Money laundering is the process by which the proceeds of the crime, and the true ownership of those proceeds, are concealed so that the proceeds appear to have come from legitimate sources.
Generally money laundering is the process by which one conceals the existence, illegal source, or illegal application of income to make it appear legitimate. In other words, it is the process used by criminals through which they make “dirty” money appear “clean” or the profits of criminal activities are made to appear legitimate.
The International Monetary Fund has stated that the aggregate size of money laundering in the world could be somewhere between 2 and 5 percent of the world’s gross domestic product.
Money launderers generally operate through international networks without disclosing their identity. Money launderers, with the help of professionals, create legal entities, which act as ‘fronts’ and use them for laundering funds.
Money laundering is a complex process that does not necessarily involve cash transactions. Basically, money laundering involves three steps. These steps can occur simultaneously also.
1. Placement: The first step is the placement, in which the funds collected from illegal activities are entered into the financial system through deposits or other means.
2. Layering: The second step involves the separation of proceeds of criminal activity from their origin. This is done through the use of complex transactions designed to wipeout the audit trail. The launderers do so by frequently using shell companies, offshore banks or countries with relaxed regulations and secrecy laws.
3. Integration: The third step involves converting these illegal funds to appear as legal money such as earnings from legitimate businesses. This is done by using additional transactions to create the illusion that the funds have been generated through legal
Some of the illegal businesses from where money is launder are:
- Drug trafficking
- People smuggling
- Arms, antique, gold smuggling
- Prostitution rings
- Financial frauds
- Corruption, or
- Illegal sale of wild life products and other specified predicate offences
All banks and financial institutions should have effective anti-money laundering programs in place. This will help in minimizing exposure to transactions, regulatory compliance, and reputation risks. There should be account-opening controls, and all suspicious activities should be monitored and reported. Banks should also keep a check on terrorist financing.