what is money laundering essay

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What Is Anti-Money Laundering (AML)?

Anti-money laundering is an international web of laws, regulations, and procedures aimed at uncovering money that has been disguised as legitimate income. For centuries, governments and law enforcement agencies have tried to fight crime by following the money. In modern times, that comes down to anti-money laundering (AML) laws and activities.

Money laundering is the concealment of the origins of money gained from crimes, including tax evasion, human trafficking, drug trafficking, and public corruption . It also includes money being illegally routed to terrorist organizations.

Anti-money laundering regulations have had an impact on governments, financial institutions, and even individuals around the world.

Key Takeaways

• Anti-money laundering (AML) laws, regulations, and procedures are attempts to reduce the ease of hiding criminal profits.
• Financial institutions combat money laundering with Know Your Customer (KYC) and customer due diligence (CDD) measures.
• Banks are tasked with monitoring financial transactions and reporting suspicious activity, which is where criminal financial activity tracking begins.

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Know Your Customer (KYC)

Regulatory compliance at financial institutions starts with a process often called Know Your Customer (KYC). KYC determines the identity of new customers and whether their funds originated from a legitimate source.

Money laundering can be divided into three steps:

• Depositing illicit funds into a financial system
• "Layering," or making a series of transactions, usually repetitive and voluminous, to obfuscate the illicit origin of the funds
• "Cleaning" and "washing" the funds by using them to buy real estate, stocks, commercial investments, and other legitimate assets

The KYC process aims to stop money laundering at the first step—when a customer attempts to deposit money.

A study from Verafin, a financial crime risk management company, estimates that $3.1 trillion in illicit money flowed through the global financial system in 2023.

Financial institutions screen new customers against lists of parties that pose a higher-than-average risk of money laundering: criminal suspects and convicts, individuals and companies under economic sanctions , and politically exposed people, encompassing foreign public officials, their family members, and close associates.

Customer Due Diligence (CDD)

Throughout the account’s lifetime, financial institutions must conduct customer due diligence (CDD)—the practice of maintaining accurate and up-to-date records of transactions and customer information for regulatory compliance and potential investigations.

Certain customers may be added over time to sanctions and other AML watchlists, warranting checks for regulatory risks and compliance issues on an ongoing basis.

According to the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN), the four core requirements of CDD in the United States are:

• Identifying and verifying the customer’s personally identifiable information (PII)
• Identifying and verifying the identity of beneficial owners with a stake of 25% or more in a company opening an account
• Understanding the nature and purpose and compiling risk profiles of customer relationships
• Monitoring suspicious transactions and updating customer information

CDD may try to uncover and counter money laundering patterns such as layering and structuring, also known as “ smurfing ”—breaking up large transactions into smaller ones to dodge reporting limits.

For example, financial institutions have instituted AML holding periods that force deposits to remain in an account for a minimum of days before they can be transferred elsewhere.

If patterns and anomalies indicate money laundering activities, suspicious transactions in U.S. jurisdictions must be reported in Suspicious Activity Reports (SARs) to relevant financial agencies for further investigation.

Anti-Money Laundering in the U.S.

AML regulations in the U.S. expanded after the Bank Secrecy Act (BSA) was passed in 1970. For the first time, financial institutions were required to report cash deposits of more than $10,000, collect identifiable information of financial account owners, and maintain records of transactions.

Additional legislation was passed in the 1980s amid increased efforts to fight drug trafficking, in the 1990s to enhance financial surveillance, and in the 2000s to cut off funding for terrorist organizations.

Banks, brokers, and dealers now follow a complex regulatory framework of conducting due diligence on customers and tracking and reporting suspicious transactions. A written AML compliance policy must be implemented and approved in writing by a member of senior management and overseen by an AML compliance officer.

Recent Expansions

The Anti-Money Laundering Act of 2020 —the most sweeping overhaul of U.S. AML regulations since the Patriot Act passed after the 9/11 terrorist attacks in 2001—subjected cryptocurrency exchanges, arts and antiquities dealers, and private companies to the same CDD requirements as financial institutions.

The Corporate Transparency Act , a clause of the Anti-Money Laundering Act, eliminated loopholes for shell companies to evade anti-money laundering measures and economic sanctions.

FinCEN, a U.S. Department of the Treasury bureau, issues guidance and regulations that interpret and implement the BSA and other AML laws. FinCEN’s guidance and regulations provide detailed instructions for financial institutions on how to comply with AML requirements.

In addition to these federal laws, many states have their own AML statutes and regulations. These state laws often mirror the federal requirements but may include additional provisions.

International Anti-Money Laundering

The European Union (EU) and other jurisdictions adopted similar anti-money laundering measures to the U.S. anti-money laundering legislation. Enforcement assumed greater global prominence in 1989 when a group of countries and nongovernmental organizations (NGOs) formed the Financial Action Task Force (FATF).

The FATF is an intergovernmental body that devises and promotes the adoption of international standards to prevent money laundering. In October 2001, following the 9/11 terrorist attacks, FATF’s mandate grew to combat terrorist financing.

