Money laundering is an illegal process of making large amounts of money as well as obscuring the origins of the money. Usually, this type of money is generated by criminal activity and then passes the money through a complex sequence of banking transfers or commercial transactions. Finally, the illegal money returns as “clean money” to the launderer in a secure and indirect way.
There are many ways a criminal can launder money and some of the popular businesses are unregulated financial services, casinos, gambling venues, cash smuggling, life insurances, securities, real estate, currency exchange service, shell companies, black salaries, and many more. The most important part of money laundering is to fly under the radar. So, criminals now use the internet to launder money easily without being detected.
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How Money Laundering Works
The money laundering process has three parts and the illegal money must come through all three steps to become clean money. The three steps are:
This is the first part of money laundering and it’s a very important part because in this part detection risk is greatest. For large-deposit, there are always reporting requirements and different questions arise like the source of the money, etc.
Under the Currency and Foreign Transactions Reporting Act of 1970, or Bank Secrecy Act, banks are required to report to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) cash deposits, withdrawals, and negotiable instrument purchases (such as cashiers’ checks) in excess of $10,000 per day.
Therefore, banks have to maintain records or issue reports on certain suspicious activities like any accountholder depositing an unusual amount of money that they never did. Therefore, money launderers make a small deposit in several accounts to avoid such situations. This process is called smurfing. Moreover, nowadays money launderers have turned to different financial systems like online transactions, Cryptocurrencies, etc.
Once the illegal money is deposited then the money is shifted through a series of transactions to create confusion and complicate the paper trail for the investigators. This process is consisting of complex financial maneuvers that will completely remove the main trails. Some common layering tactics are:
1. Wire transfers between multiple names bank accounts and multiple banks in different countries
2. Property or service transactions with shell companies that exist only in papers
3. High-dollar purchases of luxurious products like yachts, luxury cars, and gold
4. Purchases of real estate investment properties like luxurious houses, condominiums, etc.
If the amount of money is huge then the maneuvers become more complex and varied. Once they have ensured that the trail is completely shadowed they move to the final step.
In this step all the laundered funds become legitimate. This is because all the transactions are legal and money comes from legitimate accounts. Therefore, integration is regarded as the lowest-risk part of the laundering process. However, this part is not completely safe though. Some examples of integration are:
1. Sale or transfer of high-dollar items purchased with laundered funds
2. Sale or transfer of real estate purchased with laundered funds
3. Legitimate purchases of securities or other financial instruments
4. Legitimate transactions with legal entities controlled by the launderer or their associates
Popular Money Laundering Strategies
There are lots of strategies available for money laundering as it is evolving every day with the implementation of new rules and regulations from the banks and law enforcement. Below are some of the common and popular strategies of money laundering.
Casinos and Gambling Venues
This strategy is very popular among the money launderer because it is an effective and easy way to make the illegal money clean. Generally, the money launderer buys a pile of chips and then holds onto them for days. They may or may not play the games and then they will cash the chips and collect a check made out to the chip-holder or a third party. If the amount is large then the money launderers will try this method for different casinos in different countries.
This is one of the oldest money laundering strategies as well as it is simple yet most of the time risky in situations like international operations that require customs clearance. For criminal activities like wholesale drugs or arms dealing cash, smuggling is very popular as it is the most straightforward way to physically transfer a huge amount of money without involving the bank.
Life Insurance Policies
This strategy is also very popular among the money launderer because it is not heavily regulated like some other financial instruments. In this step money launderer purchases a single-premium life insurance policy and then he or other trusted person becomes the primary beneficiary. Then the launderer holds the insurance for a period of time and then cashes it with a clean check from the insurer or insurance company.
The securities industry is very popular among the money launderer because this industry is already ripped for fraud and abuse. Money launderers can put and call representing mirror-image bets on a particular security’s price action with their black money. Then the launderer can sell the profitable contract and cancel the loss-making contract at any time thanks to the capital gains tax liability law.
This is a very safe option for money launderers because of the easy regulations. This type of transaction often features shell corporations because these types of companies exist for the sole purpose of holding other corporate entities or assets. Due to the high value of the assets luxury real estate is a common wealth-sheltering tool for money launderer.
Criminal And Civil Penalties For Money Laundering
Different countries have different laws and penalties for money laundering. Below you will find the U.S. federal law for money laundering. Let’s check them!
18 U.S.C. § 1956: Monetary Transactions in Criminally Derived Property With Intent
According to the U.S. Department of Justice’s money laundering overview, 18 U.S.C. § 1956 and 18 U.S.C. § 1957 (Sections 1956 and 1957 of the United States Code) govern money laundering and related criminal conduct.
