Examples of Money Laundering Techniques & How to Prevent it

Team FOCAL
January 29, 2024

Many huge businesses have fallen victim to money laundering. Even Danske Bank was once a victim of money laundering. The UN’s estimated amount of money laundered globally in one year is 2 - 5% of global GDP, or $800 billion. But how do these criminals launder their money? What are their tactics? And what are the consequent actions?

Throughout this article, we will explore different examples of money laundering techniques and explain how criminals use these techniques to launder their money. But let’s first define the basics: What is money laundering, and what are the three stages involved in money laundering?

What is Money Laundering?

Money laundering is the process of hiding illegally earned money so that it looks like it comes from a legal source. Criminals do this to use the money without getting caught for their illegal activities. It's a big problem because it supports drug dealers, terrorists, and other criminals, helping them grow. If not stopped, money laundering can harm a country's financial institutions.

What Are The Three Stages Involved In Money Laundering?

Money laundering involves three main stages:

  • First, there's "Placement," where illegally obtained money is put into the financial system. This could mean depositing cash into banks or buying assets.
  • Next is "Layering," where the goal is to hide the money's origin. Complex financial transactions are conducted to make it difficult for authorities to trace the money back to illegal activities. This includes moving funds between accounts or buying and selling assets.
  • Finally, there's "Integration," where the cleaned money is reintroduced into the economy, making it seem like it comes from a legal source. This could involve investing in businesses, buying high-value assets, or engaging in other activities to legitimize the money.
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Examples Of Widely Used Money Laundering Techniques

The provided examples are illustrative and not based on real cases. The following examples of money laundering are utilized to demonstrate how actual money launderers engage in their illicit activities. The following are among the most common examples of money laundering, but it's important to note that these do not represent an exhaustive list of techniques employed by criminals.

In the first two examples of money laundering, we will thoroughly explain the technique of types of money laundering. However, since some steps are repeated in every technique, we will present the remaining examples of money laundering without detailed steps.

1. Money Laundering Through Real-Estate

Let’s introduce you to Omar. Omar is a clever operator with a taste for luxury and a tendency to hide his illegal gains through real estate. After gaining a substantial amount of illegal money, Omar needs to launder the funds to be able to use them for personal purposes. Omar finds an apartment building in the city. This building is valued at $1 million. So, he now begins the process of laundering the money as follows:

  1. Setting Up the Scheme: Omar crafts a make-believe company, also known as a shell company. Let’s say the company is named Lux Holdings LLC. You might be wondering why a shell company. Because he wants it to play the buyer in this scheme. It is worth noting that Lux Holdings doesn't really do any proper business, but it's perfect for Omar's money-hiding plan.
  1. Acquiring the Property: Now it is time to make the move. Lux Holdings LLC takes out a loan to buy the building. This step is important to Omar because the loan adds a layer of complexity, which makes it tricky for authorities to trace the real source of the funds.
  1. Creating Artificial Value: After sealing the deal, Omar decides to boost the property's price tag and inflate the value. Lux Holdings LLC sells the apartment building to another shell company for a pumped-up price of $1.5 million.
  1. Déjà Vu of Deception: To make it more difficult to be traced, Omar repeats this act several times. More and more fake shell companies get involved, and transactions create a messy web of property transfers that's hard to untangle.
  1. Hiding the Money Trail: In each deal, Omar makes more extra money. The excess funds from each transaction are strategically moved between accounts associated with different shell companies and jurisdictions.
  1. Legitimizing Illicit Funds: Omar's last step is using the money that looks legal from these property deals to invest in other assets or businesses, giving the appearance of lawful financial activities.

