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What is Money Laundering?

Money laundering is a process that allows criminals to transfer or unload money while hiding details and information, usually because they’re getting the money through illegal situations. Money laundering disguises where the money has come from, who it belongs to, where it’s come from or where it’s going.

Money laundering is a type of financial crime that deliberately sets out to bring in and circulate money that’s often been generated illegally into financial and economic streams, like banks. From here, criminals can then legally use the money to buy goods and services. In the context of money laundering, ‘dirty' money refers to cash made illegally and ‘clean’ money is when it is cleared to be used freely. Money laundering deceives the system to make dirty money appear as clean money.

As we’ll go on to explore, money laundering has major negative effects on society. One of the main problems with it is that once clean, this money can go on to continue funding the criminal activity that makes the dirty money and makes the impact increasingly worse. Criminals launder money because otherwise, they would have to keep their large amounts of accumulated cash, which would give them much less freedom to make purchases.

In order to protect the economy and society from money laundering and reduce these illegal activities, anti-money laundering (AML) protocols require firms to follow particular controls. If you're a business working in a relevant market, you may be affected by these requirements. Learning about what money laundering is, how it’s bad for the economy and society, and the different types and the steps authorities take to prevent it can help you understand why it’s important to maintain your own internal controls like customer due diligence (CDD) and screening sanctions lists.

What Does Money Laundering Mean For You?

Money laundering alone costs the UK over £100 billion per year, with many different factors that add to this cost. Instead of this money being used to fund education, healthcare and infrastructure, it’s used for criminals to support their crimes as well as costing the government extra resources to stop it.

While there are usually distinct stages of money laundering, there are many different ways that money laundering can occur and many sectors it can happen within. This makes it an ongoing challenge for authorities to combat the issue on a large scale, and as a result, bodies such as the FCA and regulations like AML ask financial institutions to maintain standards, policies and checks to prove they are preventing money laundering.

Criminals involved in these activities usually have to launder money because they can’t make the necessary deals that keep them running through cash. Cash is much more dangerous and inefficient, so if they can turn this cash into clean money within a legitimate financial system, they can protect themselves while growing their illegal activities. This is why financial institutions and banks are a target for money launderers and why the industry is heavily regulated to minimise its presence.

AML procedures help businesses reduce the risk of working with money launderers and protect themselves as well as society. For financial institutions, these involve Know Your Customer (KYC) processes that help you identify and verify potential customers and determine their level of risk. These actions help to highlight high-risk entities such as Politically Exposed People (PEP) and financial criminals.

Who Might Launder Money?

Unfortunately, money laundering schemes can benefit different forms of crimes, where criminals can be from white-collar, corporate backgrounds as well as street level. It can be performed by one perpetrator taking advantage of the whole business, or a group of perpetrators, who collaborate to launder money. If these criminals have been caught by the government before, they should be given sanctions and appear on a sanctions list. The process often comes from the following illegal activities.

Drug Traffickers

Drug trafficking is illegal so all of their buying and selling operates underground and out of sight of financial systems and tax authorities. It’s also cash-focused and operates across borders, which means that they can launder money to turn their cash into a more usable form of finance while hiding where it has come from. It also enables the leaders of the drug trafficking regime to safely access their money.

Human Traffickers

As part of another illegal industry, human traffickers use money laundering to turn funds they generate from an inhumane activity into safe and accessible money. Human trafficking is a global and cash-focused industry, which means that it provides criminals with the opportunity to use countries with more relaxed enforcement to legitimise their money. The same is true for weapon trafficking, which is again an international, cash-based and illegal market.

Terrorist Financing

Money is required for terrorists to perform their crimes and due to the illegal nature of terrorism, has to be funded privately. Terrorist financing is most often seen in cases linked to a wider organisation or group, because more money is needed and it usually has to travel internationally. Law enforcement often finds electronic money transfers, physical cash smuggling and foreign credit card purchases related to a terrorist organisation.

White-Collar Professionals

White-collar crimes are often focused on disguise and exploitation rather than violence, but even without this threat, they perform an illegal act for some kind of personal gain. Most of the time, this gain is financial, where white-collar perpetrators launder money to gain or avoid losing money, services or property.

While the source of money might not necessarily be illegal as the other types mentioned are, they avoid the financial and tax systems in the same way. This type of financial crime has negative economic consequences and often involves corruption, embezzlement and investment scams.

Why is Money Laundering Bad?

When criminals can turn their dirty cash into clean money, it helps financial crime go undetected: while giving them more freedom to commit illegal financial transactions. Beyond this, it has a sizable negative impact on the economy and society.

Effects on the Economy

As laundered money is unregistered, governments can’t apply a tax to it. This means that criminals aren’t paying taxes, which lowers the overall revenue that governments and economies can generate to support their society. Businesses laundering money and performing these illegal and harmful activities have an advantage because by avoiding tax, they have more money to use as capital.

What's more, if businesses exist purely to launder money, then their disguised business attempts, such as buying and selling products are unimportant to them. This means they can offer products and services at a very low price, often much lower than the cost of wholesale and production which puts legal and legitimate competitors' businesses at a major disadvantage as they simply cannot compete with prices lower than the amount they buy their products. This then takes away from the revenue of legal businesses and further reduces the tax revenue of the economy.

Effects on Society

Sadly, in many parts of the world, anti money laundering is not at the top of the priority list. So when corruption reduces the money that a government can spend, it’s likely that ventures to prevent it can't be funded and the cycle only strengthens. In an economy working hard to provide healthcare, education and infrastructure where it's needed most, government resources and funds end up being spent on efforts to prevent financial crime.