18 U.S.C. § 1956 defines three specific types of criminal money laundering, according to the DOJ:
- § 1956(a)(1): Domestic money laundering transactions
- § 1956(a)(2): International money laundering transactions
- § 1956(a)(3): Undercover money laundering transactions (known as “stings”)
Under 18 U.S.C. § 1956, money laundering transactions must occur with specific intent, as further spelled out in the section. Let’s take a closer look at the standards of criminal culpability for each type of money laundering identified in 18 U.S.C. § 1956.
According to the DOJ, criminal culpability under § 1956(a)(1) arises only when “a defendant conduct[s] or attempt[s] to conduct a financial transaction, knowing that the property involved in the financial transaction represents the proceeds of some unlawful activity…and the property must, in fact, be derived from a specified unlawful activity.”
Additionally, § 1956(a)(1) requires one of four “specific intents”:
§ 1956(a)(1)(A)(i): “Intent to promote the carrying on of specified unlawful activity.” Said unlawful activity might include the sale of illicit goods, such as controlled substances or banned weapons, but can theoretically include any activity that’s illegal under U.S. federal law.
§ 1956(a)(1)(A)(ii): “Intent to engage in tax evasion or tax fraud.” This is what got Manafort and Gates in trouble: the pair laundered money for the express purpose (among others) of hiding gains from the IRS.
§ 1956(a)(1)(B)(i): “Knowledge that the transaction was designed to conceal or disguise the nature, location, source, ownership or control of proceeds of the specified unlawful activity.” This differs from § 1956(a)(1)(A)(i) in that intent to promote unlawful activity is not required, only knowledge that the transaction conceals some aspect of the unlawful activity.
§ 1956(a)(1)(B)(ii): “Knowledge that the transaction was designed to avoid a transaction reporting requirement under State or Federal law [e.g., in violation of 31 U.S.C. §§ 5313 (Currency Transaction Reports) or 5316 (Currency and Monetary Instruments Reports), or 26 U.S.C. § 6050I (Internal Revenue Service Form 8300)].”
According to the DOJ, “[p]rosecutions pursuant to 18 U.S.C. § 1956(a)(2) arise when monetary instruments or funds are transported, transmitted or transferred internationally, and the defendant acted with one of the requisite criminal intents.”
Notably, the intent to avoid tax liability or otherwise circumvent U.S. tax law does not apply to 18 U.S.C. § 1956(a)(2). The other three intents are broadly similar to those laid out in 18 U.S.C. § 1956(a)(1).
Transactions covered by 18 U.S.C. § 1956(a)(2) must cross the U.S. border in some fashion. That is, they must originate or terminate in the United States. Wholly domestic (originating and terminating in the U.S.) and wholly international (originating and terminating in third markets or countries) fall outside this subsection’s scope.
This subsection covers “proceeds…not actually derived from a real crime,” per the DOJ. Rather, § 1956(a)(3) proceeds are “undercover funds supplied by…a Federal officer with authority to investigate or prosecute money laundering violations.”
Like § 1956(a)(2), § 1956(a)(3)’s intents exclude tax violations. Moreover, the intent threshold under 1956(a)(3)(B) and (C) is higher. Per the DOJ, the transaction must “be conducted with the intent to conceal or disguise the nature, location, source, ownership or control of the property or to avoid a transaction reporting requirement, respectively, in contrast to subsections 1956(a)(1)(B)(i) and (ii), which only require that defendant know that the transaction is designed, in whole or in part, to accomplish one of those ends.”
18 U.S.C. § 1957: Monetary Transactions in Criminally Derived Property Above $10,000
According to the U.S. Department of Justice, “prosecutions under 18 U.S.C. § 1957 arise when the defendant knowingly conducts a monetary transaction in criminally derived property in an amount greater than $10,000, which is in fact proceeds of a specified unlawful activity.”
18 U.S.C. § 1957 differs from 18 U.S.C. § 1956 in two notable respects: the intent requirement and the penalties for violation.
§ 1957’s intent threshold is much lower than § 1956’s. The four intents applicable under § 1956(a)(1) do not apply to § 1957. As long as prosecutors can show that each applicable transaction exceeds $10,000 in value, they do not need to prove willful intent to commit an offense under the section.
However, there is still an awareness component: per the DOJ, “it still must be shown that the defendant knew the property was derived from some criminal activity and that the funds were in fact derived from a specified unlawful activity.”