MONEY LAUNDERING AND TERRORIST COMBATING: BASIC CONCEPTS

What is Money Laundering?

Money laundering is the process by which criminals transforms ill-gotten gains into funds that appear to be legitimate. It is the process whereby dirty money is laundered and made it to be appeared to be clean.

As an example, with regards to drug trafficking, money laundering would entail taking the proceeds from the street sale and depositing the funds into the financial system, then transferring the funds through multiple accounts or jurisdiction to disguise the source of money.

The purpose of money laundering is to hide the existence of the underlying crime that generated the tainted money so that it can be used in commerce.

Three stages of money laundering

There are generally thought to be three stages of money laundering:

            1. placement

            2. Layering

            3. Integration

1. Placement stage:

In the placement stage, the illegal funds are placed into the financial system.

A common example of this is when a drug trafficker deposits a large amount of cash or negotiable instruments into a bank account.

Cash is not always involved in the placement stage and is not the integral part of all money laundering. The placement stage is only a beginning of money laundering. The money laundering process is far from over at this point.

2. Layering stage

The layering stage involves the money launderer engaged in numerous transactions designed to make it difficult to trace the illicit funds back to their origin.

Examples of layering includes:

• Sending wire transfers between banks and countries.
• Converting deposited cash into monetary instruments such as traveler’s check
• Buying and selling high value stocks, goods or real estate with the funds.

These actions are meant to distance the money from its true source and make the funds appear to be involved in legitimate commerce for the purpose of confusion the audit trail.

3. Integration stage

The integration stage focuses on making it appear the illicit proceeds of crime are part of legitimate commerce through investigation in normal transactions.

Examples of integration includes investment in properties, business or other financial ventures to make it appear that the investments are from the personal wealth or legitimate business source.

Once the investment is made, it is very difficult to determine that the underlying funds are from illegal sources.

Consequences of Money Laundering

• Money laundering has clear ramifications to a country’s economic and social structure. In particular, it generates increased crimes.
• Money laundering has an adverse effect on country’s economic policies and stability of countries, in particular, small, emerging countries.
• Whenever a country is known as being vulnerable to money laundering- because of corruption, inadequate laws or/and tax enforcement- criminals will tend to recognize it as haven and will gravitate to it.
• Money laundering undermines the private sectors of the country. The illegal front companies involved in money laundering have an unfair competitive advantage because they are more focus on laundering funds than a legitimate profit.
• Financial institutions are also threatened by money laundering. Money laundering takes advantage of the institutions by subjecting it to undue risk.
• Further, a loss of tax revenue can occur when there is influx of money launderers  who usually do not pay taxes.