Those standards—the FATF’s 40 Recommendations—provide a framework for AML and Combating the Financing of Terrorism (CFT) regulations and policies in more than 190 jurisdictions worldwide, covering CDD, transaction monitoring, reporting of suspicious activity, and international cooperation.

Other important international organizations in the fight against money laundering include the International Monetary Fund (IMF) and the United Nations (U.N.), and programs include the Council of the European Union’s Anti-Money Laundering Directive (AMLD) and the Basel Committee on Banking Supervision’s Customer Due Diligence (CDD) for Banks.

The IMF has pressed member countries to comply with international norms thwarting terrorist financing. The U.N. added AML provisions to address money laundering associated with drug trafficking in the 1998 Vienna Convention, with international organized crime in the 2001 Palermo Convention, and with political corruption in the 2005 Meridian Convention.

The Council of the European Union’s AMLD, a directive that sets out AML/CFT requirements for all EU member states, has been amended several times to reflect the changing risks of money laundering and terrorist financing. The Basel Committee on Banking Supervision’s CDD for Banks provides detailed recommendations for banks on how to identify and verify the identity of their customers.

Anti-Money Laundering and Cryptocurrency

Cryptocurrency has drawn increasing attention among AML professionals and regulatory bodies. Virtual coins provide anonymity to users, presenting criminals with a convenient way to store and move money.

According to cryptocurrency and blockchain analytics firm Chainalysis, addresses connected to illicit activity sent nearly $39.6 billion worth of cryptocurrency in 2022, up 141% from 2021. This figure dropped to $24.2 billion in 2023, but it was still a significant amount of money (it was only about 0.78% of all illicit funds).

The decentralized nature of cryptocurrency markets makes it challenging to implement and enforce AML regulations. Traditional AML frameworks designed for centralized financial institutions were not adequate in the past for the decentralized cryptocurrency ecosystem, but regulators have made significant progress in addressing the weaknesses that were present.

Blockchain analysis and monitoring tools enable financial institutions and law enforcement to identify and investigate suspicious cryptocurrency transactions. Crypto forensic services like Chainalysis, Elliptic, and TRM Labs have the technology to flag crypto wallets , exchanges, and transactions tied to designated terrorist organizations, sanctions lists, political groups, government actors, and organized crime such as hacking, ransomware, scams, and contraband trafficking on darknet markets.

Inside the U.S.

In the U.S., cryptocurrencies are largely an unregulated market, and few regulations explicitly target the asset class by name. Instead, AML enforcement actions, such as those against crypto exchanges Binance and FTX, have been prosecuted under existing laws and statutes, such as the Bank Secrecy Act and the Foreign Corrupt Practices Act (FCPA).

Only under the Anti-Money Laundering Act of 2020 did U.S. companies become legally required to comply with financial screening regulations that apply to fiat currencies and tangible assets. Businesses that exchange or transmit virtual currencies now qualify as regulated entities and must register with FinCEN, adhere to AML and CFT laws, and report suspicious customer information to financial regulators.

Outside the U.S.

More formal rules on intervening in virtual currency money laundering are expected to be introduced in the U.S. and abroad. Recent steps include an Internal Revenue Service (IRS) proposal and several European bills for financial platforms to report digital asset payments and transactions to national and transnational regulatory bodies, law enforcement agencies, and industry stakeholders.

On the global stage, the Financial Action Task Force (FATF) Travel Rule, an international AML framework that would require collecting and sharing beneficiary information for cross-border cryptocurrency flows, is being closely watched and gaining traction among regulatory bodies worldwide.

Several countries have implemented or are implementing the FATF Travel Rule in their civil and criminal codes to increase the transparency and accountability of cryptocurrency transactions.

Some AML requirements apply to individuals. By law, U.S. residents must report receipts of multiple related payments totaling more than $10,000 to the Internal Revenue Service (IRS) on IRS Form 8300 .

What Is Considered Anti-Money Laundering?

Anti-money laundering (AML) refers to legally recognized rules, national and international, that are designed to thwart hiding criminal profits inside the financial system.

Customer due diligence (CDD) refers to practices that financial institutions implement to detect and report AML violations.

Know Your Customer (KYC), also known as Know Your Client, is a component of CDD that involves screening and verifying prospective banking clients.

What Is an Example of Anti-Money Laundering?

Financial institutions are required by law to gather information on customers, track deposits and outflows, and report any suspicious activity.

What Are the 3 Stages of Money Laundering?

The three stages are placement (depositing), layering (obscuring through many transactions), and integration or extraction (using for large purchases or withdrawing).

Governments have evolved their approach to money laundering deterrence by establishing and revising regulatory controls that elicit proactive participation from financial institutions. Anti-money laundering is crucial for safeguarding the financial system from crimes.

Swift. “ What Does KYC Mean? ”

United Nations, Office on Drugs and Crime. “ Money Laundering .”

Nasdaq Verafin. " 2024 Global Financial Crime Report ."

Swift. “ The KYC Process Explained .”

Federal Financial Institutions Examination Council, Bank Secrecy Act/Anti-Money Laundering Infobase. “ Politically Exposed Persons .”

