Insights

The Dirty Money Series #2: How dirty money is cleaned

Posted by Dacreed on May 6, 2019 11:39:09 AM

Blog #2When criminals make money from illegal activities such as fraud, drugs and tax evasion they need to ‘clean’ it in order to spend it in the legal economy. They need to convert the proceeds of crime so that they can realise and enjoy the financial benefits of their offending.

Money laundering is a process that cleans illegally obtained funds of their dirty criminal origins. The money is laundered so it looks like it comes from a legitimate source, enabling criminals to cover their tracks and avoid being detected. Successful money laundering allows criminals to enjoy profits and furthers the cycle of criminality by making funds available for reinvestment in crime.

The core principle of money laundering is the criminal abuse of vulnerabilities within the financial, legal and property systems. Criminals identify businesses that don’t confirm customers’ identities, or don’t have the right checks and balances in place to detect suspicious transactions, activities, behaviour or financial arrangements.

While there are many methods of money laundering, most incorporate three steps: placement, layering, and integration.

 

Placement: Illegal funds are moved from their criminal source and introduced into the formal financial and business system, for example by depositing cash from drug sales into a bank account registered to an anonymous corporation or a professional middleman, co-mingling it with business takings, or using it to purchase assets. This stage of money laundering is where criminals are often most vulnerable to detection since they are introducing sometimes large amounts of money into the financial system seemingly out of nowhere.

Layering: The illegal funds are moved or disguised to conceal their true origin, for example using a network of complex transactions involving multiple banks or accounts, or companies and trusts. The purpose of layering is to muddy the waters and make the money difficult to trace, which is why criminals seek to use legitimate businesses to layer the proceeds of crime.

Integration: The newly clean money re-enters the mainstream economy to benefit the original criminals. They might invest it into a legal business, claim payment by producing fake invoices or even start a bogus charity placing themselves on the board of directors with an exorbitant salary. Criminals may also invest the disguised funds or assets in further criminal activity or buy high-value property assets and luxury goods. During the integration stage, the funds or assets appear to have been legitimately acquired.

 

People who finance terrorism use similar methods to channel money to violent causes. Terrorists need money for weapons, for supplies to make explosives, for travel, and they have to disguise who’s providing and receiving the money. Any use of the money by a terrorist group to support their organisation and its cause is terrorism financing.

The difference between money laundering and terrorism financing is that money laundering moves the proceeds of crime to the legal economy while terrorism financing moves money out of the legal economy for criminal activity. However, many of the methods and financial channels used are the same.

As with money laundering, there are different methods of terrorism financing, most incorporating three steps: raising funds, transferring funds, and use.

 

Raising funds: Funds are raised from legitimate sources, donations or criminal activity.

Transferring funds: The funds are moved to the planned destination, which can require the funds to be moved internationally. This can be done by couriers physically carrying cash or high-value commodities, transferring funds through the ordinary banking system, or through shell companies (companies that exist only on paper with no office and employees, and are used as a vehicle for various financial manoeuvres).

Use: The funds are used either to commit terrorist acts or to fund ongoing operations.

 

While New Zealand is reasonably low on the radar for global terrorism fundraising, some donations have probably made their way to questionable organisations. These donations tend to be small, from “legitimate sources” and hard to spot. If overseas terrorist groups succeed in using NZ’s businesses, companies, payment platforms and charities to support terrorism financing, or find local supporters to assist in terrorism financing, the impact on NZ’s reputation will be considerable.

 

Next in The Dirty Money Series: The gatekeepers

Topics: Insider, Business Management, AML/CFT

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