three main steps to doing it right.
The first step is the placement. Placement is the stage when the money enters the financial system for the first time. In this step, the money may be deposited in a bank, added to the accounts of an existing business or disguised as a transaction. The placement is usually achieved through a series of regular small transactions. If you are a criminal and you make the mistake of a large amount of cash you are probably gonna get caught right away. Of course, many people who attempt money laundering schemes have no past experience and don’t know what behavior is likely to be flagged. This step is widely considered to be the riskiest. If the deposits are scrutinized at this stage, none of the justifications that will exist later in the scheme will yet be in place.
The second step of money laundering is the layering. Layering is the stage where the illicit money is put together with legitimate money or placed in constant motion. Layering usually involves generating so many intricate transactions that the dirty cash disappears into them. Illicit money can be used to gamble, then placed into stocks, then shuffled around in different currencies and then used to buy financial products like life insurance policies. Layering can work in dramatically different ways depending on the scheme. In all schemes, however, the purpose of the layering stage is to make it difficult for even a skilled accountant to differentiate between money that came from legal transactions and money that came from funds that were placed for laundering. While layering is typically a safer stage than placement, those who are not careful often can still be caught easily if they make mistakes. For example, if a business that averaged $5,000 in transactions a day for years were to suddenly start processing $10,000 in transactions a day, it might attract scrutiny.
The third and last step is integration. Integration is the stage where the money re-enters the legitimate economy. When the money appears to come from legal businesses or investments, or the trail has become too difficult to follow, the money can then be placed into larger-scale investments. Integrated cash is often placed into luxurious assets, properties, long-term investments, and new businesses. Integrated cash may be used to purchase assets that can be used to facilitate future money laundering more safely.
4 Major types of money laundering:
There are several types of money laundering, like casino schemes, cash business schemes, smurfing schemes, and foreign investment schemes. A complete money laundering operation will often involve more than one of these as the money is moved around to avoid detection.
For instance, proceeds from cash businesses can be gambled, just as the success of a cash business that has been infused with placed cash can be used to justify investments or loans, which come from cash placed offshore.
The casino scheme
Let’s talk about casino scheme. The casino scheme works by funneling the money through gaming. The money is converted into chips, which are then briefly played with and then transferred back into cash. Those chips are usually converted by the launderer. Often, the casino where the money is being laundered is in a different nation than the launderer’ s nation of origin. This makes it difficult for law enforcement in either country to gather evidence that might reveal proof of the money laundering. When we talk about the casino scheme, the placement stage happens when the money is delivered to the proxy who will take payment in cash and then change it into chips. In some countries, travel agencies provide casino chips as part of their packages. Paying for these in cash can be a smart way to avoid getting your cash moved without electronic records.
The Layering step is when the money is laundered through gambling, the layering stage happens when the cash or chips are carried into the casino and used for gambling. Usually, very few of the chips are used for gambling because of the risk of losing. Instead, the chips are lightly used for several hours and then converted back into cash. The receipts from the cashout are used as evidence of the cash’s legitimacy. There is no record of how many chips were carried into the casino, so the launderer can plausibly claim that small amounts were carried in and the larger sum comes from winnings. The money laundered through casinos is relatively easy to integrate. Once the winnings have been reported and any taxes have been paid, the money can be used for any other purposes.
The cash business scheme
The cash business scheme is one of the most used and popular schemes for laundering large amounts of physical cash. Even today, there are a lot of businesses who handle most of their transactions in cash. Illicit cash can be inserted into these transactions at a fast or slow pace. Laundering money through cash-intensive businesses was the preferred method of the famous gangster Al Capone. He evaded investigators for years by funneling the money his crimes generated through his small empire of laundromats. The term money laundering was coined by the agents investigating him. The placement for a cash-intensive business scheme involves direct cash payments to the owner or manager of the establishment. The money to be laundered for the day is brought to the premises of the business. It stays in a safe place until it can be added to profits for the day through one of several methods. When the money is laundered through cash businesses, the layering stage takes place when fake transactions are slipped into the books throughout the day. These transactions may take the form of fake customers, or through extra services tacked onto legitimate transactions, with the difference added from the placed money.
Cash-intensive business schemes often extract the cash through daily profits. This scheme requires the money to be laundered kinda slowly, but a decent amount is ready every single day, so, it’s making it more liquid for the launderer. Taxes are paid on the reported profits, and the money can now be used for any purpose.
The smurfing scheme
Now let’s talk about the smurfing scheme. The term smurfing refers to the practice of distributing small amounts of a larger cash amount to a series of partners who then deposit the money in incremental amounts. Smurfing is used to get around the currency reporting requirements that banks are required to observe in a lot of countries. Small quantities that come from many partners are less likely to trigger an automatic report. The placement stage starts with the cash being distributed through a network of people, smurfs, who can be trusted to deposit the money back again on schedule. Larger criminal organizations are more likely to use this strategy because they already possess a big network of obedient members. The layering stage for this type of scheme happens as the money is deposited back into one or many different accounts. More advanced smurfing schemes will try to make sure that the money is deposited in ways that avoid automatic detection. The cash must not just be deposited in small amounts, but in varying amounts and at different intervals. The money can be extracted as it is moved back into the account. While this scheme avoids automatic detection, it is not as safe as the other schemes. If the deposits do come under scrutiny, it could be difficult for the launderer to explain why the deposits were made.
The foreign investment scheme
The foreign investment scheme A lot of countries are allowed and encouraged to invest in US businesses. However, the IRS has little power to account for how the money used in these investments was accumulated. In some cases, the money comes from illicit activities. The launderer delivers the cash to the foreign investor, who then returns it by making an investment into the launderer’s business. The placement happens when the cash is delivered to the foreign partner.
In most successful schemes, the launderer will not appear to have any prior contact with the investor who is holding the money. For all intents and purposes, the money appears to be the property of the foreign partner. The layering stage happens when the foreign business invests into the legitimate, legal business using money that was placed with them. These amounts are usually larger than in other schemes, but difficult to prove illegal. The money in this scheme can be more difficult to extract, in spite of the fact that large amounts can be moved. Investments into a business must be credibly used within that business and for that business. The money can be extracted from the profits that the investment generates, or from high executive salaries funded by the original investment.