Financial Industry Regulatory Authority. “ Frequently Asked Questions (FAQ) Regarding Anti-Money Laundering (AML) .”

U.S. Treasury Financial Crimes Enforcement Network. “ Information on Complying with the Customer Due Diligence (CDD) Final Rule .”

Cornell Law School Legal Information Institute. " 12 CFR § 229.13 - Exceptions ."

U.S. Treasury Financial Crimes Enforcement Network. “ History of Anti-Money Laundering Laws .”

U.S. Treasury Financial Crimes Enforcement Network. “ BSA Timeline .”

U.S. Office of the Comptroller of the Currency. “ Bank Secrecy Act (BSA): BSA & Related Regulations .”

U.S. Treasury Financial Crimes Enforcement Network. “ FinCEN Informs Financial Institutions of Efforts Related to Trade in Antiquities and Art ,” Pages 1–2.

JD Supra. “ FinCEN Crypto & Ransomware Guidance: Will 2022 Bring More Changes? ”

International Monetary Fund. “ The IMF and the Fight Against Money Laundering and Terrorism Financing .”

Chainalysis. " 2024 Crypto Crime Trends: Illicit Activity Down as Scamming and Stolen Funds Fall, But Ransomware and Darknet Markets See Growth ."

Chainalysis. “ Crypto Money Laundering: Four Exchange Deposit Addresses Received Over $1 Billion in Illicit Funds in 2022 .”

Atlantic Council. “ Cryptocurrency Regulation Tracker .”

Internal Revenue Service. " Treasury and IRS Issue Proposed Regulations on Reporting by Brokers for Sales or Exchanges of Digital Assets; New Steps Designed to End Confusion, Help Taxpayers, Aid High-Income Compliance Work ."

European Parliament News. " New EU Rules to Combat Money-Laundering Adopted ."

European Council. “ Anti-Money Laundering: Council Adopts Rules Which Will Make Crypto-Asset Transfers Traceable .”

Financial Action Task Force. “ Virtual Assets: Targeted Update on Implementation of the FATF Standards on Virtual Assets and Virtual Asset Service Providers .”

Internal Revenue Service. “ Form 8300: Report of Cash Payments Over $10,000 Received in a Trade or Business .”

Internal Revenue Service. “ Cash Payment Report Helps Government Combat Money Laundering .”

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Money Laundering, Meaning, Act, Stages, Prevention, UPSC Notes

Table of Contents

Process of Money Laundering

Methods used in money laundering, impacts of money laundering, anti-money laundering measures in india, anti-money laundering measures at the global level, money laundering upsc pyqs, money laundering faqs.

Mains: Challenges to internal security through communication networks, money laundering and its prevention

Money Laundering is the processing of illegitimate money to disguise its illegal origin and make it appear as coming from legitimate sources . It is the process of making the dirty money look clean . The illegitimate money/ Black money arises from either proceeds of corruption, proceeds of crime, or tax evasion on legally earned money. It enables the criminal to enjoy these profits without fear of law enforcement agencies. Therefore, it is an essential step in almost all types of organised criminal activities such as drug trafficking, human trafficking, arms smuggling, and so on. Moreover, money laundering is also crucial in funding terrorism activities around the globe including in India.

Money laundering involves three stages that finally release laundered funds into the legal financial system. These three stages are as follows:

This is the first stage of the money laundering process when illegal funds are first introduced into the legitimate financial system. It is done through several methods, including wire transfers or depositing money into financial institutions such as banks , casinos , shops , and other businesses. During this phase, the following techniques are employed to conceal the source and ownership of the funds.

• Breaking up the money: Money is divided into smaller sums and depositing it into multiple bank accounts to avoid detection.
• Depositing across borders: The cash may be transported across borders and deposited in offshore financial institutions to conceal or disguise to purchase high-value assets , such as artwork, diamonds, and gold, which can be resold later for payment by cheque or bank transfer, further distancing the illegal proceeds from their source.

It involves multiple financial intermediaries and transactions to confuse Anti-money laundering (AML) checks.Layering money laundering is gradually adding legitimacy to the source of illicit money, making it difficult to track. It is generally considered the most complex stage. Some of the methods utilised during this step include:

• Changing the money's currency.
• Multiple inter-bank transfers.
• Multiple structured deposits and withdrawals ( Smurfing )
• Purchasing high-value items such as diamonds, cars, or property.
• Multiple wire transfers between multiple accounts in different countries.
• Opening "shell" companies.
• Investing in businesses that require minimal paperwork, such as currency exchanges, art galleries, and car washes.
• Using money "mules ."

