Why is Money Laundering Illegal?

Table of Contents:

  1. Is Money Laundering Illegal?
  2. What is Money Laundering and Why is it Illegal? 
  3. What is Illegal Money? Methods and Stages of Money Laundering
  4. Is There Any Such Thing As Legal Money Laundering in India? 

Is Money Laundering Illegal? 

Why is money laundering illegal? Any type of illegal activity involves the use of money and is almost always the prime reason behind it. The method of money laundering refers to when criminals disguise the origins of their illegal wealth and protect their asset bases so that they can avoid being suspected by law enforcement agencies and prevent leaving behind any trail of evidence.

What is illegal money? Criminals and terrorist organizations rely on laundered money to fund criminal acts and sustain themselves to carry out further terrorist activities. The money comes from a wide variety of sources for the use of criminals. They aren’t heavily concerned with hiding the origin of money as they are with hiding its destination and the purpose behind its collection. Therefore, criminals employ money laundering techniques used by other launderers to conceal their illicit funds.

Prevention and detection of money-laundering are effective means of identifying criminals and terrorist groups and finding out the illegal activities from which they receive their funding. The application of intelligence and investigative techniques, carried out by different international organizations is one way of disrupting terrorist groups and eradicating financial crime.

What is Money Laundering and Why is it Illegal? 

Why is money laundering illegal? A large number of criminal acts are done to generate a profit for an individual or group that carries out the criminal act. Money laundering is the processing behind these criminal proceeds to hide its illegal origin. Activities of organized crime include illegal arms sales, smuggling, drug trafficking, and prostitution rings, to generate a large number of illicit funds. Large profits can also be produced from embezzlement, insider trading, bribery, and computer fraud schemes to create the incentive to “legitimize” the profits made through money laundering. Therefore, criminals disguise their source by changing their form or moving the illicit funds across countries where it’s likely to be suspected.

To answer ‘is money laundering illegal?’, increasing concern over money laundering, the G-7 Summit which was located in Paris, in 1989, established the Financial Action Task Force (FATF) to develop a coordinated international response to money laundering. One of the first tasks of the FATF was to develop a total of 40 FATF Recommendations, which dictated measures to be taken by national governments to implement effective AML programs.

Since then, a number of laws have been issued to prevent and punish those responsible for money laundering activities. The first such law, the Bank Secrecy Act (BSA) originated in the 1970s which refers to regulations followed by insured financial institutions to maintain certain records and report it to the U.S. Department of Treasury. The BSA requires that financial institutions report large cash transactions into, out of, and within the U.S., in excess of $10,000. Along with this, financial institutions are also required to report suspicious transactions, consisting of those, which they believe are related to criminal activity or which appear intended to avoid triggering the reporting requirements.

Over the past several decades, several acts and regulations have expanded and strengthened the scope and enforcement of the BSA and AML/CTF measures. These regulations and acts have been issued into laws and include:

After the 9/11 terrorist attacks, Congress passed the USA Patriot Act, which included provisions to strengthen regulations of financial transactions. Title III of the USA PATRIOT Act is called the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001, which focuses on money-laundering issues. The provisions under the USA PATRIOT Act strengthened the existing BSA framework by strengthening customer identification procedures. The Act required the creation and implementation of new AML programs and created potential criminal liability for FIs “willfully blind” to money-laundering taking place within their institutions. The law also required institutions to designate Compliance Officers/MLROs, implement internal training programs, and conduct independent audits. FIs were also required to implement certain procedures that would verify the customer’s identity and check it against lists of known or suspected terrorists. The above laws can call for an investigation of a suspect financial institution by the Federal Reserve and the Office of the Comptroller of Currency, which may later impose fines or call for criminal prosecution.

Is money laundering illegal? A study was conducted by the United Nations Office on Drugs and Crime (UNODC) to determine the magnitude of illicit funds generated by organized crimes, and further investigation into the extent to which these illicit funds are laundered.  The results of the report found that criminal proceeds in 2009 amounted to 3.6% of global GDP, with 2.7%  (or USD 1.6 trillion) being laundered money.

What is Illegal Money? Methods and Stages of Money Laundering

Methods and Stages of Money Laundering

What is money laundering and why is it illegal? Money laundering, an illegal process of making large sums of money through criminal activities, involves 3 stages – placement, layering, and integration.

