Money Laundering: How Does it Work, Common Methods, Biggest Cases in History, and Precautions against It

Harshit Verma Harshit Verma
Jan 11, 2022 16 min read
Money Laundering: How Does it Work, Common Methods, Biggest Cases in History, and Precautions against It

Money is the basic set of resources everyone needs. While there are two methods to make money, one is through hard, slow and honest work and the other is by duping people fast, people tend to choose the second. In this world where everyone wants to afford things fast it has been increasingly seen that people are trying to find shortcuts to everything. This, of course, is not the right thing to do. You cannot get rich tomorrow, by any means.

It is true that you need money to be stable and all. People all over the world try hard to amass as much as they will be needing in future. However, some notorious humans try to dupe the rules and regulations that are made to safeguard the integrity of the nation. They try to avoid taxes illegally, try to amass much money that is either illegally earned or hidden and transported by any means. This article talks about that issue, which has money as the epicentre.

The conflict of money laundering in this world. We will first develop a little understanding of what money laundering is and then we will discuss what has been the cases that had the largest impact on the world. This article will end with precautionary measures. Read on to learn something about the loophole called money laundering.

What is Money Laundering?
How Does Money Laundering Work?
Common Methods of Money Laundering Used by Criminals
The Biggest Money Laundering Cases in History
What are the Effects of Money Laundering?
What are the Precautions for Money Laundering?
AML (Anti-money laundering) Initiatives
FAQ

What is Money Laundering?

Money laundering can be defined as some window dressing that is done to the โ€˜moneyโ€™, to make it appear as if it was legitimately earned. It is to ensure that illegally earned money (Or even black money) looks white and pure and looks legitimately earned. It is done with some tweaks to prevent any issues that might happen in any future transactions. Thus, Money laundering makes the illegally acquired money look as if it has been obtained genuinely.

This method can be used for more than one purpose like it can be used to change or hide the nature, location, source, situation and even the movement of criminal activity. It makes the proceeds that are earned from illegal activities look legitimate and legal.

In simpler terms, laundering is the process by which hides or converts illegally earned income. It helps criminals get away with getting their money a clean and clear image. The process of money laundering is a huge criminal behind all that is wrong in the world. It provides a safe and secure passage for all the proceeds that one can earn with bad works. Any activity that is illegal, wrong and criminal is effectively hidden by the means of money laundering.

It can be drug trafficking, or even as much heinous as terrorist funding, laundering makes it look legitimate and legal. Thus, the process of money laundering is something that converts the money (from any criminal activity) to money from a legitimate source, thereby maintaining the credibility of the money earned.

Laundering is a serious crime and is done in probably every country in the world. Not only is it illegal but it is also immoral. It is such a serious problem that it encompasses both the white-collar and the street-level criminals. The roots of this business run deep in many parts of the world.

How Does Money Laundering Work?

The process of money laundering is super important for tricksters and all the criminal organisations all over the world. It is their only way on which they can rely to get their illegal money in a legitimate manner.

They are so reliant on this method that they are even ready to pay a lot of money in return for laundering money for them. This is how much they are ready to launder their illegal money. This process is not often easy, it has to be done with precise work of hands.

Anything wrong here or there can demolish the whole organisation. To avoid any errors and issues, there are different phases through which it happens. There can be many illegal ways to launder money but some points in the process are always the same and constant. We here will discuss those three common touchpoints which are common in most money laundering cases -

There are three predictive points and those are -

Placement

This is mostly the first step in a money laundering process. The first is always the entry of illegal money into the system. As soon as illegal money is placed in a tight spot, it becomes necessary to layer it with a protective genuine financial system or to cover them in legal ways.

Layering

Layering refers to the layering that is needed to cover the fingerprints on the notes, not exactly but similarly to a criminal investigation. Layering is layering the money with various transactions and accounting or bookkeeping tricks. Any accounting loophole that can hide the source of the unaccounted money, is useful here. Not to mention that it is done by experts having good knowledge and bad intentions.

Integration

The cash that is laundered through layering it with multiple accounts and transactions are now withdrawn. It is withdrawn in order to return the proceeds to the original criminal that will look like legitimately earned money. This is the integration of money in one place.

All these three methods are the most commonly seen and mostly seen/abbreviated steps in the money laundering process. But it is here to note that there can be more steps than just these three. There can be more layers and more routes by which money is integrated.

