How Money Laundering Works

Money laundering is a complex process whereby illegally obtained funds are introduced into the legal economic cycle in order to obscure their criminal origin. The objective is to transform "dirty" money into "clean" money. This process typically occurs in three stages:

1. Placement

In this initial phase, the illegal funds are introduced into the financial system. As large amounts of cash are conspicuous, criminals often employ methods to fragment the sums. A classic example is "smurfing" or "structuring", where large cash amounts are divided into many small, inconspicuous deposits across various accounts to bypass reporting thresholds.

2. Layering

This is the most complex phase, where the trail of the money is obscured. The funds are moved through a multitude of transactions, accounts, and countries to disguise their original origin. Common techniques include:

• Shell companies and front companies: Funds are transferred between these entities using fictitious invoices for non-existent services or goods.

• Round tripping: Money is transferred abroad via complex routes and later returns as a "legitimate" investment.

• Trade-based money laundering: Over or under invoicing in international trade is used to shift values. For instance, a good is sold for an unrealistically high price to transfer money.

3. Integration

In the final phase, the laundered money is reintroduced into the legal economic cycle and can now be utilised as "clean" income or wealth. Examples of this include:

• Real estate and luxury goods: Criminals purchase expensive items such as properties, luxury cars, or art with the laundered funds and later sell them. The proceeds from the sale are then considered legitimate capital.

• Casinos: The gambling industry is often used for introduction and concealment. Criminals buy chips with illicit cash, gamble for a while, and then exchange the chips for a cheque or bank transfer, which is declared as legitimate gambling winnings.