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What is Money Laundering and Is Online Money Laundering A Real Threat?

Did You Know – The 3 stages of money laundering can be categorized as placement, layering, and integration. While all these 3 stages are applicable to cash money laundering, the stage of layering is more relevant to online methods of money laundering.

What Is Money Laundering and Why Is It Dangerous?

Money laundering is a method of washing black money that has been made out of illegal activities, in an attempt to hide it from the authorities. Money laundering is typically done by professional service providers, such as casinos and car washes, laundromats, and other large businesses that can easily clean the money due to a large volume of business. 

The various methods used to launder money were initially undetected for decades. However, due to experts developing a set of anti-money laundering strategies, it is now possible to catch and flag potential money laundering crimes. 

Money laundering helps criminal organizations, not only fund but also make gains from illegal activities usually at the cost of their victims. These activities may include drug sales, gun sales, human racketing and trafficking, and smuggling of dangerous and contraband items. 

This technique of washing money and hiding it from the authorities can also be used to fund white-collar crimes such as insider forex trading, bribing for personal gain, and making gains out of Ponzi schemes.

What Is Online Money Laundering Through Cryptocurrency?

You may be wondering what is considered money laundering especially through bitcoins and cryptocurrency as these are becoming popular online payment modes. In June 2021, a report generated by the US Financial Crimes Enforcement Network indicated that there is a tie between cryptocurrency and online illegal activities. 

This report stated that both bitcoins and other forms of cryptocurrency are becoming increasingly popular choices for criminals to purchase ransomware options. Furthermore, this report indicates that online currency is also being used by online elements to purchase drugs and other harmful products through the internet. 

Although cryptocurrency offers some amount of anonymity, it can still be traced from the sender to the receiver’s wallet with some effort. To ensure that this detection is kept to a minimum, criminals that operate online have been using a combination of mixers and tumblers to fracture this connection and go undetected.

What is Layering in Money Laundering?

Layering in money laundering is one of the 3 stages of cleaning black money. The first stage is placement, which involves placement of the black money into a financial institution or system. 

This can be done by fragmenting a large sum of money, into much smaller funds. These funds are deposited into bank accounts through cash, demand drafts, wire transfers, and other forms of unsuspected deposit methods. 

At times money launderers may also choose to hide one’s identity by creating either offshore accounts or trust funds and withdrawing only small amounts of funds that are below the suspected custom’s limits of automatic detection. 

The second stage is layering which is done with the purpose of throwing off their scent from the black money trail. Some of the popular methods used by professional money launderers include buying and selling small investments in a frequent manner, as well as using certain firms such as holding companies as a front for these money-washing techniques. 

Many times, the funds are also constantly circulated across accounts through bank accounts in different countries. In the case of funds that are circulated from one country to another, more often than not, these countries do not fully abide by the anti-money laundering authorities in the USA, UK, and other AML prevention countries. 

The third stage is integration which is the end game of professional money launderers and their criminal beneficiaries. This stage involves integrating the washed funds as clean money into the financial system. 

This money when washed is considered legitimate if it goes undetected. The funds that have been cleaned using money laundering tactics, can be used to buy goods, services, real estate, companies, and other legit purchases. 

Professional money launderers may use variables to wash money due to preference or to go undetected. This implies that they may at times not use all the 3 stages of money laundering, while at other times they may use one or more methods repeatedly or twos method more often than the third. 

What Is Anti-Money Laundering and Is It Effective for Detecting Fraudulent Activities?

Anti-money laundering, also known as AML, is a set of tactics and strategies that are effective in detecting patterns that emerge through certain suspected activities. These red flags look for certain traits or tell-tale signs such as smurfing. 

Smurfing in money laundering is also commonly referred to as structuring, breaking down money from larger sums to smaller sums that may go undetected without AML techniques in place. 

In the world of Cryptocurrency, techniques such as chain hopping can be detected using AML strategies. Chain hopping is a method of converting one form of crypto for another while quickly and seamlessly transferring the crypto from one blockchain to another repeatedly.  

