What are the 3 steps in money laundering?
Money laundering, by its very nature, is an illegal activity carried out by criminals outside of the normal range of economic and financial data.
In order to avoid taking part in this type of activities, it is important to have a good understanding of how it all works. As AML systems are the solution to this underlying threat, we feel that this article could explain better all the inner works of money laundering, the reasons why people engage in such activities and exactly how they do it. Keep reading to find out more!
What are the 3 steps in money laundering?
1. The first stage of money laundering, called placement, is when the launderer introduces his illegal profits into the financial system. To do this, he might take large amounts of cash and break them up into smaller sums to deposit directly into a bank account. He could also buy a series of monetary instruments (cheques, money orders, etc.), collect them, and then deposit them into accounts at another location.
2. The second stage – or layering – follows after the cash has been placed in circulation. The launderer engages in a string of conversions or transfers of the funds to remove them from their origin during this phase. The money may be sent through a number of accounts at various banks across the world by way of conversion, or it may be wired via a series of accounts at different banks throughout the world. This method of laundering using widely dispersed bank accounts is especially prevalent in jurisdictions that do not collaborate with other countries on anti-money laundering investigations. Launderers frequently conceal the transactions as payments for goods or services to give them a legitimate appearance.
3. After the launderer successfully processes his criminal earnings through the first two phases, he moves to the third stage: integration. In this stage, the funds re-enter legitimate circulation in activities such as investments in real estate, luxury items or business ventures.
But what is money laundering?
So we know what are the 3 steps in money laundering, but we must also define it clearly. The aim of a large number of criminal actions is to make money for the individual or group who performs them. Money laundering is the process of turning illegal funds into legitimate currency. This method is essential since it enables criminals to enjoy their earnings without risking their source. Illegal arms sales, smuggling, and organized crime activities like drug trafficking and prostitution rings can produce huge sums of money.
Embezzlement, insider trading, bribery, and computer fraud scams may result in huge gains and provide the incentive to “legitimize” the illicit earnings through money laundering. When a criminal activity generates a large profit, the perpetrators must find a method to keep control of the money without attracting attention to the crime or those engaged in it. Criminals hide the sources, transform the form, or relocate funds to reduce their likelihood of being discovered.
The Financial Action Task Force on money laundering (FATF) was established by the G-7 Summit in Paris in 1989 to develop a co-ordinated international response to the growing issue of money laundering. One of their first objectives was to create 40 recommendations outlining measures that national governments should take to establish effective anti-money laundering programs.
How could it affect business?
The banking and financial services sector is dependent on the public’s perception that it is run within a framework of high legal, professional, and ethical standards. A reputation for honesty is one of a bank’s most important assets.
If funds from criminal activities can be readily processed through a certain institution, because its employees or directors have been bribed, or because the institution looks the other way on their illegal source, it might become an active participant in the criminal organization. Such complicity will have a damaging influence on attitudes of other financial intermediaries and regulatory bodies, as well as ordinary consumers.
As for the potential macroeconomic costs of unchecked money laundering, one may point to inexplicable changes in money demand, prudential risks to bank stability, contamination effects on lawful financial transactions, and increased market volatility as a result of unanticipated cross-border asset transfers. Furthermore, because it encourages corruption and crime by rewarding wrongdoers, successful money laundering jeopardizes societal trust and democracy and the rule of law by undermining their integrity.
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