Integration

In the last stage, dirty money re-enters the mainstream financial system as a legitimate transaction. This is done in the form of business investment, purchase, or the sale of an asset bought during the layering. The major methods used are as follows:

• Property dealing
• Front companies and fraudulent loans
• Foreign bank complicity
• False import/export invoices

Money laundering involves carrying out several transactions to hide the origin of the money. Some major methods/types of transactions carried out are as follows:

• Structuring or Smurfing: A smurf evades government scrutiny by breaking up large transactions into a set of smaller transactions that are each below the reporting threshold.
• “Mules” or cash smugglers: A money mule is someone who accepts and transfers money from fraud victims to smuggle it across borders and deposit it into foreign accounts. Some money mules are aware that they are aiding in illegal activity, but some are not aware.
• Gaming and Gambling sectors: The susceptibility to money laundering is high in these sectors. Given its high transaction volume and potential for anonymity , effective AML measures are necessary.
• Shell companies: These are created to obscure or hide the assets of another entity. These companies exist only on paper and lack a physical presence , staff, revenue, or significant assets. However, they may hold bank accounts or investments.
• Transaction Laundering: It is a type of electronic money laundering that uses e-commerce to obscure transactions. 
• Smugglers: This technique is the earliest form of money laundering, involving the physical transport of cash across borders. This has been a favoured method for terrorists.
• Hawala: It is an informal system for transferring money around the world. Hawala transfers money without any physical money actually moving .
• Cybercrime : Cyber crimes such as theft of identity, illegal access to email, and credit card fraud are being carried out to aid in money laundering and terrorist activities. 
• Open Securities Market: Laundering is possible due to instruments like hedge funds and participatory notes which have very limited disclosures to the source. 
• Money laundering through cryptocurrencies: Cryptocurrencies are anonymous therefore the placement stage of the money laundering process is often absent.

Money laundering has severe and extensive impacts on businesses, economies, societies, and nations. The major impacts of money laundering are as follows:

Threats to Internal Security

Organised and transnational crime include money laundering in some form or other.

• For example, funds flow from Pakistan’s ISI to the operatives of various terrorist groups like Harkat-ul-Mujahideen (HUM), the Harkat-ul-Jihad-al- Islamic (HUJI), the Lashkar-e-Taiba (LET) and the Jaish-e-Mohammad (JEM) to carry out terrorist acts against India.
• The 26/11 Mumbai Terrorist attack was financed through money laundering and hawala.
• Organised Crime: Narcotics trade, human trafficking, Illegal wildlife trade, and illegal arms trade all thrive on money laundering.
• Extremism: Naxalism/Left Wing extremism, and insurgency in northeast Indian states and other areas all benefit from money laundering.
• Cybercrime : Cybercriminals can use modern technology to launder money obtained through cybercrime.

Economic Implications

As emerging markets open up their economies and financial sectors, they become increasingly easy targets for money laundering activities. The major impacts are as follows:

• This results in the crowding-out of private-sector businesses by criminal organisations.
• It results in less profits and higher costs to businesses along with higher prices to consumers.
• Criminal activity is associated with bank failures around the globe such as in the case of the European Union Bank.
• In some emerging markets these illicit proceeds may surpass government budgets, leading to a loss of control of economic policy by governments.
• The unpredictable nature of money laundering leads to the loss of policy control.
• Reduced confidence in markets due to money laundering diminishes legitimate global opportunities, sustainable growth, and investments while attracting international criminal organisations. 
• This also leads to higher tax rates for honest taxpayers.

Social Impacts

Apart from adversely affecting the economy and security of the nation money laundering also causes severe societal issues, listed as follows:

• Promote Crime: There are significant social costs and risks associated with money laundering. Money laundering is a crucial process for organised criminals that allows drug traffickers, smugglers, etc. to expand their operations.
• Increase Fiscal burden: This drives up the cost of government due to the need for increased law enforcement and health care expenditures (for example, for treatment of drug addicts) to combat the serious consequences that result.
• Rise in Corruption: Money laundering transfers economic power from the market, government, and citizens to criminals. Furthermore, the sheer magnitude of the economic power that accrues to criminals from money laundering has a corrupting effect on all elements of society. It may even lead to the virtual takeover of a legitimate government in extreme cases. 
• Affect Stability: The social and ethical fabric of the society will be jeopardised, threatening the democratic institutions of society. Further, it can fuel distrust, protests, and anti-national activities.

Since 2020-21, the ED has registered 3,110 cases under the anti-money laundering law, and over 12,000 complaints to investigate alleged foreign exchange violations. The following Anti-Money Laundering measures are taken:

• It carries out verification of the identity of clients, maintenance of records, and reporting. Businesses with AML obligations report to the Financial Intelligence Unit. 
• It carries out the investigation of and prosecution of money-laundering offences.
• Customer due diligence (CDD) requirements: The banking industry, financial institutions, financial service providers, gaming businesses, and casinos have to ensure CDD requirements. It helps determine the customer's risk level. These organisations have to conduct AML checks, detect suspicious transactions of customers, and report to authorised units.
• Foreign Exchange Management Act, 2000, (FEMA): It aims to prevent money laundering and other illegal activities related to foreign exchange transactions. It enables regulation of the flow of payments to and from people outside the country; regulation of all financial transactions involving foreign securities or exchange; enables the RBI to place restrictions on transactions from capital accounts, etc.
• RBI AML Guidelines: The guidelines enable Authorised Money Changers (AMCs) that engage in the purchase and/or sale of foreign currency notes/traveller cheques to put in place the policy framework and systems for the prevention of money laundering while undertaking money-changing transactions. Guidelines also include Know Your Customer (KYC) requirements.
• Benami Properties Transactions (Prohibition) Amendment Bill, 2015: The bill allows for the confiscation of Benami properties. A benami transaction is a property, held by one person but the consideration for it is paid by another.  
• Narcotic Drugs and Psychotropic Substances Act, 1985: This Act does not explicitly mention money laundering, but it does include provisions to seize and confiscate the proceeds of drug trafficking.
• Measures to Prevent Terror Financing: The Unlawful Activities (Prevention) Act (UAPA) and amendments to the PMLA provide provisions to designate individuals and organisations as terrorist entities, freezing their assets and choking off funding.
• Mutual Legal Assistance Agreements: Mutual legal assistance agreements facilitate the exchange of evidence and prosecution of money laundering cases with global dimensions.
• Membership of FATF: India has effectively used the grouping to push for sanctions against countries like Pakistan which was placed in the grey list for indulging in money laundering to fund terrorism.
• India is a signatory to various conventions of the UN: India is a signatory to the Vienna Convention to combat Money Laundering and other relevant conventions of the UN.

The global nature of money laundering requires global standards and international cooperation . The Anti-Money Laundering measures taken at the Global Level are as follows:

• FATF Recommendations: These are a set of measures that are endorsed by over 180 countries .
• United Nations Global Programme against Money Laundering, Proceeds of Crime, and the Financing of Terrorism (GPML): The GPML was established in 1997 to help UN member states comply with UN conventions and other instruments related to money laundering and terrorism financing.
• The convention mandates the member states to criminalise the laundering of money. 
• It promotes international cooperation and makes extradition between member states possible.
• Other UN conventions: the UN Transnational Organised Crime Convention (2000), Convention for Suppression of Financing of Terrorism (1999); Convention against Transnational Organised Crime (2000), and Convention against Corruption (2003) contain provisions related to combating money laundering.
• The APG aims to ensure that individual members effectively implement international standards against money laundering, terrorist financing, and proliferation financing related to weapons of mass destruction.
• It comprises nine countries from the Eurasian region i.e. Belarus, China, Kazakhstan, Kyrgyzstan, India, Russia, Tajikistan, Turkmenistan, and Uzbekistan. 
• EAG is also an associate member of the FATF.

Question 1. Discuss how emerging technologies and globalisation contribute to money laundering. Elaborate measures to tackle the problem of money laundering both at national and international levels. (UPSC Mains 2021)

Question 2. India’s proximity to two of the world’s biggest illicit opium-growing states has enhanced her internal security concerns. Explain the linkages between drug trafficking and other illicit activities such as gunrunning, money laundering, and human trafficking. What countermeasures should be taken to prevent the same? (UPSC Mains 2018)

Question 3. Money laundering poses a serious security threat to a country’s economic sovereignty. What is its significance for India and what steps are required to be taken to control this menace? (UPSC Mains 2013)

Q1. What are the steps in the money laundering process?

Ans. The process involves three major steps i.e. placement, layering, and integration. Placement places illegitimate money into the legitimate financial system. Layering hides the source of the money through a series of transactions by making money non-traceable. Integration integrates the money back into the market as clean money.

Q2. What is black money?

Ans. When the income is not declared to evade taxes or hide its illegitimate origin, it is termed black money. Money Laundering is used as a means to convert black money into white money.

Q3. What Is an Example of Money Laundering? 

Ans. Cash earned illegally by drug smuggling may be laundered using highly cash-intensive businesses such as a restaurant. Here the illegal cash is mixed with legitimate cash before being deposited in a bank account.

Q4. What is the full form of CDD?

Ans. Customer due diligence (CDD) includes performing background checks and other screening on the customer at the time of onboarding to ensure that they are properly risk-assessed. CDD and Know Your Customer (KYC) initiatives are at the heart of Anti-Money Laundering measures in India.

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What Is Money Laundering and Is It Possible to Fight It Essay

Money laundering is a crime that can be explained by the theory of the crime of the powerful, and this is the focus of this research essay. By using specific examples of the most powerful individuals in influential positions and some major global corporations, this research essay shows that money laundering is indeed a crime of the powerful and almost untouchable.

According to the Internal Revenue Service (2015), money laundering refers to “the activities and financial transactions that are undertaken specifically to hide the true source of the money” (p. 1). Certainly and more often money involved in laundering is obtained from illegal activities and the main objective of laundering is to ‘clean’ the dirty money and give it a legitimate appearance in terms of source. It is a crime, which involves taking the proceeds and using other legal channels to move the money. Specifically, “a criminal or someone acting on a criminal’s behalf generates proceeds, in the form of money or property, as a result of committing a designated crime known as a Specified Unlawful Activity (SUA)” (Leff 2013, p. 4). The term money laundering can be attributed to the act of American mobster Al-Capone (1899-1947) more than 85 years ago (Shah 2015). It is believed that Al-Capone cleaned his dirty money using the laundry trade. This marked the major starting point for money laundering, and it is believed that more than $1 billion had been laundered using different forms of legal entities. These businesses were critical in disguising and hiding all the illegal proceeds from controversial sources such as “gambling, prostitution, bootlegging business and rackets involving law enforcement and political protection” (Shah 2015, p. 1).