Common Methods of Money Laundering Used by Criminals

Exports

There can be Exports that are faked multiple times, in fact, it is one of the common ways criminals do this. A fake export can look like the money is legitimate and is travelling to some other country or province in some official manner. It was very frequently used in Europe in recent years.

Stock Markets

Another unsaid method is via investing the money out. Stock Markets are the major regulator of money supply and the money can be hidden behind this big money machine. Anyone can purchase shares, stakes to bonds from stock market brokers in any part of the world. Noting that the Stock market has a ubiquitous approach in all its workings, more money can be transported and invested in these money markets. Stock markets capitalise on the transaction and make it look legitimate.

Expensive Paintings

If you are a Hollywood fan, then this method would be quite familiar to you. It is evident in movies that gangsters buy some expensive art to cover the money that they have. Thus, Antiques and paintings that are ridiculously expensive can be used too. Hide money or even turn the illegal black money into legitimate white money.

Electronic Means

Then comes the smart modern way of pulling out money laundering. That is, by Electronic means. It has become increasingly easy to transfer money to each otherโ€™s wallets. This has not to mention also eased the hard work of money launderers. Now you can just transfer money with a click of a button or a few taps. Electronic means provides a wonderful and magical opportunity to exchange money without revealing its true identity or form.

If you are a modern thief, this trick would come in really handy. Criminals can convert real money to untraceable digital money, which is super hard to trace. That illegal or black money can also be stored in a cloud of games and rewards. It can be distributed through auctions and sales through gambling websites.

Cryptocurrency

If you move ahead in technology and money transactions, you will hit a block. That block is no other than the blockchain. As the world of cryptocurrency rises, so do the concerns of money management all over the world. It is forecasted that it will become extremely easy to get away with black money in the form of cryptocurrencies. What can be worse? They are not even regulated with one organisation, it is power in the hands of people and what if they fail to manage the power. Although there are proper ledgers at place working overnight to record all the transactions, it still can be hard to track individuals involved in the theft.


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The Biggest Money Laundering Cases in History

Up till now, we have all learnt that money laundering is a complex process and can include many forms and types. This calls for some real study on scams that the world has witnessed already. Let us now discuss which tricksters (read criminals) were able to dupe the national security laws of money laundering. This is the history that saw some of the biggest cases of money laundering in the world -

HSBC

HSBC was one of the top firms that showed signs of money laundering. The organisation was tried by the senate. It came under the limelight in the year 2012 when the United States Senate triggered a search in its operations.

On further investigations, it was found that they were breaking AML laws. AML here is Anti-money laundering laws. It was found that the entity HSBC was found to be guilty of the following frauds and illegal activities.

Firstly, they offered banking services to clients hailing from Saudi Arabia, even after knowing the fact that the clients had contacts with terrorists. HSBC sanctioned money transactions from Iran and North Korea without raising any sort of ticket that signifies any issue with those transactions.

HSBC let a subsidy of them having relations with a Mexican counterpart go, even when that counterpart had ties with drug trafficking. HSBC ignored all the risky factors and let the relationship with such a threat of an organisation go without any issue.

The reports say that an estimate of about 881 million Dollars was laundered in summation. This was a huge amount and the entity was banned from any workings for the foreseeable future. HSBC was a reminder that every entity has to be regulated so that it runs according to the lines seated by AML laws. HSBC was fined $1.9 billion dollars for laundering money.

BCCI (Bank of Credit and Commerce International)

The name BCCI is an acronym for Bank of Credit and Commerce International. It is a name now long forgotten. It was however not the same in history. In the mid 19s, BCCI was the seventh-largest private bank in the world. ย In the mid-1980s the bank was found to be involved in some really serious business of money laundering and even drug smuggling.

BCCI was found with sums of money that were in billions in criminal profits. The name that is forgotten now is estimated to have hidden and laundered a sum of almost 23 billion dollars. This much money was laundered and the bank made a name for itself in the black market of thieves and money launderers.

It is reported that the bank was too picky of its clients, it had relations with some really big names in the industry. BCCI has been reported with relations with Saddam Hussain (Former military dictator of Panama Manuel Noriega) and Palestinian terrorist leader Abu Nidal. By 1990 BCCI was entangled in its own corporate structure and ran into obscurity. That was when the time came for its investigation.

