Money laundering is a criminal endeavor that's more pervasive than you might think.
According to government sources, between $800 billion and $2 trillion in cash is laundered internationally on an annual basis.
By definition, money laundering is a practice that turns money received illegally into money that is deemed legal. The crime comes from hiding the ill-gotten gains from law enforcement officials in the process, often through intricate and complex financial transactions that flow around the world.
To criminals, running dirty money through the wash allows them to spend that money without fear of reprisal. Otherwise, spending stolen cash represents a risk the law enforcement officials will run down the cash transactions stemming from illegal activity and tie those transactions back to the criminal. In that scenario, the money would be seized and the criminals will go to jail.
Money Laundering Broken Down
Think of money laundering as the handling of two forms of money - "dirty" cash earned illegally and "clean cash" that comes out of a money laundering campaign. The laundering of dirty money occurs when the perpetrators steer the ill-gotten cash through one or, more likely, several legitimate businesses or financial institutions to legitimize the money.
In that regard, money laundering is a criminal offense, as the act of hiding illegally obtained cash is a crime all its own. In the U.S., states have different interpretations of what money laundering is (and money laundering is criminalized under both state and federal statutes.) But in general, any action to hide money illegally obtained by laundering is a criminal offense.
To help law enforcement officials get a better handle on prosecuting money laundering cases, the U.S. Supreme Court has ruled that, to make a case against money laundering, prosecutors must demonstrate that an individual hid money specifically to suppress the location, ownership, origin, nature, and control of the cash that was laundered.
The Court ruled that money laundering wasn't an offense because of the simple act of "hiding" money - it became a criminal offense when the cash was taken and moved through channels to give it the air of legitimacy.
Penalty-wise, money laundering is virtually always cited as a felony offense, although misdemeanor cases do appear from time to time. If found guilty of a misdemeanor money laundering case, a criminal can expect a year or so in jail. If found guilty of a felony, the guilty party can expect in excess of one year in jail, plus fines and penalties. Repeat offenders have been sent away to jail for as many as 35 years.
Fines vary from state to state, and with federal cases. As a rule of thumb, though, fines are often designated in twice the amount of the money laundered. For example, if a criminal launders $500,000 in cash, the fine often stands at $1 million.
History of Money Laundering
Historically, money laundering has been around in some form for 2,000 years, when Chinese merchants cycled money through various businesses and complex financial transactions to hide the income from government bureaucrats, who sought to garnish the income.
Some historians tie the term "money laundering" more prominently to the early 1900's and gangsters like Al Capone, who is said to have to bought up laundromats to funnel dirty money (from activities like bootlegging and prostitution) through the laundromats and mix the cash with legitimate business income. In that way, Capone and other gangsters were able to hide the money from law authorities
It wasn't until later in the 20th century when law enforcement tied the terms "money" and "laundering" together - partly to identify gang members, drug dealers, Mafia kingpins and other criminal elements who disguised the source of cash earned illegally, and laundered that cash into legitimate and legal funds.
Steps Used in Money Laundering
Money laundering evolves through three stages: placement, layering and integration.
In this, the first stage of money laundering, the goal is to run illegally-earned money through the financial system. Money launderers do so in several ways, including:
- Disbursing money through multiple bank or brokerage accounts, at smaller amounts.
- Buying multiple money orders, and using the money orders as legitimate cash.
- Slicing the entire cash amount into smaller amounts, and funneling it through the financial system in creative ways. For example, a money launderer can take $25,000 into a casino, exchange it at various cashier windows for chips, place a few hands of poker for an hour, and turn in the chips for cash, and leave the casino with untraceable cash.
- Buying up real estate with illegal cash, then selling the property quickly to obtain a legitimate source of cash.
- Setting up shell companies to hide illegally-gained assets.
At this, the second stage of money laundering, the money launderer begins moving money around aggressively, either directly or indirectly, into various financial accounts like a bank account or a business. This is designed to make the original source of the cash impenetrable to investigators.
At this point in the scheme, money launderers may exchange cash in larger or smaller amounts, to better avoid detection. Often, criminals use the layering stage to wire money through multiple global financial accounts to "rinse" the cash completely.
At this, the third stage of money laundering, the goal is to withdraw cash from the layering stage and use it as legal currency, far away from any prying eyes in law enforcement.
At this point, the entire money laundering staging process has made it substantially difficult to trace the flow of the money, and the perpetrator is free to use the money as he or she pleases.
Unfortunately for law enforcement investigators, money laundering, especially for larger amounts, isn't so cut-and-dried on a step-by-step basis. Often, the layers listed above overlap, or the placement stage is avoided altogether.
Those complexities make it even more difficult to uncover laundered money schemes.
The Amount of Money to Be Laundered Matters
All in all, money laundering detection avoidance techniques depend on the amount of cash involved.
For example, a smaller amount of money (say, $25,000) can be easily hidden from law enforcement through multiple deposits at different banks, or through the casino approach listed above. Make no mistake, money launders know the rules on handling large sums of cash, and they take advantage of those rules to hide illegal money.
For example, the Bank Secrecy Act of 1970, passed into law at a time when the U.S. government was getting more aggressive about money laundering, mandated that financial institutions report deposits of $10,000 or more in a single day to the U.S. Department of Treasury.
When a financial institution flags a deposit of $10,000 or more, it must file a "Suspicious Activity Report" that notes the account deposit, with any details on how the deposit might stem from the use of illegal funds.
But money launderers could easily bypass the law by only depositing $9,000 into a bank or turning instead to a funneling scheme that leverages high-cash businesses, like bars, check cashing companies, or 24-hour convenience stores to launder the cash.
Larger amounts of $100,000, or even $1 million or more, must be handled differently.
Often, larger amounts of money are washed via sophisticated financial transactions through offshore banks in multiple countries, and in multiple currencies, making it very difficult for investigators to track.
Money Laundering in the 21st Century
Even though the use of cash is in decline, given the rise of internet-based financial vehicles, along with the rise of bank cards and mobile payments, money laundering remains a huge problem for government, businesses and especially law enforcement agencies.
As long as money launderers have ways to shift money around the world and keep it secret, the crime of money laundering will remain rampant. So, too, will the efforts of law enforcement to detect and uncover money laundering schemes, and hold criminals accountable for cleaning up dirty money.