Typically, legitimate businesses aren’t concerned about their funds’ source or how they appear to other businesses. However, criminal organisations may need to mask the source of their funds to appear legitimate in the eyes of other businesses.
During the money laundering process, money or assets are typically moved through several different accounts to disguise the source of the funds and thus make the source appear legitimate.
You might think it doesn’t matter where the money originates, as long as your business is getting paid. However, money laundering can be used for terrorist financing and can affect whole economies if left unchecked.
Money laundering affects everyone and, therefore, needs to be kept in check by businesses at risk of processing these funds.
How does money laundering work?
As you might expect, there is no easy way to disguise the source of funds, so the schemes used by criminal organisations are typically complex.
The three steps of money laundering
Money laundering happens in three distinct steps:
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Placement - the “dirty money” is injected into the legitimate financial system
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Layering - the money is moved from place to place to conceal the original source
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Integration - the money is moved from the now legitimate account and disbursed
These steps can be repeated as many times as necessary before the desired result is achieved.
The six types of money laundering transactions
Although money laundering works by moving funds from account to account to mask the original source, it’s not just a case of moving it from current account to current account.
At the end of the day, that would be reasonably straightforward to track.
Because of this, there are seven distinct types of transactions used in the money laundering process:
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Structuring and smurfing - large sums of cash are deposited into several different bank accounts rather than as a lump sum into a single account.
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“Mules”/cash smugglers - cash is smuggled across borders and deposited into foreign accounts.
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Investing in commodities - small, high-value items, such as gems and gold, can be relatively easy to move into different jurisdictions where they can be sold again.
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Buying and selling - involves large, high-value items, such as cars and real estate, which can be purchased relatively quickly before being sold again as a legitimate income.
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Gambling - casinos are places where both high-value and low-value stakes can be made, making them a good place to split large amounts of cash.
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Shell companies - these companies only exist on paper, and no actual trading takes place within them. However, they can be used to move money between businesses by issuing invoices and collecting payments.
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Cryptocurrency - anonymous, online cryptocurrency accounts are an easy target for criminals looking to legitimise their funds.
What actions do businesses need to take?
If your business is covered by the money laundering regulations, you must ensure you can track the source of the funds moving through your business.
To this end, you must complete Know Your Customer and Anti-Money Laundering checks.