What is Money Laundering? Definition, examples, & prevention.

An estimated £1.5 trillion is laundered globally every year.¹ It is estimated that £100 billion is laundered through and within the United Kingdom or via UK-registered corporate structures and financial institutions. It is therefore essential for companies to understand how money laundering occurs and how to prevent it as failure to comply with Anti-Money Laundering (AML) regulations and involvement in laundering may result in reputational damage as well as legal consequences such as fines, asset forfeiture, and criminal charges as regulators increasingly implement more robust compliance measures.  

This article will define money laundering, lay out the stages of the laundering process, provide examples of the methods used by launderers, suggest prevention strategies, show how using board management software such as BoardCloud can aid in compliance with AML laws and rules, and answer some frequently asked questions about money laundering. 

What Is Money Laundering?

Money laundering is the process of disguising the origin of money obtained by illegal means. This process often involves complex transactions to evade regulatory authorities. 

The process is referred to as ‘laundering’ as ‘dirty money,’ money obtained by illegal means, is ‘cleaned,’ made to look like legitimate income. 

In the United Kingdom, the Proceeds of Crime Act (POCA)² defines Money Laundering as "the process by which the proceeds of crime are converted into assets which appear to have a legitimate origin, so that they can be retained permanently or recycled into further criminal enterprises."

The Stages of Money Laundering

There are three stages of money laundering: placement, layering, and integration.

Stage 1: Placement - This is the stage at which illicit funds are first introduced into the system.

Stage 2: Layering - Multiple transactions are conducted to obscure the origins of the funds. This could involve multiple transactions between bank accounts, the purchase of various assets, or investments in financial institutions. We will go into further detail in the next section. 

Stage 3: Integration - The laundered funds are reintroduced into the legitimate economy through additional transactions, and the money now appears clean - to come from a legitimate source.  

These stages build upon each other and will often overlap.  

Money Laundering Methods

Criminals have used various methods to launder their money, ranging from smurfing to the ownership of sports teams in foreign countries. Here are some examples of known methods: 

• Structuring, also known as smurfing, is a method of placement whereby large amounts of cash are broken up into smaller amounts and deposited in a bank. These small transactions appear legitimate and do not raise suspicions of the authorities.   
• Criminals may purchase high-value properties or other assets using illicit funds. Once the property or asset is sold, the proceeds of the sale appear legitimate.
• Shell companies and trusts are used to disguise the true owners of the money and are often registered in countries where anti-money laundering regulations are lax. 
• Similarly, dirty money is transferred into offshore accounts without stringent AML regulations. 
• Businesses that receive the majority of their revenue from cash transactions are also often used as fronts to launder money. The ‘dirty money’ is disguised by its commingling with the incidental profits of the legitimate business. 
• In South America, sports team ownership has been used to launder money.³ With football clubs receiving transfer fees multiples of the player’s true value. 

The methods of money laundering are ever-evolving and now include the purchase and sale of cryptocurrencies and NFTs, and the use of AI and machine learning to mask transactions.  

Methods of Prevention 

Various methods of money laundering prevention have been adopted by companies to deal with the evolution and growth of money laundering. It is suggested that companies implement the following practices to avoid falling foul of the law: 

• Develop a company policy detailing procedures and controls to prevent and detect money laundering. This policy should comply with existing UK and International Anti-Money Laundering regulations, such as the Financial Action Task Force (FATF) recommendations.⁴ Institutions, such as banks, law firms, real estate agents, and accountants, are governed by sector-specific regulatory requirements. 
• Appoint a compliance officer responsible for AML compliance and the investigation of suspicious activity.
• Ensure that staff are trained and educated to recognize the signs of suspicious activity and know the appropriate procedures to escalate reports of such activity.  
• Implement Know Your Customer (KYC) practices. These help identify customers and ensure awareness of any potential involvement in illegal activities. These may include gathering information about customers, such as government ID, proof of residence, and background checks to determine the risk from clients to money laundering and fraud. 
• Regularly audit and monitor transactions to detect suspicious transactions showing indications of placement or layering. 
• Maintain easily accessible records of customer details and of the monitoring and auditing undertaken for a period of 5-7 years. 
• Employ AI-driven monitoring systems to detect the occurrence of suspicious transactions.

The Role of Technology and BoardCloud in Compliance 

BoardCloud provides a secure platform for organizations to manage their compliance obligations efficiently. Board members can easily access compliance materials, review critical documentation, view past financial records, and track updates to regulations. 

With BoardCloud, organizations have the tools they need to maintain compliance, improve governance, increase transparency and accountability, and ensure that they are following best practices to avoid being involved in money laundering schemes.

In a world where regulatory scrutiny continues to increase, businesses cannot afford to ignore the risks associated with money laundering. With the right technology and strategies in place, your organization can stay ahead of potential threats.

FAQs 

Where does the term money laundering originate? 

The earliest record of money laundering dates back to 2000 years ago, when Chinese merchants laundered money to circumvent regional government bans on trading. The first recorded usage of the term ‘money laundering’ was by The Guardian in 1973 in its coverage of the Watergate scandal. 

What is the largest AML fine ever levied?  

The French bank BNP Paribas paid a fine of £6.5 billion when US regulators discovered that the bank had processed billions of dollars of transactions between sanctioned countries and had deliberately stripped these transactions of identifying markers to avoid detection. The largest fine levied against a UK company is the £264.8m fine levied against NatWest after being convicted of three anti-money laundering (AML) offences. 

What is the longest prison sentence received for money laundering? 

Stephen Saccoccia received a 660-year prison sentence for laundering money for a Mexican drug cartel in the US in 1993. 

References 

¹ Major Money Laundering Countries - Sanction Scanner

² Proceeds of Crime Act 2002

³ As a trafficker pursued dreams of soccer glory, investigators closed in

⁴ FATF Recommendations