Several internationally renowned leaders, including “Nigeria’s dictator Sani Abacha, former Filipino President Ferdinand Marcos, Panama’s Manuel Noriega, Taiwan’s Chen Shui-bian, former Ukrainian Premier Pavlo Lazarenko, former Guatemala President Alfonso Portillo and Indonesia’s ex-President Suharto” (Shah 2015, p. 1) among others have been convicted in money laundering cases within the last past decades. These were no ordinary citizens.

The above-mentioned powerful individuals (mainly government officials) were convicted of criminal offenses involving hiding and disguising huge sums of money, which they had obtained through dubious means.

When the mighty get involved in money laundering activities, it shows that crime, to some extent, is not only committed by petty thieves but also individuals of influence and international reputations. Their status in society gives such crimes a new dimension and thus the theory of crime of the powerful. The fact that watchdog agencies have been able to investigate and apprehend the most powerful individuals involved in money laundering demonstrates that such agencies are serious about combating organized crimes and holding cartels behind them liable for criminal conduct.

Today, the world football governing body, FIFA is fighting serious allegations of corruption while UEFA has been accused of money laundering and child trafficking. It is believed that proceeds from these acts are cleaned through legal entities. These powerful bodies and individuals use legal international transfer systems to launder or filter their dirty money. Allegations of corruption and money laundering in these football sports giant bodies are not new. Such cases have been reported since 2006 with specific concerns on questionable transfer deals associated with irregular money movement among various global network clubs.

Researchers in money laundering have often cited challenges such as interference that many police officers encounter when investigating political destabilization and massive corruption linked to powerful politicians and their cartels (Tupman & Zabyelina 2015). According to Tupuman and Zabyelina (2005), there is a mismatch between issues related to organized crimes and governments and response policies. More than 20 years ago, it was evident that many reforms in the police investigatory practices would expose several money laundering crimes committed by governments and people in governments or their powerful associates. Money laundering is a cross-border, organized crime supported with widespread linked networks that mainly include legal bodies. In some instances, they challenge investigators and the existing legal frameworks. Thus, they require extraterritorial police involvement and cooperation. However, organized crimes, to some extent, have always found their way in governments of the day. Such powerful cartels use their money to fund political campaigns and support initiatives in society to make even more profits legally.

At the center of money laundering are financial institutions. Many banks, including the giant HSBC and small ones and other financial institutions, auditing firms, and law firms among others have been linked to money laundering directly or indirectly. Banks offer the most reliable means of participating in the financial system. In this role, banks have the primary role and responsibility of ensuring that they safeguard and protect the system from criminal activities. Thus, banks should “detect and prevent criminal proceeds and terrorism funds from entering the financial system” (Day 2013). These roles and responsibilities are covered by various laws of nations and therefore must be applied and failures could lead to sanctions and subsequent prosecution. The law is a robust tool to curb money laundering within the banking system, and banks are expected to implement and adhere to it – an anti-money laundering policy. Financial institutions may also depict questionable conduct and thus might indicate possible ongoing criminal activities. In other words, they may demonstrate “willful conduct, which is systemic, pervasive, and results in significant amounts of criminal proceeds flowing into or through a financial system” (Day, 2013). With sufficient suspicion, such financial institutions should be investigated to ascertain if they have implemented and enforced AML policies and adhere to banking conducts and regulations.

Banks are powerful. This is the case of HSBC, and it reflects a new episode in money laundering. In the past few years, federal investigators established that HSBC was engaged in serious crimes, including “money laundering for terrorists and/or facilitating cleaning for drug cartels and moving dirty money for Saudi banks associated with terrorist organizations” (Greenwald 2012, p. 1). Based on the investigation, it was established that “senior bank officials were complicit in the illegal activity” (Greenwald 2012, p. 1). In fact, “an HSBC executive at one point argued that the bank should continue working with the Saudi Al Rajhi bank, which has supported Al Qaeda” (Greenwald 2012, p. 1).

It is noteworthy that powerless, ordinary folks would be prosecuted and imprisoned for similar crimes ruthlessly with maximum aggression possible. It has been shown that powerless, unknown, low-level workers have been persistently handed long sentences concerning jail terms for engaging in comparatively inconsequential money laundering activities, which are not threats to the public and on a negligible scale when compared to crimes HSBC and its senior executives had committed.

Such actions cannot apply to HSBC. In the past few years, the US Department of Justice made it clear that HSBC would not be “criminally prosecuted but outright claimed that the reason is that they are too important, too instrumental to subject them to such disruptions” (Greenwald 2012, p. 1). The US Department of Justice opted to shield HSBC from criminal sanction for the public good (Greenwald 2012, p. 1). This shows the role of the global banking giant and the position of the US authorities on money laundering. Instead, the authority fined HSBC $1.9 billion for handling dirty money from drug barons and rogue states.

Day (2013) argues that law enforcement officers have many tools to investigate and prosecute financial institutions or any other institutions that engage in money laundering.