2. Trade-Based Money Laundering

In this example of money laundering, Maya is a criminal who uses trade-based money laundering. Maya decides to use a business that deals with electronics for her scheme. Here's how Maya goes about the process:

  1. Setting Up the Operation: Maya establishes a seemingly legitimate import-export business. Let’s say she calls it TechTraders Inc. This business specializes in electronic goods.
  1. Faking the Transactions: TechTraders Inc. buys electronic goods at the regular market price but generates fake invoices showing a much higher value. Maya uses these inflated invoices for customs declarations and payments.
  1. Inflating the Value: After the purchase, TechTraders Inc. sells the electronic goods to another shell company, GlobalTech Solutions, at an exaggerated price, for example, double the actual market value.
  1. Doing it Again: For Maya to hide the origin of the money even more, she repeats this process multiple times. 
  1. Moving the Extra Money: Maya moves the excess funds from each transaction between accounts associated with different shell companies and international jurisdictions. Maya takes advantage of the various AML regulations between different countries, and that’s why she uses international accounts. 
  1. Camouflaging the Dirty Money: In the end, Maya uses the money that looks legal from these deals to buy other things or start other businesses, making it seem like everything is lawful.

3. Money Laundering Through Placement

In this money laundering example, Sarah, a money launderer, operates a chain of cash-intensive businesses, including a laundromat. On a typical day, the laundromat legitimately collects $5,000 in cash from customers. To introduce illicit funds into the legitimate proceeds, Sarah adds an additional $5,000 – money obtained from illegal activities. The laundromat then falsely reports a daily cash intake of $10,000, allowing the illicit funds to be deposited in the business's bank account, making it appear as ordinary business proceeds.

4. Money Laundering Through Layering

Rami, a money launderer, conducts multiple transactions to layer the origin of illicit funds. He transfers $50,000 from one bank account to another, converts it into traveler's checks, moves the funds through international wire transfers, and finally invests the money in a series of high-risk stocks. 

5. Money Laundering Through Integration

Nadia owns a chain of seemingly legitimate nail salons. She invests illicit funds by purchasing high-end beauty products and equipment for her salons. She then integrates the illicit funds into the salon's operational expenses and assets. 

6. Money Laundering Through Smurfing

In this smurfing in money laundering example, Michael breaks down a large sum of illicit cash into smaller, less suspicious amounts. He recruits individuals (AKA smurfs) to make multiple small deposits into different bank accounts, each staying below the reporting threshold. He launders the money by moving the illicit funds through the banking system.

7. Money Laundering Through Cryptocurrencies

In this money laundering example, David uses digital currencies to transfer and conceal illicit funds by converting them into privacy-focused cryptocurrencies. He exploits the anonymity nature of using cryptocurrency to launder his money.

8. Money Laundering Through Offshore Accounts

Ahmad opens bank accounts in a jurisdiction with strict bank secrecy laws. He funnels illicit funds through these offshore accounts. Using offshore jurisdictions adds an additional layer of complexity to the money laundering scheme. Offshore accounts are one common type of money laundering. 

Real-life Examples of Money Laundering

HSBC, the largest bank in Europe, faced a $1.9 billion fine for facilitating drug cartels in laundering hundreds of millions. Investigations revealed the bank's lax regulations allowed it to serve as the primary money laundering channel for drug cartels in Mexico and Colombia, funneling around $881 million in drug money.

The Bank of Credit and Commerce International (BCCI) was engaged in money laundering, fraud, and arms trading. BCCI's illicit activities led to its collapse, resulting in a loss of approximately $20 billion in value.

Wachovia was implicated in a money laundering operation conducted by Mexican drug gangs. The bank settled the case by paying $110 million in asset forfeiture, with estimates suggesting over $350 billion was laundered through Wachovia.

Liberty Reserve's founder, Arthur Budovsky, was sentenced to 20 years for conducting a massive money-laundering operation involving credit card theft, Ponzi schemes, and hacking. Before closure, Liberty Reserve handled transactions totaling $8 billion.

Historical Figures and Money Laundering

1. Al Capone

Al Capone's legal woes began in 1929 when he faced a federal grand jury in Chicago for contempt of court. Arrested on the spot, he posted bond but was soon entangled in another arrest in Philadelphia for carrying concealed deadly weapons, leading to a swift one-year sentence.

