Elucidating Money Laundering (ML) in simpler terms
Earlier this year, while listening to a podcast I stumbled upon a very intriguing topic about how Vancouver is considered a hub for Money Laundering. At that time, I had little to no idea about this heinous crime but it really piqued my interest. So I did a lot of research and educated myself about how this is executed and what government agencies, financial institutions, and regulatory bodies are doing to curb this issue. I would like to summarize my thoughts about this crime in a series of articles.
This part is about what ML is and its different stages.
In simpler terms, ML is a process which criminals use to transform ill-gotten money gains into funds that appear to be legitimate. The purpose to launder money is to hide the existence of underlying crime that generated the tainted money, so it can be used in commerce just like clean money.
One should not confuse ML with tax evasion because the funds involved in the case of ML are always illegitimate whereas tax evasion could also be from legitimate sources.
Dirty Money → laundered → made to appear to be clean.
Let’s try to understand ML more clearly with an example — With regard to drug trafficking, ML would entail taking the proceeds from street sales and depositing the funds into the financial system, then transferring the funds through multiple accounts or jurisdictions to disguise the source of money.
- Placement: As the name suggests, illegal funds are simply placed into the financial system like a bank, credit unions, etc. Cash is not always involved at this stage. Negotiable instruments like checks, money orders, drafts, travelers' checks are also deposited in financial institutions. It is the beginning of the ML process and the ML process is far from over at this point.
- Layering: At this stage, numerous small transactions are carried out by the money launderer between offshore and onshore banks especially to make it difficult to trace the illicit fund back to its origin. These actions are basically done to distant the funds from their true source and make the funds appear to be involved in legitimate commerce and also to confuse the audit trail. Examples- sending wire transfers, converting cash into monetary instruments like travelers check, buying and selling high-value goods and stocks.
- Integration: This stage focuses on making it appear that the illicit proceeds for crime are part of legitimate commerce through investment in normal transactions. This is done by investing in real estate, businesses, or other financial ventures. It completely integrates the dirty money into the system. Once these investments are made it is almost impossible to determine that the underlying funds are from illegal sources.
P.S. It is almost but not completely impossible to trace down these funds. Financial institutions, regulatory bodies, etc. have policies, rules, and regulations dedicated to curb this problem. The next question is how they do that but that's a topic for another article.