The Bank Secrecy Act (BSA), for instance, has been used to pursue criminal charges against powerful individuals engaged in money laundering. Government can seize the assets and property of individuals engaged in money laundering, but they must investigate to determine the overall violation. Leff (2013) has however observed that asset forfeiture is usually misunderstood or ignored and as a result, powerful criminals can enjoy their dirty money even if convicted.

The age of information technology has even made money laundering more lucrative. Today, technology has ensured that money laundering is an online activity that can be executed through simple steps (Lisanawati 2010). Online transaction facilitates money transfer across national and international borders. There are technical legal issues associated with these emerging practices. Evidence such as electronic funds transfer is available to trace the movement of the money. In some instances, countries have not been able to formulate laws and regulations to control online money laundering. Emerging issues with technology and the transfer of money create even more challenges that are technical. Lisanawati (2010) argues the “increase in the amount of crime indicates the following series of techniques and mechanisms that had been detected about money laundering activity” (p. 163).

Investigating money laundering is not simple. Investigators must review many documents to follow trails of dirty money. These documents may include real estate records, assets, and banking details, which could show the movement of money in processes of laundering. During investigations, any records that can assist to trace the money are regarded as important. The investigation aims to trace all avenues that the money follows until it gains legitimate status. Investigations must discover all parties involved to prove criminal conduct. Schneider (2004) has shown that financial proceeds of organized criminal activities are often laundered through real estate in Canada.

When governments fail to prosecute powerful individuals or institutions engaged in criminal activities, it sets a bad precedent and reflects a dark day for the rule of the law, which many common citizens must face when caught. The case of HSBC shows that powerful banking giants cannot be prosecuted. They operate outside the law and/or above the rule of law. They cannot be punished even if caught red-handed engaged in money laundering and criminal offenses. On the contrary, common criminals who engage in such activities face several decades in jail. It sets a new precedent. That is, the most powerful are free to” engage in whatever crimes they want without any fear of the law” (Greenwald 2012, p. 1). The bank was left because it is too big and important and therefore its failure could have devastating effects on the public.

The most powerful actors in money laundering are fully immunized against the rule of law (Greenwald 2012). It seems powerful countries have accepted this fact. This is an anomaly and the opposite of what citizens expect from institutions and individuals that break the law. Money laundering is an organized transnational crime. It thrives on illicit activities across different countries. Most powerful criminals use various means to achieve their goals and they may opt to clean their money in states with weak governments. Such governments do not have the power to oppose them and as a result, many illegal activities apart from money laundering can thrive.

Money laundering hurts economies. It develops an underground, untaxed economy that has overall negative consequences on the growth of economies. Money laundering is a threat to the global financial system and any failure to prosecute individuals or institutions reflects a failure in the criminal justice. It is noted that”no doubt that the wrongdoing at HSBC was serious and pervasive, but the bank is simply too big, too powerful and too important to prosecute” (Greenwald 2012, p. 1).

Shah (2015) has provided a short account of only powerful persons and institutions with global reputations that have been associated with money laundering, which depicts that money laundering is generally a crime of the powerful. Few of these cases have been successfully prosecuted. The amount of money involved in these transactions is huge and therefore creates powerful individuals when they get proceeds. Banking and other financial institutions are most vulnerable because they do not enforce their anti-money laundering regulations. Consequently, they help powerful criminals meet their goals. In this case, they become part of the system for money laundering. The crime involves powerful people in governments and private businesses. In addition, investigating alleged money laundering schemes is not simple for investigative officers because of several trials that the money must go through to become clean.

Attempts to investigate money laundering by governments show that no criminal activities should go unpunished. In most instances, however, the nature of the investigation is complex and outcomes remain uncertain while powerful criminals continue to enjoy their proceeds.

Reference List

Day, M K 2013, ‘Prosecuting Financial Institutions and Title 31 Offenses’, United States Attorneys’ Bulletin, vol. 61, no. 5, pp. 19-28.

Greenwald, G 2012, ‘HSBC, too big to jail, is the new poster child for US two-tiered justice system’, The Guardian , Web.

Internal Revenue Service 2015, Overview – Money Laundering , Web.

Leff, D A 2013, ‘Money Laundering and Asset Forfeiture: Taking the Profit Out of Crime. United States Attorneys’ Bulletin, vol. 61, no. 5, pp. 4-11.

Lisanawati, G 2010, ‘Electronic Funds Transfer in Money Laundering Crime Needed in Response to Meeting of Technology and Crime in Indonesia’, International Journal of Cyber Society, vol. 3, no. 2, pp. 163-170.

Schneider, S 2004, ‘Organized crime, money laundering, and the real estate market in Canada’, Journal of Property Research, vol. 21, no. 2, pp. 99-118.

Shah, S 2015, Powerful people arrested for money laundering , Web.

Tupman, B & Zabyelina, Y G 2015, ‘Organised crime yesterday, today and tomorrow’, Journal of Money Laundering Control, vol. 18, no. 2.

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Article contents

Money laundering: history, regulations, and techniques.