Capone's legal saga continued in 1930 when he was found guilty of contempt of court, resulting in a six-month sentence in Cook County Jail. Simultaneously, the U.S. Treasury Department gathered evidence on tax evasion charges, implicating Capone and other mobsters.

In 1931, Capone took a dramatic turn by pleading guilty to tax evasion and prohibition charges, initially claiming a deal for a two-and-a-half-year sentence. However, the presiding judge rejected any binding agreement. Consequently, Capone changed his plea to not guilty.

The legal climax occurred on October 18, 1931, when Capone was convicted of tax evasion and sentenced to eleven years in federal prison. Fines, court costs, and back taxes totaling $215,000 added to the hefty penalty. Serving his time at various institutions, including Alcatraz, Capone's legal battles showcased the intricate web of charges he faced.

2. Meyer Lansky

Meyer Lansky, spanning from 1902 to 1983, played a pivotal role in diverse organized criminal activities and collaborated with notorious figures from the 1920s to the 1970s. His primary focus was on gambling enterprises, contributing significantly to the development of Las Vegas and casino projects in pre-revolutionary Cuba. 

In 1972, Lansky faced indictment for alleged involvement in skimming millions from a Vegas casino. However, due to his declining health, the charges against Lansky were dismissed in consideration of his inability to stand trial. The released files cover the period from 1950 to 1978.

3. Pablo Escobar 

Pablo Escobar, a skilled money launderer, employed significant amounts of cash to either bribe or intimidate PEPs (Politically Exposed Persons) in facilitating his money laundering endeavors. At the peak of his criminal career, his wealth was estimated to be around $9 billion.

How Do Financial Institutions Prevent Money Laundering?

Financial institutions employ measures to prevent and detect money laundering:

Firstly, through Customer Due Diligence, they carefully check and verify the identity of their customers. This helps ensure that the individuals or businesses involved are legitimate.

Secondly, by Reporting Suspicious Transactions, financial institutions actively monitor transactions and report any that seem suspicious or unusual. This early detection helps authorities investigate potentially illicit activities.

Thirdly, by Maintaining Records, financial institutions keep detailed records of financial transactions. This documentation assists in tracking and analyzing the flow of money, making it harder for criminals to disguise their activities.

These practices collectively form a strong defense against money laundering, safeguarding the integrity of financial systems.

Conclusion

In conclusion, as we persist in combating this severe financial crime, it remains crucial for businesses and individuals to stay attentive, adapt to evolving tactics, and work together to uphold the integrity of the global financial system.

In the aforementioned examples of money laundering, we can see the role advanced solutions like FOCAL AML Compliance Suite play in helping businesses ensure KYC compliance through document verification and real-time identity checks. Our automated AML screening and ongoing monitoring services, encompassing global watchlist checks, PEP and sanctions screening, and adverse media checks, empower and enable businesses to safeguard against money laundering while maintaining due diligence.

Check out Aseel’s success stories and learn how FOCAL enhanced Aseel's compliance practices and drove the company's growth by an astonishing 250%

FAQs

Q1. What are some ways money laundering happens in banks?

Money laundering in banks can occur through various methods, such as shell companies, offshore accounts, or using complex transactions to conceal the illicit origin of funds.

Q2. How much money is considered money laundering?

The amount considered as money laundering varies, but it generally involves large sums, often exceeding certain thresholds that financial institutions monitor.

Q3. Can we spot money laundering when someone signs up for a service, and what signs do we look for?

Yes, signs of money laundering can be detected during customer onboarding. Indicators include unusual transaction patterns, inconsistent financial information, or the use of false documents.

Q4. What do global organizations like the Financial Action Task Force (FATF) do to stop money laundering?

Organizations like FATF play a crucial role in combating money laundering by setting international standards, conducting assessments, and promoting cooperation among countries to strengthen anti-money laundering measures globally.

Q5. What are examples of money laundering?

Examples include shell companies, smurfing, trade manipulation, real estate deals, and cryptocurrency use.

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