Today, when globalisation has reached its pinnacle, vast sums of money flow across borders. Most of the money that flows across borders is earned from legitimate sources. However, a big part of that money is illegitimate money acquired from foul practices and illegal businesses. The illegitimate money needs to be cleaned so that it can be integrated with legitimate money. This is what we call Money Laundering. In this blog, we will discuss what money laundering is and how it works on such a massive scale.
A Thorough Understanding Of Money Laundering?
Money laundering is the process of converting illegitimate money earned from crimes, frauds, scams, and other things into seemingly legitimate money. Criminals convert this money and make its origin untraceable, making it difficult for law enforcement agencies to track and seize them. The Financial Action Task Force, an international organisation that tracks money earned from illegitimate activity and terrorism funding, has estimated that around 2-5% of the global GDP is linked to some sort of money laundering activity. The 2-5% accounts for almost $800 billion to $2 trillion. This amount is greater than even the GDP of some nations.
How Is Money Laundering Done?
Money laundering is a complex process that requires money to be stored and placed at various checkpoints to ensure that the money stays untraceable. Here are the stages of money laundering.
Placement
The first step to successfully laundering money is depositing it at a single or various financial institutions. This can include smurfing, the process of dissecting a large chunk of cash into various smaller deposits. Large sums can also be used for different things like casinos, buying jewellery, a sports car, or even better, real estate. This way, it becomes very hard to identify the dirty money.
Layering
The next step in money laundering is layering. In this stage, the money is transferred to various accounts through multiple transactions which makes tracing the money very hard. This also includes sending fast amounts of money in small transactions to offshore or shell companies. Due to small deposits, this money is integrated into the financials of the company it is being sent to and becomes legitimate in the process. People might also invest money in tax havens like Monaco.
Integration
This is the last step of laundering money. Once the money is transferred into various accounts as small deposits, it becomes distant from its illegitimate sources. After it has become distant, it is re-introduced into the owner’s financial system. This clean money is taxable and can be used to purchase various things or invest in multiple markets without any suspicion.
How Can We Fight Money Laundering?
Governments all around the world are looking for ways to identify money laundering by employing state-of-the-art technologies. Some of the ways governments are trying to stop money laundering are:
Synergy Between Governments
Money laundering has become a global problem, and governments of various countries are working together to fight it. The Financial Action Task Force has introduced various global standards for anti-money laundering and combatting terrorist financing. Governments worldwide share various financial information to track money.
Technology
AI and machine learning are boons for fighting money laundering. Governments and agencies are trying to incorporate AI and machine learning to identify patterns and suspicious transactions and detect wrongdoings. Moreover, the improvement in AI technology can also improve the transparency and traceability of blockchain technology, which has become the new mode of laundering money for the elites.
Navigating Challenges For The Future
Money Laundering remains a global problem, and financial institutions and governments are working extensively to eliminate it. However, with the help of international cooperation, new and stricter regulations, and the adoption of new emerging technologies, authorities are better equipped to combat Money Laundering. By understanding the methods used by money launderers and identifying transactions that indicate suspicious activity, the cases of money laundering can be decreased, and we can all expect a safer financial landscape.