Placement – Defined by the movement of cash from its original source. The source is easily disguised, followed by placing the cash into circulation through financial institutions, casinos, shops, currency exchange services, or other legal establishments, businesses that are local or outside the country. This process of placement can be carried out through various methods which include:

  1. Currency Smuggling – Cash smuggling occurs when cash is hidden or concealed, in or out of the US. It is concealed to avoid filing a report for transporting currency or monetary instruments outside the country.
  2. Bank Complicity – When a financial institution is owned or controlled by corrupt individuals suspected of working with criminals and other terrorist groups, which makes the process of passing funds through banks easy for money launderers. The financial sector requires adequate checks to prevent leeway for laundering.
  3. Currency Exchanges – The liberalization of foreign exchange markets provides room for currency movements in a number of transitional economies and money laundering schemes can benefit from such policies.
  4. Securities Brokers – Brokers have the power and are able to facilitate the process of money laundering by structuring large deposits in a way that the original source of the funds remains unknown.
  5. Blending of Funds – Financial institutions are vehicles for laundering because one way to hide cash is to blend it with a lot of other cash. Or an alternate way to use the money and disguise it from illicit activities would be to set up front companies, which enables the funds to be obscured in legal financial transactions.
  6. Asset Purchase – Asset purchases made in cash are a classic method of money laundering. The purpose is to change the form of the funds from conspicuous cash to an equally valuable but less suspicious form.

Layering is meant to make the detection of money more difficult and to cover the laundering activity. This process is to make the tracking of illegal proceeds done by law enforcement agencies more difficult. Layering includes the following methods:

  1. Cash Converted into Monetary Instruments – With the use of banker’s drafts and money orders, and after the placement is successful within the financial system by way of a bank or so. Then following which, the proceeds can then be converted into monetary instruments.
  2. Tangible Assets Bought with Cash then Sold – Assets bought through illicit funds can be resold locally or outside the country which makes it more difficult to trace or seize.

Integration is the process that involves money that has been laundered by the above two processes to move into the economy mainly through the banking system. Thus this financial transaction appears to be part of legal business earnings. Although, this isn’t the same as layering, because in integration, detection and identification of money laundered are provided through informants and the methods include:

  1. Sale of Properties – The sale of real estate property to integrate laundered funds back into the economy is a common practice amongst money launderers. This is why many criminal groups use shell companies to buy properties so that the proceeds from the sales are considered legitimate.
  2. Front Companies & False Loans – Criminals lend themselves their own laundered proceeds in an apparently legitimate transaction, with front companies that are incorporated with corporate secrecy laws.
  3. Foreign Bank Complicity – Known foreign banks are a difficult target for law enforcement because they represent a higher order of sophistication. Assistance by foreign banks is often protected and is against law enforcement scrutiny, which isn’t just through criminals but also because of banking regulations of other sovereign countries.
  4. False Invoices of Import & Export – False invoices are used by import and export companies. This is an effective way of transferring illicit funds back into the economy. Overvaluation of entry documents is made to justify the funds which are later deposited in domestic banks and funds received from exports.

Is There Any Such Thing As Legal Money Laundering in India? 

No. There is no such thing as legal money laundering. With the Prevention of Money Laundering Act (PMLA), in 2002, the initial money laundering law in India originated in 2002 but has been amended 3 times since then in 2005, 2009, and 2012. The last amendment got approved by the President on January 3, 2013, and came into effect from February 15, 2013, onwards.

The 3 main objectives of PMLA to combat money laundering in the country were:

  1. First, prevent and control money laundering.
  2. Second, confiscate and seize tangible property obtained from laundered money.
  3. Third, deal with any other issue connected with money laundering in India.

The PMLA Amendment Act of 2012 has put concealment of funds, acquisition of a possession, use of proceeds of crime, and possession of money on the criminal list. The provisions of the Act apply to all financial institutions – banks, mutual funds, insurance companies, and their financial intermediaries.

To know more about what is money laundering and why is it illegal and how it works, watch this Ted-Ed video.

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“Teamwork is the ability to work together toward a common vision. The ability to direct individual accomplishments toward organizational objectives. It is the fuel that allows common people to a...

ABA Regulatory Compliance Conference: 10 Sessions You Can’t Miss

The 2019 edition of the American Bankers Association (ABA) Regulatory Compliance Conference is a few more days away. Organized by the Washington, D.C.-based trade association, the conference is touted...

Tookitaki AMLS Wins SBR Technology Excellence Award 2019

Tookitaki’s Anti-Money Laundering Suite (AMLS), an end-to-end machine learning-powered transaction monitoring and names screening solution, has bagged the inaugural Singapore Business Review Tec...

Watchdogs Grow Optimistic about AI Prospects at Banks

Proper regulation of banking operations is important as any failure in the banking system would affect the wider economy. Therefore, banking is one of the most regulated industries across the globe. F...

Pitfall of Black Box AI at Banks: Explaining Your Models to Regulators

The use cases of artificial intelligence (AI) and machine learning in front-office, middle-office and back-office activities at banks are growing slowly but steadily. The major areas of AI play includ...

AI for Regulatory Compliance at Banks: 4 Assessments Before You Okay the Solution Proposal

Banking is one of the industries where artificial intelligence and machine learning find their applications at a rapid pace. Regulatory compliance within banking is an area which has become a costly a...

