What is Money Laundering? How Can Your Business Counter It?

As the name suggests, money laundering is the process of turning dirty money clean. The dirty money in question is usually income from illegal activities and needs to be laundered in order to make it appear as if it has been sourced from legal and legitimate sources.

Money laundering is a serious problem for developing and developed countries alike. According to a United Nations Office on Drugs and Crime (UNODC) report, money ranging from $800 billion to $2 trillion is laundered every year. That is about 2% to 5% of the global GDP. That is the amount of money that came from illegal activities like human trafficking, drugs, terrorism, and more.

Anti-money laundering (AML) measures exist to catch individuals and organizations responsible for these illegal activities and subsequent money laundering. Businesses and financial institutions adopt these measures along with their own personal processes to curb the growth of money laundering.

How does Money Laundering Work?

Money laundering is a multi-step process where the individual or organization related to the illegal activity tries to distance themselves and the income generated from the criminal act. Following are the steps taken by criminal individuals and organizations to launder money:

1. Placement

The first step in laundering money is called placement, where the income from illegal activities is reintroduced to the legal financial system. This step usually involves making small, unsuspicious deposits by the owner of the illegal money.

The deposits are also often made under different accounts, which are sometimes created using synthetic identities or stolen identities. This involves more people in the mix, making traceability harder.

2. Layering

After placement comes layering. Layering involves moving illegal money, which has been recently introduced into the financial system through placements. Layering intends to make the source of the illegal funds hard to track.

Layering is done by spending illegal money on different transactions. These transactions can be in the form of buying and selling property, or financial assets, extending loans, or buying goods from other countries. The money is offshored to countries with relaxed AML regulations.

3. Integration or Extraction

Integration or extraction is the final step in money laundering. Here, the money is transferred back to its initial owner, now made legal through the processes of placement and layering. Extraction usually involves extending loans to entities related to a company, with no intent or attempts at repayment from either end. Individuals and organizations often form shell companies in order to act as a medium for the disbursal of these funds.

Post-integration, laundered money can become extremely hard to track and link to the criminals. This is why banks and financial institutions need to improve their recording and reporting mechanics to better track any suspicious activity.

Methods to Launder Money

Mentioned above were the steps that owners of illegally sourced money take to launder said funds. Now, let’s take a look at the many ways these people go about executing these steps.

• Structuring: Also known as smurfing, it is the process of making multiple deposits to a bank of amounts that are just below their reporting threshold. Smurfing allows criminals to slip under the automated reporting triggers but has become a somewhat known trend. This popularity has led to banks and financial institutions being more vigilant about smurfing attempts.

• False Invoicing: This method involves generating invoices or bills for trades that never took place or goods that didn’t even exist. In some cases, the invoices generated correspond to real trades, but their value is inflated to move money under the concerned authorities’ noses.

• Funding businesses: Illegal funds are often used to invest in legal and legitimate businesses. This allows the owners of these funds to blend their illegal money with the legitimate capital of the business. Once the illegal funds are invested, they become indistinguishable from the rest of the business’ capital and can be withdrawn to turn the money clean.

• Forex Trading: Illegal funds are often used to buy foreign currency through foreign banks. The countries that are selected usually have less strict AML regulations, which allows the owner of the funds to easily launder their money.

• Cash Transactions: Another way to inject illegal money into an economy’s financial system is to buy financial products or instruments using cash. These include insurance, securities like shares of companies, and more. Using cash allows the input of the funds to remain untraceable while registering legitimate transactions with the dealers of the financial products/instruments.

These are only a few of the many ways bad actors try to launder money. As the financial ecosystem constantly evolves, new methods develop as well. Therefore, it is necessary for businesses to build a robust ecosystem to ensure their own as well as their clients’ security. Developing the measure to ensure this security requires technical expertise, which is where Signzy comes in.

How can Signzy Help with Anti-Money Laundering

One of the most prevalent ways to counter money laundering is to improve client verification and onboarding processes. These improvements can take place in the form of better ID verification, integrating biometric security measures, building robust KYC processes, and more.

Signzy’s API Marketplace has all of these tools ready and waiting for your business. Aimed at streamlining your customer’s experience, Signzy’s APIs ensure that your onboarding processes are simple, and don’t lead to any user drop-offs.

Conclusion

As we mentioned before, money laundering is a growing issue across the world, and with technological advancements, this problem will evolve as well. However, these are not threats to the businesses in these industries, but opportunities to evolve their systems to counter money laundering more effectively.