• Benjámin Villányi Benjámin Villányi Department of Economics, Bar-Ilan University
• https://doi.org/10.1093/acrefore/9780190264079.013.708
• Published online: 26 April 2021

The goal of money laundering is to hide the tainted origin of criminal revenue. In this sense, it is a secondary crime that is always connected to another breach of law. These offenses can be different types of theft, trade in illicit goods, as well as other non-violent acts such as tax fraud, bribery, and, nowadays more relevantly, cybercrime. Depending on the size of the unlawful income, criminals may launder on their own or collaborate with other specialists. Especially in cases of large-scale tax evasion, grand corruption, transnational drug trafficking and similar highly organized forms of crime, laundering can entail very complex schemes performed in multiple countries. To describe and analyze this activity, a three-stage model is a widely accepted framework. The placement is the first step, when the illicit money is introduced into the financial system. The layering involves multiple transactions to remove the traces of these funds, while in the last stage criminals attempt to integrate the laundered money into the legal economy through various kinds of investments.

Beginning with the 1970s, increasing international cooperation aimed to counter this activity and set standards that were later adapted to national judicial systems. Different types of crime were the focus of such approaches, which also shaped the methods used. During the Prohibition era rum-running and illegal gambling raised the most concern, later the war on drugs, and from the early 2000s the war on terror, and more recently the cryptocurrencies are in focus of anti-money laundering. The financial extent of worldwide money laundering is difficult to estimate with reasonable precision, but it is comparable to national economies in magnitude. Money laundering can have a social as well as financial impact, especially when it helps corrupt politicians to stay in power, decreases tax morale to unfeasible depths or enables organized criminals to take over whole economic sectors and geographic areas.

• money laundering
• financial crime
• organized crime
• white collar crime
• tax evasion
• bulk cash smuggling
• international legal cooperation

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Money Laundering

Money laundering is the processing of criminal proceeds to disguise their illegal origin. This process is of critical importance, as it enables the criminal to enjoy these profits without jeopardizing their source.

Money laundering has been addressed in the UN Vienna 1988 Convention Article 3.1 describing Money Laundering as:  “the conversion or transfer of property, knowing that such property is derived from any offense(s), for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in such offense(s) to evade the legal consequences of his actions”.

In addition, the 2000  UNTOC Convention  contains provisions related to combatting money laundering in Articles 6 and 7, while Articles 12, 13 and 14 relate to confiscation of procced of crime. Furthermore, the 2003  UNCAC Convention  Articles 14, 23 and 24 also contains measures related to combating money laundering, with Article 31, and 51 to 59 (Chapter V) containing provisions for the freezing and confiscation of proceeds of crime.

Money laundering is a process which typically follows three stages to finally release laundered funds into the legal financial system.

3 Stages of Money Laundering

• Placement (i.e. moving the funds from direct association with the crime)
• Layering (i.e. disguising the trail to foil pursuit)
• Integration (i.e. making the money available to the criminal from what seem to be legitimate sources)

In reality money laundering cases may not have all three stages, some stages could be combined, or several stages repeat several times. For instance, if cash from drug sales is divided into small amounts and then deposited into banking accounts by “money mules” and afterwards transferred as payment for services to a shell company. In this case the placement and layering are done in one stage.

The estimated amount of money laundered globally in one year is 2 - 5% of global GDP, or $800 billion - $2 trillion in current US dollars. Due to the clandestine nature of money-laundering, it is however difficult to estimate the total amount of money that goes through the laundering cycle.

Terrorist Financing

Terrorists and terrorist organizations usually need to rely on money to sustain themselves and to carry out terrorist acts. Terrorist financing encompasses the means and methods used by terrorist organizations to finance activities that pose a threat to national and international security. Money provides terrorist organisations with the capacity to carry out terrorist activities, which can be derived from a wide variety of sources. Money can come from both legitimate sources (i.e. profits from businesses and charitable organizations) and criminal sources (i.e. Drug trade, weapon smuggling, kidnapping for ransom).

While a money laundering scheme is usually circular and the money eventually ends up with the person who generated it, a terrorist financing process is typically linear, and the money generated is used to propagate terrorist groups and activities.

It can be divided in following stages:

Proliferation Financing

Generally speaking, proliferation is the spread of nuclear, radiological, chemical or biological weapons; their means of delivery such as missiles, rockets and other unmanned systems, as well as related materials, such as weapons of mass destruction (WMD)-sensitive materials, equipment and technology. If appropriate safeguards are not established, maintained and enforced sensitive materials, technology, services and expertise can become accessible to individuals and entities seeking to use them in WMD programmes. They can also become accessible by terrorists who are pursuing chemical, biological, radiological or nuclear (CBRN) capabilities.

While there is no internationally agreed definition for proliferation financing yet, it can be described as providing financial services for the transfer and export of nuclear, chemical or biological weapons; their means of delivery and related materials. It involves the financing of trade in proliferation sensitive goods, but could also include other financial support to individuals or entities engaged in proliferation.

The financial elements of a WMD programme can be divided into three stages:

• Raising of funds
• Obscuring of funds
• Shipping of necessary items

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