Criminal activities produce $300 billion of revenue in the U.S. each year, about the same as the entire utilities industry. Money laundering is the process of making profits from these criminal activities look like they’re from a legitimate source. Criminals often aim to get people in occupations such as accounting or financial services to unknowingly assist them in money laundering schemes, but anyone can become a target. Let’s take a closer look at what money laundering is, how it works, and what you need to know to protect yourself.
What Is Money Laundering?
Money laundering is using a series of financial transactions to introduce illicit or "dirty" funds into the financial system. Each transaction disguises the source of the money until eventually, it’s housed in a legitimate financial institution or business, and it appears to be "clean." Criminals want to use their money without it being traced back to their crimes. They can't successfully operate without using some form of money laundering to avoid detection and prosecution.
Money laundering is used to hide cash from crimes like drug trafficking, as well as funds from white-collar crimes such as embezzlement or tax-evasion schemes.
Some common money laundering tools include:
- Virtual currencies: Cryptocurrencies like bitcoin are attractive for money laundering because they are anonymous. Transactions are visible, but they are difficult to track to an individual. In 2019, Chainalysis traced $2.8 billion bitcoin in illicit funds into bitcoin exchanges.
- Money mules: These individuals are recruited by criminals to receive money into their legitimate bank accounts, then transfer it to a third party. Money mules are often unwittingly recruited through social media, email, and online job boards, lured by promises of making easy money.
- Prepaid debit cards and gift cards: These prepaid cards are anonymous, and they can be used to divide large amounts of cash into smaller ones. Anyone can use gift cards to pay for goods and services, or they can be sold at a discount through online marketplaces. Fraudsters also use them to extract funds from their victims.
- Front companies: These businesses combine "dirty money" with money from legitimate operations. Front companies have relationships with banks and other financial institutions that provide a path to "clean" money.
Money laundering is a threat to everyone because it provides the means for terrorists, drug dealers, human traffickers, arms dealers, fraudsters, identity thieves, and others to expand their influence and operations.
How Money Laundering Works
The money laundering process has three distinct stages: placement, layering, and integration.
The first step is to move the "dirty" money into the financial system. One tactic is to use many small, inconspicuous cash transactions, such as using multiple accomplices to purchase gift cards, buy money orders, or make small cash deposits into bank accounts. Another tactic is to mix the dirty funds with the clean money earned by a front company. Money launderers may also use foreign banks in countries with weak financial-crime enforcement to open accounts with cash or other funds.
Once the funds have entered the financial system, criminals use a flurry of complicated financial transactions, or layers, to distance the money from its original illegal source. At this stage, criminals may buy and sell high-value items like jewelry, artwork, or automobiles. They may use professionals to set up trust accounts, open correspondent accounts from foreign banks, or purchase financial products such as insurance, stocks, or bonds.
Finally, the money is funneled from the layers to a new source that is accessible to the criminal. The high-value artwork is sold, the financial products are liquidated, or the money is distributed from trusts or correspondent accounts. The funds can now be reintroduced into the financial system from a legitimate source using banking, brokerage, or other types of accounts that are accessible. The criminal can now use this money for any purpose, since it appears to be clean and legitimate.
A Money Laundering Example
In a recent case, two brothers were arrested by the FBI in Maryland for laundering over $5 million from a "Romance" fraud scheme, through which they defrauded more than 200 victims from around the world. The brothers first registered a company for the purpose of buying and selling cars at auction. They then recruited their victims from dating sites on the pretext of establishing a romantic relationship, eventually conning them into sending money as a loan. They laundered this money—up to $200,000 per victim—through the front company, then sent some of it to accomplices in Ghana, and kept 10% of the proceeds for themselves. If they’re convicted, the brothers could each face up to 20 years in federal prison.
Is Money Laundering Illegal?
Money laundering is a federal crime punishable by fines and prison time. The U.S. money laundering law applies to anyone who engages in a financial transaction while knowing that the funds came from criminal activities.
Financial institutions have to comply with the Bank Secrecy Act and the USA PATRIOT Act, both of which are aimed at detecting and preventing money laundering. The Bank Secrecy Act requires financial institutions to maintain transaction records and report currency transactions over $10,000 and any suspicious activity. The USA PATRIOT Act requires financial institutions to have an anti-money laundering program in place, and to take specific steps to identify a customer and their source of funds when they open an account.
Is Money Laundering Really Worth It?
We think we’ve been pretty clear that money laundering is illegal and its effects can be devastating. If you need another example, consider the case of Bruce Bagley, a (formerly) respected professor of international studies at Miami University. Professor Bagley is the author of Drug Trafficking, Organized Crime, and Violence in the Americas Today, and is widely recognized as an expert in money laundering and corruption. In November 2019, Professor Bagley was arrested for laundering over $2 million in proceeds from a Venezuelan bribery and corruption scheme in the United States. He pled guilty in June 2020.
FBI Assistant Director-in-Charge William F. Sweeney Jr. commented: “About the only lesson to be learned from Professor Bagley today is that involving oneself in public corruption, bribery, and embezzlement schemes is going to lead to an indictment.”
- Money laundering in the U.S. is a $300 billion enterprise.
- Criminals recruit people to unknowingly assist them in money laundering using social media, dating sites, and job boards.
- Money laundering is a federal crime.
- Money laundering is a threat to everyone because it helps criminals expand their operations.