Money Laundering 101

Crime, Money

Money laundering refers to various techniques people use to take money derived from criminal activities and make it appear like it came from a legitimate source – to make it look “clean.” It’s estimated that hundreds of billions of dollars are laundered every year, mostly through financial institutions. For obvious reasons, exact numbers are impossible to attain. There are two major players here: the criminals themselves, and the financial institutions that knowingly help them launder money.

The Money-Laundering Process

The money laundering process usually takes place in three stages:

1. Placement. The “dirty” money is put into the chosen financial system. Cash may be deposited into a bank account, for example, or electronic funds may be moved from one account to another.

2. Layering. The money goes through several complex transactions to prevent its real source from being discovered. This can include moving money from one bank to another or buying and selling commodities, for example.

3. Integration. The now-clean money is integrated into the economy.

Cash is a big part of money laundering operations, and some money launderers use cash-based businesses like casinos, restaurants, or strip clubs for laundering purposes. Large cash deposits into domestic banks arouse suspicion (read more below), so criminals may deposit large amounts of cash into offshore banks with more secrecy, or may use the process of “structuring,” aka “smurfing,” where cash is deposited in smaller amounts.

Anti-Money Laundering Enforcement

It is a crime to participate in money laundering. That includes not just the criminals who got the money illegally, but the banks and other institutions that help them launder it. U.S. financial institutions must comply with anti-money laundering (AML) regulations.

The U.S. is a member of the intergovernmental agency Financial Action Task Force (FATF), founded in 1989, which fights money laundering and terrorism financing. In addition to following the guidelines of the FATF, U.S. lawmakers have passed several laws addressing AML. The Bank Secrecy Act requires financial institutions to do their due diligence and to report certain activities to the Treasury Department.

  • Cash transactions in amounts over $10,000 are reported on a Currency Transaction Report
  • Other transactions may be reported in a Suspicious Activity Report
  • “Know your customer” is a common way of saying that financial institutions must be sure of the identity of their customers and be aware of their typical financial activities

The Money Laundering Control Act of 1986 and the Anti-Drug Abuse Act of 1988 both made it harder for businesses and financial institutions to aid in money laundering.

These laws are intended to identify criminals and criminal organizations, to prevent and punish institutions that aid them, and to provide those institutions a way to keep themselves above suspicion. If a bank suspects that one of their clients is laundering money to finance terrorism, for example, it must terminate that account.

Money Laundering and the Drug Trade

A large amount of money being laundered comes from the illegal drug trade, and drug cartels routinely use large banks for laundering purposes. They can make large amounts of money off of these high-volume clients.

The U.K.-based bank HSBC recently came under fire for laundering large amounts of drug money in Mexico. Drug cartels transferred billions of dollars via wire transfer and deposited hundreds of thousands of dollars into the bank, which did not follow basic AML protocol. As a result, HSBC was forced to close U.S. accounts (leading to a loss of $2.6 billion in fees and revenue) and lost $1.9 billion in forfeitures and penalties. For a company with over $2.6 trillion in assets, this is a small amount, but officials hope other banks will take notice and make sure they’re in compliance.