The US Senate report says that Price Waterhouse started an investigation on this matter. The credit and commerce bank shut down its operations even before the investigations were completed.

Even after an early shutdown, the bank owed hefty amounts of fines due to the AML (Anti-money laundering) laws it broke. It was also reported that the CIA (Central Intelligence Agency) user accounts listed on the BCCI, to fund Afghan Mujahideen during their war with Russia (The soviet union) in the 1980s. On the land of money laundering accusations, the Bank of Credit and Commerce transferred about 20 billion dollars in money laundering

Nauru

Nauru Island
Nauru Island

Nauru is the name of a tiny pacific island. It is about 1100 miles away from the coast of New Guinea. The place might be small and dingy but it is quite an epicentre of money laundering. This small land has been the go-to place for the highest-profile of criminals and gangsters. In the late 1990s, Russian criminal gang lords laundered about 70 billion dollars through banks that were registered in Nauru. Those banks were mostly called โ€˜Shellโ€™ banks.

Shell banks are the banks that exist only on paper and nowhere else in real life. They cannot be traced on a map, nor do they have any physical office/branch in real life. Nauru even allowed those banks to record transactions without naming the people behind those transactions. This was done to incentivise more and more transactions. The small land of the Nauru coast of Australia turned into a shell corporation heaven for the Russian mafia. The place is now only known for being a money-laundering favourable place after being a natural resource hotspot.

After the US treasury found out about the illegal money business going on in Nauru, they imposed heavy sanctions on that land. Only to surprise, it was found that the penalties were even more than the penalties imposed on Iran (Another laundering place).

With factors like those of Shell Banks, and recording money transactions without account names, cooked all this hassle. All of the factors above made Nauru a safe place for money launderers. The island has been blacklisted and all the shell banks that were once there, are deregistered on the spot. Since 2001, Nauru has taken steps to clean up its act and has accepted financial aid from Australia.

Standard Chartered

Standard Chartered is one of the biggest banks in the world. This humongous financial institution was accused of helping out the Iranian government to launder an amount of about 265 billion dollars. This huge amount was reported to be laundered as there were not enough/sufficient checks at places. This lack of governance of checks and looks made this big money to be transported illegally.

When it was investigated and regulated by concerned authorities, the organisation paid about 350 million dollars in fines in 2012. Standard Chartered also paid 350 million dollars again in fines and settlements in 2014 for not improving their AML (Anti-money laundering) face and compliance with the assigned rules. After that, they improved their AML sector within the organisation and since then, it has been on a check.

Pablo Escobar

All the Pablo fans out there, do you know how big that criminal was. Pablo Escobar, the most successful criminal ever known to known history. He was so rich and had money in such amounts that it is said once, he spent 1000 dollars in a consecutive week on rubber bands which were used to hold up the bundles of cash that he had. Not to mention, his business was drugging and although the business was illegal, he was a master of the trade.

He was so good at the drugs business, it is reported that he once in time-controlled about 80 per cent of the worldโ€™s drugs business (Cocaine trade). With such a hold over the most profitable business, he had loads of money. And because of that, he was forced to make more ways to launder his money to look legitimate. He was so into money laundering that probably the epicentre of his business was just that, โ€˜Cash Launderingโ€™.

The recipe that he followed in getting all the money back to himself was simple. He paid bankers some bribe to which they returned the favour by turning his black cash into legitimate money. In 1989, reports say that his personal fortune was worth about 9 billion dollars, which made him the seventh richest person in the world at that time. He died in a gunfight in 1993 with Colombian authorities.

Wachovia

It is now a part of Wells Fargo, Wachovia was among the biggest banks in the United States in the 2010s. The bank was found to have allowed drug cartels in Mexico to launder close to US$390 billion through its branches during 2004-2007. The drug cartels had one job specific to money laundering. They laundered money (Proceeds) that came from selling drugs in the United States to the other side of the Mexican Border. Then, they used money exchangers to deposit the money into their bank accounts in Mexico.

"Wachovia's blatant disregard for our banking laws gave international cocaine cartels a virtual carte blanche to finance their operations," said Jeffrey Sloman, the federal prosecutor. Yet the total fine was less than 2% of the bank's $12.3bn profit for 2009. On 24 March 2010, Wells Fargo stock traded at $30.86 โ€“ up 1% on the week of the court settlement.

