Updated: Nov 14, 2019
WHAT IS MONEY LAUNDERING?
Money laundering investigations have busted kingpins of international criminal organizations, prevented terrorists from carrying out attacks, exposed double agent spies, and even contributed to the resignation of a United States president.
Broadly defined, money laundering is the act of disguising the proceeds of illicit activities. And although money laundering has evolved from that initial mandate, it is usually still composed of three main phases: placement (introducing illegal money to the legitimate financial system), layering (tumbling that cash through transactions intended to obscure its source), and integration (where the cash begins to acquire “legitimate” wealth). That process can take many forms and variations, but the criminalization of money laundering is, simply put, an effort to take the profit out of crime.
Laws against money laundering first appeared in the U.S. in the 1930s, during the Prohibition era, when illicit money from the sale of black market alcohol flowed in and out of legitimate financial institutions. Proving the existence of illegal funds could, in some instances, be easier than proving the existence of illegal activity. With that revelation, and with the introduction of new anti-money laundering laws, government officials had a new avenue to prosecute criminal offenders: by following the money.
The 1980s saw money laundering laws evolve into use in the war on drugs as a means to lower the burden of proof on convicting drug traffickers. During this era, an international view of money laundering began to take shape, where top offenders would often reside in countries less regulated and policed outside of North America. However, those offenders still operated largely in dollars, and therefore law enforcement once again had a separate axis on which to attack criminal enterprises.
The September 11 attacks brought about the war on terror and a new and modern understanding of money laundering: this was a crime that was no longer concerned only about disguising the source of an income, but also the destination. Cutting supply lines to suspected terrorist organizations was a critical first step in the war on terror, and as both individualized and country-specific sanctions have become an increasingly important form of geopolitical pressure, complex anti-money laundering methods have grown in tandem to cover a territory that is much wider than ever before.
Subcategories of money laundering can include tax evasion and other types of white collar crime, but the most important trend in money laundering today is threat financing. Many of the most recent financial crime laws across the world—including the Patriot Act in the U.S., policies in Australia, New Zealand, and Hong Kong, and frameworks set by the International Monetary Fund (IMF)—openly equate money laundering with terrorist financing and sanction busting.
Criminals need accomplices to launder money, and those accomplices are often in various states of awareness as to their complicity. In the case of France’s largest bank, BNP Paribas — which was fined a record $8.9 billion for actively obscuring its involvement in laundering money for sanctioned nations of Sudan, Iran, and Cuba—the illegal financial actions were condoned by the highest level of executives.
A lengthy investigation by American authorities found that bank executives altered information to obscure the source and destination of Sudanese clients. They laundered money to and from a genocidal regime that had harbored Osama Bin Laden. Still, no executives were individually charged by U.S. law enforcement, but strict penalties beyond the $8.9 billion were put into effect. BNP Paribas was barred from processing dollar transactions for a year, significantly hampering its ability to operate and interact with the wider financial system, and in effect handcuffing the bank.
Security and forensics professionals gather evidence about money laundering by following the trail of illicit capital, sometimes before it is even recognized to be illicit. Due to their familiarity with how money is moved, they can detect weaknesses in financial institutions as well as spot red flags in transactions that a typical financial professional might wave through. The complex web of international transactions and schemes that comprise modern money laundering requires dedicated forensic professionals who can unravel that tangled web and identify conspirators as well as prevent future avenues of impropriety. Forensics professionals need to continuously adapt their methodology to match the evolving nature of money laundering.
PREVENTION AND DETECTION OF MONEY LAUNDERING
Forensics professionals attack money laundering on two primary vectors: prevention and detection. On the prevention end of the spectrum, it is not as simple as introducing the standard prevention methods such as strict know your customer (KYC) requirements, which can come with negative side effects that affect financial institutions in the developing world as well as charities operating in conflict zones. A survey found that two-thirds of charities had experienced funding problems as a result of such KYC requirements. Introducing proper preventative safeguards to financing requires not a butcher’s knife but a scalpel, as well as a skilled hand to apply it to a variety of nuanced contexts.
On the detection side, money laundering is more complex than it has ever been. The classic methods of money laundering (e.g., cash-intensive businesses, structuring of deposits, cash smuggling) have given way to real estate schemes, tax amnesties, shell companies, and even bank capture (i.e., where a criminal enterprise buys a controlling interest in a legitimate bank for illicit purposes).
What’s more, new frontiers in online gaming and cryptocurrency are changing the map and scope of money laundering. Known as the cyber age of money laundering, this era has ushered in digital currency alternatives to traditional laundering. In the words of an ex-IRS crime chief: “If Al Capone were alive today, this is how he would be hiding his money.”
While it is impossible to definitively know the reach of an enterprise like money laundering that is by nature concealed, the IMF estimates that 2 to 5 percent of the global economy involves laundered money. Even while recognizing the limitations of available data sets, the U.S. Treasury projected in 2015 that $300 billion is generated annually in illicit proceeds. The UN Office of Drugs and Crime puts the number closer to $2 trillion. The general consensus is that the scale of money laundering is both global and massive.
As those ill-gotten gains attempt to enter the legitimate financial system, it is up to security and forensic professionals to block its entry, stymie its movement, track down its perpetrators, and pull up the drawbridge behind them.