Money laundering is the process of disguising the proceeds of crime and integrating it into the legitimate financial system. Before proceeds of crime are laundered, it is problematic for criminals to use the illicit money because they cannot explain where it came from and it is easier to trace it back to the crime. After being laundered, it becomes difficult to distinguish money from legitimate financial resources, and the funds can be used by criminals without detection.
How Does Money Laundering Work?
There are countless ways to launder money. Generally, money laundering can be broken down into three stages:
- Placement – the initial entry of illicit money into the financial system
- Layering – the process of separating the funds from their source, often using anonymous shell companies
- Integration – the money is returned to the criminal from legitimate-looking source
Where Do Banks Come In?
Because laundering money almost always requires it to pass through one or more banks, the primary strategy against it is to require banks to perform certain checks and monitor transactions to make sure their accounts are not being used for money laundering. In some cases, they may have to file a suspicious activity report (SAR) with law enforcement following a high-risk transaction. In extreme cases, they might refuse to do business with a suspicious client.
In recent years, there have been a number of high-profile Western bank scandals over money laundering. Most notably, HSBC admitted to violating the Bank Secrecy Act by failing to monitor over $200 trillion in wire transactions between its Mexico and U.S. subsidiaries, among other crimes. $881 million in drug money from the Sinaloa and Norte de Valle drug cartels were found to have been moved through HSBC-Mexico’s accounts to HSBC-USA via the unmonitored wire transactions.
What about Trade-Based Money Laundering?
Sophisticated criminal operations often use trade-based money laundering, which can also involve trade misinvoicing, to move large quantities of illicit money between countries. By co-mingling the proceeds of crime with the proceeds of legitimate business, launderers are able to disguise the ultimate source of the illicit money. For example, in the Lebanese-Canadian Bank case, an international drug money laundering operation with ties to Hezbollah commingled the revenues from used car sales in Europe with cocaine sales in Africa.
What Does GFI Recommend We Do about Money Laundering?
Many of GFI’s policy recommendations, such as eliminating anonymous shell companies and tackling trade misinvoicing, will have the effect of making it more difficult to launder money, which means they make it more difficult for criminals to actually use their money without being caught. In addition to those, GFI has several other policy recommendations to address money laundering:
- Make all felonies predicate offenses for money laundering. In many countries, certain key crimes such as tax evasion cannot be the basis for a money laundering charge.
- Countries should comply with all FATF standards. According to a 2013 OECD report, many FATF countries are poorly compliant on key standards designed to prevent money laundering.
- Better enforce existing criminal laws. Bankers who knowingly commit crimes and allow bank accounts to be used to shelter criminal money should be held personally accountable. To date, enforcement has generally focused on moderate-sized fines and promises by banks to improve compliance. No bank should be “too big to jail.”