Tumbling and mixing are methods method used to hide and blend in multiple transactions using a series of online and offline exchanges, which make the deposits and withdrawals tougher to track back to the source account. 

Cycling is a way of transferring fiat money from one account to buy and sell online bitcoins and finally transferring the sale amount into a whole different banking institution and account. 

Smurfing, tumbling, mixing, and cycling are usually used in the second stage of money laundering known as layering. However, AML techniques can detect red flags in all 3 stages, from placement to integration, and not just In the layering stage.

What is Shrinkage in Money Laundering?

Shrinkage is the cost of money laundering that may cost as much as 50% of the initial black money amount. The amount of shrinkage in money laundering depends on the volume and frequency of using the cleaning service, the amount to be cleaned as well as the risks taken by the money laundering professional to get the task done. 

Shrinkage can also depend on the tactics used in the integration phase such as fake employee generation through payroll manipulation, and loans offered to certain shareholders that do not ever get paid back. At times a technique known as dividends may also be used which is paid directly to the shareholders of criminally owned and run companies.

What Are the Other Methods of Money Laundering?

While there are numerous methods to wash black money and make it seem legit, other common methods of money laundering include:

  • Purchasing assets such as jewels and precious metals that can be easily moved across state lines
  • Purchasing, and reselling cars, houses, boats, ships, and other investments
  • Using casinos as a front to launder money by buying chips through black money and cashing the unused chips as clean money
  • Cash counterfeiting, washing the cash through gadgets and electronic purchases, and returning the items for a full refund within the exchange period. 
  • Using only on paper inactive firms such as offshore shell companies to buy and sell investments
  • Using electronic money laundering techniques to engage in online gambling websites
  • Using virtual gaming sites to convert black money, into gaming tokens and then cash out in cryptocurrency 
  • Investing in online auctions, virtually hosted sales to make purchases and then sell the purchased items for clean money or return the items for laundered money

Why Are Anti-Money Laundering Protocols For Businesses A Must To Follow?

Anti-money laundering protocols have to be followed by the law, any suspected red flags have to be reported to the authorities immediately and this has to be done discreetly without tipping off the suspected individual. 

Anti-money laundering protocols can protect your business from being a partner in crime, an accomplice, and getting jailed or fined for cooperating with criminals who may be washing money through your business. 

A few of the common anti-money protocols include criminalizing businesses that participate in money laundering activities directly or indirectly, having a set of Know Your Customer policies in place for all situations, and recording all transactions through detailed ledgers, and software filtering techniques. 

Financial institutes are required by law to have a mandatory holding period of up to 1 week of the initial deposit into the account. Businesses are also required to implement new technology through regular updates in all workplaces that may wind up becoming a front for money laundering. Both AI and Big Data technologies are considered anti-money laundering machinery.

What Is The Fine and Jail Time for Money Laundering?

  • In the USA, the penalty for washing money is a jail time of up to 20 years in a federally run prison. The accused may also face an additional fine of either up to $500,000 or double the total amount of money laundered to date. 

  • In the UK, the penalties include jail time not exceeding 14 years with unlimited fines based on the total amount laundered. 

  • In India, the penalties include a jail time of 3 to 7 years and an additional fine equivalent to $6,200 or INR 5,00,000. 

  • In Germany, the penalties include a jail time of up to 5 years for unorganized money laundering, but up to 10 years for ongoing and organized crimes. If the act was committed due to gross negligence, then the accused may be eligible for a reduction of the sentence. 

  • In France, the penalties include jail time of up to 10 years for organized and ongoing acts of money laundering, especially with criminal intent. An additional fine between €750,000 for natural and €3.75 million for natural and legal persons respectively. 

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Chris Wyatt
Chris Wyatt

Chris is an ex Financial Consultant and avid discover in ways to save and spend money. Chris has been involved in finance since 2012 and has continues to provide information in traditional financial markets and cryptocurrency.

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