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The term "Money Laundering" supposedly originates

from the American gangster Al Capone

who ruled over a profitable empire of organized crime.

He hid the profit from his criminal activities

by investing some of it into

cash-only laundromats with no known owner.

The illegally obtained money

was mixed with legitimate sales

from the laundromats to hide its illicit nature

and the term “Money Laundering” was born.

Money Laundering is described as a process

which involves taking profits from criminal activities

and hiding their illegal sources,

so it appears as the profits have been made legally;

in other words, a way of making “dirty” money “clean”.

The main driving force

behind a large number of criminal acts

such as drug trafficking,

prostitution rings, embezzlement, bribery,

fraud schemes, is to generate a profit.

To be able to spend such illegal funds,

the criminals involved must find a way

to place the funds into the financial system.

The challenge for the criminals

is to place the funds

without attracting the attention of

the law enforcement authorities.

One way of doing so is to divide

the profit into smaller sums

and placing them into several bank accounts

that are not associated with the criminals.

Next, a series of conversions

or movements of the funds will begin.

The purpose of this is to distance the funds

from their illegal source.

Once the funds cannot be traced back

neither to its illegal source nor the criminals,

the funds are considered “clean”

and ready to be spent or invested.

The example describes

the conventional Money Laundering process

which involves three stages.

1) Placement

The launderer introduces the illicit gains

into the financial system.

Placement can be done at banks

or other financial institutions,

casinos or other legal businesses.

This is of course the most risky part

in the process since institutions

and other businesses can raise questions

about the origin of funds.

Below are examples of placement transactions:

Loans: Repaying legitimate loans using illegal funds.

Structuring or smurfing:

Dividing the illegal funds into smaller multiple deposits

on several bank accounts.

Foreign exchange:

Purchasing foreign exchange with illegal funds

Mixing of funds:

Mixing illegal funds with legal funds.

For example into cash intensive business like restaurants.

2) Layering

The distancing of illicit funds from their illegal origin.

With the purpose to obscure the origin

and ownership of funds,

a series of conversions or movements of the funds will begin.

Below are examples of layering transactions:

Moving funds from one financial institution

to another

Reselling high-value goods

Buying stocks, bonds or life insurance products

Moving the funds via shell companies,

i.e. inactive companies or corporations that essentially exist on paper only

3) Integration

The re-entering of laundered funds

to the legal economy.

By this stage the funds are laundered

to the extent that is quite difficult

to distinguish legal from illegal wealth.

The remaining step is to

supply apparent legitimacy to the illicit wealth.

This is done by making what appears

to be normal transactions.

Example of integration transaction:

Investments into real estate,

luxury assets such as artwork or jewellery,

or business ventures.

However, it is important to remember

that criminals don’t necessarily apply

all stages when laundering money.

The below scenario is an example of this.

Equivalent to and also legally defined as Money Laundering,

is when legally gained money is turned into “dirty” money,

i.e. reversed Money Laundering.

A simple example of this is employers

who pay illicit workers in cash to avoid paying taxes.

The actual crime, in this example,

tax evasion, does not take place until taxes is due for payment

and the employer has made a profit

by avoiding paying such taxes.

The tax evader has no need for placement

or layering.

Instead, the profit can be spent

or invested immediately.

Since Money Laundering is a consequence

of almost all crime generated profit,

it can occur anywhere in the world.

Rough estimates suggest that between 2–5 percent

of the global GDP,

that is between EUR 715 billion and EUR 1.87 trillion,

is laundered each year around the globe.