We Believe in Innovation, the Key to Survival and Growth

“Innovation distinguishes between a leader and a follower.” -Steve Jobs What comes on the top of your screen when you google the meaning of the word innovation is – the introduction of somet...

Compliance Functions in Need of a Technological Overhaul. Can Machine Learning be the Game-Changer?

McKinsey in its latest compliance benchmarking survey found that compliance function at financial institutions has reached “an inflection point” and current compliance standards are in an “incho...

Tookitaki Raises US$7.5 mn Series A from Global VCs to Transform Regulatory Compliance

Tookitaki, a regulatory technology company that aims to enable financial institutions to develop sustainable compliance programs, has raised US$7.5 million in Series A round. The round was co-led by L...

From Wachovia to Danske Bank: Biggest Money Laundering Cases in Recent Times

Money laundering – the criminal activity of processing criminal proceeds to disguise their origin – is one of the gravest problems faced by the global economy, and its size is growing rapidly. It ...

A Modern Approach to Address the Reconciliation Challenges of Financial Services

Reconciliation of transactions is deemed critical for the smooth running of every financial institution. The speed and accuracy of data reconciliation can distinguish a successful institution from its...

Busting a Myth: Compliance Officer’s Job is All About Risk

Regulatory compliance has become a dreadful task for banks after regulators across the globe set stricter norms in the aftermath of the 2008 financial crisis in an effort to prevent financial crimes s...

SocGen Goes Next-Gen with Tookitaki Reconciliation Suite

Société Générale leveraged Tookitaki’s Reconciliation Suite to automate the bank’s existing break reconciliation system. Key Challenges Addressed The bank’s finance department was unable to ...

Attending ACAMS Conference in Singapore? Tookitaki Awaits You with Its Disruptive AML Solution

“In today’s era of volatility, there is no other way but to re-invent. The only sustainable advantage you can have over others is agility, that’s it.”- Jeff Bezos Singapore is hosting ACAMS’...

MAS’ Stress on Transaction Monitoring for Effective AML/CFT Compliance and Machine Learning is the Answer

Singapore is known for its top-notch AML/CFT regime created through up-to-date legislation, stringent policy and uncompromising supervision to safeguard against the abuse of the city state’s financi...

Mifid II and the Pressing Need for a New Reconciliation Approach

The financial services industry in the EU has been confused with the introduction of a revamped version of the Markets in Financial Instruments Directive (Mifid II). The ambitious regulatory reforms t...

Is Automated Reconciliation Next to Impossible in Today’s Complex Financial World?

The 2008 global financial crisis and fairly new regulatory requirements like Basel III asked financial institutions (FIs) to cut operating costs and adopt a lean operations structure, pushing FIs to r...

Modern Tech to Reshape US AML Compliance with Regulators’ Recent Handshake

George Bernard Shaw once said: “Those who cannot change their minds cannot change anything.” The past week has seen a significant change of mind from financial regulators in the US in their ardent...

Skills Development: We Have Talents and We Strive to Multiply Them

“Mastery lies on an infinite continuum, and as a result, we will never reach the end. We can, however, see to it that we are as far along that continuum as our circumstance allows.” ― Chris Mat...

It’s Our Fourth Founding Day; Taking a Pause to Cherish Our Simple but Awesome Journey

Today, as we step into our 4th year of foundation, I feel proud and honored to be leading Tookitaki that has been successful in creating added value to all its stakeholders. I was never a CEO and Took...

Tookitaki Expands into the US with New Office in Charlotte

SINGAPORE, Sept. 24, 2018: Tookitaki Holding Pte Ltd, a leading regulatory technology company, is pleased to announce the official opening of its North American office in Charlotte, NC, in the Unite...

We Tame Machines but We Unleash Human Spirits

We are well aware of the fact that our progress as an organization is in the hands of our employees. The more energy, time and attention we invest in them, the more yield we receive. So, we always mak...

5 Methods That Modern Money Launderers Use To Beat Detection

Society prepares the crime, the criminal commits it. DID YOU KNOW? Every year, an estimated amount in the range of US$800 billion-US$2 trillion (2-5% of global GDP) is being laundered globally Regulat...

Risk Management Conference: Positive Vibes from All Corners

The Risk Management Association’s (RMA) premier annual event, the Risk Management Conference, came to an end on 6 November, and Tookitaki had the privilege to attend the event which we believe was ...

Singapore Fintech Festival: Tookitaki to showcase advanced machine learning solutions in financial services

Singapore is assured of the Fintech world’s unwavering attention next week, as the city state, is hosting this year’s Fintech Festival during 12-16 November. Touted as the world’s largest platfo...

The RMA Clarion Call to Address Risks and the Tookitaki Way

Risk officers, doing your best today is good while preparing hard for tomorrow is extraordinary. Risk management at banks has become difficult due to operational and regulatory changes. The Risk Manag...