At the Mexico border, the requirements were not clear and regulated which added to the money laundering situation. The regulatory requirements with regard to the source of funds were not on par with current standards. Later on, the money that was transported to Mexico was roped in back to Wachoviaโ€™s accounts in the US. The total money laundered by this bank amounted to 390 billion dollars.


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What are the Effects of Money Laundering?

Now you must be thinking about what happens if the situation is not controlled, and that is a legit question. If money laundering is not stopped, it can raise havoc. How? Let us find out -

When some money is unaccounted for and lies around in society, it can be used for any purpose. The intentions can be constructive as well as destructive. Depending on the purpose, it can create a ruckus for the society we live in.

As we all know, money can be used as an incentive for many things, it can be an incentive for good things, hardworking and it can also be an incentive for bad things for society. In that situation, the social and political cost of such money can be severe.

In addition to that factor of thought, money laundering can weaken society as a whole. It can lower the boundaries of social and collective ethical standards. In developed countries, it can be efficient and effectively used in terrorism and any sort of destructive activity or behaviour.

On the other hand, if unaccounted money or money laundering is in an underdeveloped country then it can be serious damage to the progress of the country and the integrity of such a nation. For example, those examples can be disastrous in the second most populous nation, India.

What are the Precautions for Money Laundering?

There can be precautions as well for this money laundering influence. These precautions can lead to a safer environment for all, the government and the citizens. Let us discuss some of the precautions that are advised by experts and are worth a read -

Tax Evasion

First of all, the process of one laundering starts from the intention of tax evasion. At the heart of the issue is hiding the income to save some pennies of taxes. This has to be completely stopped. Tax evasion has to be stopped in all steps of production to consumption. This will help make people aware of the monitoring. This will also reduce significant money movements from one place to another.

Local governments should be held accountable for the money management of an area. They have to be fully authorised as well to do their duties on full throttle. For this purpose, the government and the media can work hand in hand to be more effective in maintaining the secrecy of sensitive topics.

Reducing Tax-free Earnings

The private sector has to be regulated as well. Cartels should be prevented and any sort of underground economy should come to an end. This can be done by reducing the tax-free earnings as much as possible in nature. This can be hard for developing countries, as they rely on taxes for development but they can do small changes as well.

AML(Anti-money laundering)

Businesses can protect themselves by strictly accounting for all the transactions as well as adhering to the AML(Anti-money laundering) norms. For which they can use the AML software available in the market such as Sanction scanner and many others available throughout the internet.

AML (Anti-money laundering) Initiatives

Throughout the article, we have mentioned something called AML, we did mention it but what it is actually? Anti-money laundering is a set of initiatives that rose to global prominence in the year 1989. They were formed by a group of companies and countries who were concerned about the issue. It is an entailing part of the Financial Action Task Force (FATF). The mission of which is to prevent and control the money transactions that are unrecorded and benefit from money laundering all around the world. In October 2001, following the 9/11 terrorist attacks, FATF expanded its mandate to include combating terrorist financing.

Another important organisation that controls the fight against money laundering is the IMF or the International monetary fund. Just like the FATF, the IMF also runs on a mission of preventing money laundering as they assert influence on countries and corporations to act according to the accepted international standards.

Laws like these are effective and work in a manner that prevents market manipulation, trade in illegal goods, corruption on public funds and even tax evasion on a global level (large scale).


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Conclusion

Laundering is a serious crime and is done in probably every country in the world. Not only is it illegal but it is also immoral. It is such a serious problem that it encompasses both the white-collar and the street-level criminals. The roots of this business run deep in many parts of the world. With this rooted problem, it can be a serious hindrance to the development of countries and even corporations at a smaller level.

There are many international corporations like the FATF (Financial Action Task Force) and IMF (International monetary fund) trying to influence these numbers. Reading the history of money laundering, it is threatening that it can happen today too. In this world where we talk about decentralised currency as the new currency. It is going to be hard to prevent such happenings in todayโ€™s world. It does not just harm corporations and societies but even the society and constituents of society.

FAQ

How does money laundering cash work?

The money that needs to be laundered is carried into foreign bank accounts in small amounts and then is transferred back to where it came from.

What is the most common way to launder money?

The most common ways to launder money is investing in gold, investing in stocks or transferring money to foreign bank accounts.

Is laundering money illegal?

Yes, Money laundering is illegal as the laundered money can be used for illegal activities.

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