What Methods are Used to Launder Money?


What Is Money Laundering?

Money laundering involves three basic steps to disguise the source of illegally earned money and make it usable: placement, in which the money is introduced into the financial system, usually by breaking it into many different deposits and investments; layering, in which the money is shuffled around to create distance between it and the perpetrators; and integration, in which the money is then brought back to the perpetrators as legitimate income, or “clean” money.

Smurfs, Mules, and Shells

Historically, methods of money laundering have included smurfing, or the structuring of the banking of large amounts of money into multiple small transactions, often spread out over many different accounts, to avoid detection; and the use of currency exchanges, wire transfers, and “mules” or cash smugglers to move money across borders. Other money laundering methods involve investing in mobile commodities such as gems and gold that can be easily moved to other jurisdictions; discretely investing in and selling valuable assets such as real estate; gambling; counterfeiting; and creating shell companies.

While these methods are still in play, any type of money laundering must also include modern methods that put a new spin on the old crime by making use of the Internet.

Money Laundering in the Digital Age

A key element of money laundering is flying under the radar. The use of the Internet allows money launderers to easily avoid detection. The rise of online banking institutions, anonymous online payment services, peer-to-peer transfers using mobile phones, and the use of virtual currencies such as Bitcoin have made detecting the illegal transfer of money ever more difficult. Moreover, the use of proxy servers and anonymizing software makes the third component of money laundering, integration, almost impossible to detect, as money can be transferred or withdrawn leaving little or no trace of an IP address.

Money can also be laundered through online auctions and sales, gambling websites, and even virtual gaming sites, where ill-gotten money is converted into gaming currency, then transferred back into real, usable, and untraceable “clean” money.

A spin on the Internet scam of phishing for a victim’s bank account number under the pretense of depositing a fictitious lottery winning or international inheritance involves actually making multiple deposits into the victim’s bank account with the stipulation that a portion of the money must then be transferred to another account—i.e., laundered.

Existing anti-money laundering laws (AML) are slower to catch up to these types of cybercrimes, since existing AML laws attempt to uncover dirty money as it passes through traditional banking institutions. Cybercrime, however, has become one of the top priorities for the Treasury’s Financial Crimes Enforcement Network (FINCEN). In a June 2021 memo, the agency outlined the growing threat of money laundering vis cryptocurrencies and cyberattacks such as ransomware that can illegally funnel digital funds overseas.

The Bottom Line

The act of hiding money is thousands of years old, and it is the nature of money launderers to attempt to remain undetected by changing their approach, keeping one step ahead of law enforcement, just as international governmental organizations work together to find new ways to detect them.

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