Money Laundering - How? Why? Oh my!

Recently, I did a short online tutorial on money laundering and found it really interesting, so I decided this topic has to go down in my blog. What is money laundering? It is a way by which illegal sources of money are disguised to make them look like they are from legal sources.

Illegal sources of money could refer to funds from drug trafficking and smuggling, fraud, extortion, corruption or prostitution rings. Significant profits are made through such criminal activities and fraudsters have to find a way to enjoy this money without attracting any attention to the activity or people involved. Money laundering happens in almost every country in the world but it is difficult  to give an exact figure of how much money is being laundered every year. In 1996 though, IMF estimated that 2-5% of the world's GDP, which ranges between USD 590 billion and USD 1.5 trillion is being laundered every year.

So the next question will be, 'How is money laundered'? Money laundering occurs in 3 steps, which by order are, 'Placement', 'Layering' and 'Integration'. In the placement stage, the launderer introduces the illegal money into the financial system by probably breaking up a huge sum of money into smaller amounts and depositing them into bank accounts.

Next is the layering stage in which the money is converted into financial instruments or wired through various accounts from banks all over the world. In this phase, complex financial transactions are made to disguise the illegal source of the money.

Once these two stages are successfully completed, the money launderer then proceeds to the integration stage where money re-enters the legitimate economy. This is where the launderer uses the money for actual intentions such as investing in luxury assets or business ventures.

Banking and financial services industry take money laundering very seriously and are taking several concrete steps to uncover and eradicate money laundering as it is a matter of integrity, which is the most important value for a financial institution. If a financial institution is found to have links or complicity with criminals and their activites, the impacts are disastrous such as loss of reputation, faith of other financial intermeidiaries, regulatory authorities and customers, and huge fines. For example, Wachovia was found to have been involved in the handling of illicit funds of $378.4 billion dollars between 2004-2007 for Mexican-currency exchange houses.

There are several organizations such as the United Nations, the World Bank and International Monetary Fund or divisions in organizations trying to get an edge over the problem of money laundering. However, given the scale on which it happens and the multi layers of complex activites that take place in the process, several criminals get away with successful money. An international organization, The Financial Action Task Force(FATF) has been set up to combat money laundering and terrorist financing. As of 2011, FATF has 34 member states and 2 regional organizations who are encouraged not to deal with 'uncooperative countries' on financial matters. FATF's uncooperative list has gone from 15 countries in 2000 to none in 2009. This is significant progress in the attempt to control money laundering. Only global awareness and cooperation will contribute to the abolition of money laundering.