Money laundering came to be the term for any process that cleans illegally obtained funds of their dirty criminal origins, allowing them to be used within the legal economy. This practice is about as old as money itself. Merchants hid their riches from tax collectors, and pirates sought to sell their bounty without drawing attention to how they got it.
With the recent arrival of virtual currencies, offshore banking, the dark net, and global markets, schemes have become much more complex. Although modern money laundering methods vary greatly, most share three basic steps: placement, layering, and integration.
Placement is where illegally obtained money is converted into assets that seem legitimate. That’s often done by depositing funds into a bank account registered to an anonymous corporation or a professional middleman. This step is where criminals are often most vulnerable to detection since they introduce massive wealth into the financial system seemingly out of nowhere.
The second step, layering, involves using multiple transactions to further distance the funds from their origin. This can take the form of transfers between multiple accounts, or the purchase of tradable property, like expensive cars, artwork, and real estate. Casinos, where large sums of money change hands every second, are also popular venues for layering. A money launderer may have their gambling balance made available at a casino chain’s locations in other countries, or work with employees to rig games.
The last step, integration, allows clean money to re-enter the mainstream economy and to benefit the original criminal. They might invest it into a legal business claiming payment by producing fake invoices, or even start a bogus charity, placing themselves on the board of directors with an exorbitant salary.
Money Laundering History
Money laundering itself wasn’t officially recognized as a federal crime in the United States until 1986. Before that point, the government needed to prosecute a related crime, like tax evasion. From 1986 on, they could confiscate wealth simply by demonstrating that concealment had occurred, which had a positive effect on prosecuting major criminal operations, like drug traffickers.
However, a legal shift has raised concerns involving privacy and government surveillance. Today, the United Nations, national governments, and various nonprofits fight against money laundering, yet the practice continues to play a major role in global crime.
And the most high-profile instances of money laundering have involved not just private individuals. But major financial institutions and government officials. No one knows for sure the total amount of money that’s laundered on a yearly basis. But some organizations estimate it to be in the hundreds of billions of dollars.
Money Laundering Example
As one of the most notorious gangsters in history. Al Capone presided over a vast and profitable empire of organized crime. When he was finally put on trial, the most he could be convicted of was tax evasion. The nearly $100 million a year, that’s 1.4 billion in today’s currency. That Capone had earned from illegal gambling, bootlegging, brothels, and extortion, would have served as evidence of his crimes.
But the money was nowhere to be found. Capone and his associates had hidden it through investments in various businesses. Whose ultimate ownership couldn’t be proven, like cash-only laundromats. In fact, those laundromats are part of the reason for the name of this activity, money laundering.