15 Money Laundering

Money Laundering

MONEY LAUNDERING IS A FINANCIAL TRANSACTION SCHEME to conceal or attempt to conceal the identity of proceeds illegally obtained so that the proceeds appear to come from legitimate sources.

Money laundering is a global problem that is being tackled by governments. There are many government organizations, or those sponsored by governments, involved in various roles to combat money laundering. Some of these anti-money laundering (AML) organizations collect financial information for detection purposes while others foster cooperation and implementation of standards among member countries. These organizations provide a wealth of informational resources.

  • The Financial Action Task Force (FATF) (www.fatf-gafi.org/pages/aboutus/whoweare) is an intergovernmental policy-making body that sets standards to combat money laundering and terrorist financing.
  • The Organisation for Economic Co-operation and Development (OECD) (www.oecd.org/about) membership consists of 34 countries that work together to promote policies for better economic and social well-being. Policies include those relating to AML.
  • The Egmont Group of Financial Intelligence Units (www.egmontgroup.org/about) provides a forum for members around the world to combat money laundering and terrorist financing.
  • The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) (www.fintrac-canafe.gc.ca/fintrac-canafe/1-eng.asp) receive financial transaction reports and analyze the data to detect trends and patterns of money laundering and terrorist financing.
  • The Financial Crimes Enforcement Network (FinCEN) (www.fincen.gov/about_fincen/wwd) is a part of the United States Department of Treasury that collects financial transactions data and analyzes the data for law enforcement purposes to combat money laundering.

Our concern is whether our organization is unwittingly or otherwise involved in the money-laundering process. We should understand the stages of money laundering and the red flags of potential money laundering.


When money is obtained from various illegal activities—such as corruption, bribery, tax evasion, drugs—where the criminal does not want the authorities to know the source of the income, they engage in money laundering. Money laundering disguises the illegal origin and legitimizes the funds so they can be openly used.

There are three main stages in the money-laundering process, each with its own complexity and risk.

The Placement Stage

This is the riskiest stage of the money-laundering process. Large cash deposits and frequent suspicious deposits are required to be reported to government entities such as FINTRAC and FinCEN. The objective is to place the cash into foreign or domestic bank accounts without raising red flags. To make the dirty money appear to be clean, deposits are made into domestic banks by splitting the large amount into smaller amounts and making multiple deposits below reporting limits to avoid detection. This is known as smurfing or structuring. Often, currency exchange businesses are used for these smaller amounts and to obtain alternative currencies for deposit.

For deposit to foreign entities, the cash needs to be smuggled out of the country. Funds are converted to large denominations to reduce the bulk. Purchasing diamonds and other jewels or precious metals by converting the cash can also facilitate the smuggling. Electronic transfers and other payment methods, such as gift cards, are tools that can be used in the placement stage. Additional placement methods include:

  • Use of insurance products such as immediate or deferred annuities.
  • Use of investment-related transactions such as purchases of securities.
  • Use of nonbank financial services such as wire transfer companies and currency exchange entities.

The Layering Stage

The layering stage is the most complex of all the stages; this is where the origin of the money is being made difficult to trace. A number of transactions or layers need to be put between the original sources of the funds before they are brought back into the legal economy. Funds might be moved to foreign countries that usually have strong bank secrecy laws, moved into accounts in the name of others who are nominees, or moved to accounts held by offshore corporations where the beneficial ownership is hidden and the funds can be withdrawn and redeposited to a number of other accounts.

Other layering tools and techniques include:

  • Bank secrecy laws
  • Offshore banks
  • Tax havens
  • Shell corporations
  • Trusts
  • Intermediaries
  • Walking accounts

Walking accounts are frequently used as they are very effective as a layering tool. An account is opened in one foreign jurisdiction where funds are deposited. The account is arranged so that all deposited funds are immediately transferred to another account, usually in another jurisdiction. The first bank is instructed to notify the second bank if any inquiries to the account are made. The second bank then has instructions to transfer the funds to a third bank. This provides the criminal with additional protection from investigation and seizure by law-enforcement agencies.

The Integration Stage