Newsletter Subscribe
Enter your email address below and subscribe to our newsletter
What is Money Laundering?
Money laundering is the illegal process of making large amounts of money obtained from criminal activities appear to be earned legitimately. It conceals the origins of illicit funds to integrate them into the financial system without detection.
Definition
Money laundering is the act of disguising the proceeds of crime so that they appear lawful, typically through a sequence of transactions designed to obscure their criminal origin.
Key Takeaways
- Involves concealing the source of illicit funds.
- Typically includes three stages: placement, layering, and integration.
- A major global financial crime with strict regulations and penalties.
Understanding Money Laundering
Money laundering allows criminals to enjoy the profits of illegal activities—such as fraud, corruption, drug trafficking, smuggling, cybercrime, or bribery—without raising suspicion. The process usually follows three stages:
- Placement – Introducing illegal funds into the financial system.
- Layering – Moving money through complex transactions to hide origins.
- Integration – Reintroducing laundered money into the economy as apparently legitimate funds.
Examples of laundering methods include shell companies, fake invoices, cash smuggling, cryptocurrency mixing, real estate purchases, and trade-based laundering.
Governments and financial institutions use anti-money laundering (AML) laws, monitoring systems, and reporting requirements to combat these activities.
Formula (If Applicable)
There is no formula, but AML compliance involves:
- KYC (Know Your Customer) procedures
- Suspicious Transaction Reporting (STR)
- Customer Due Diligence (CDD)
Real-World Example
A criminal syndicate deposits cash into small, frequent bank transactions below reporting thresholds (“smurfing”), transfers it abroad through shell companies, then uses it to purchase real estate, making the funds appear legitimate.
Importance in Business or Economics
Money laundering destabilizes economies, fuels corruption, distorts competition, and infiltrates legitimate businesses. It undermines trust in financial systems and exposes institutions to legal and reputational risk.
Types or Variations
- Trade-Based Money Laundering
- Real Estate Money Laundering
- Cryptocurrency Laundering
- Casino-Based Laundering
- Smurfing / Structuring
Related Terms
- Anti-Money Laundering (AML)
- Financial Crime Compliance
- Terrorist Financing
Sources and Further Reading
- Financial Action Task Force (FATF)
- United Nations Office on Drugs and Crime (UNODC)
- Investopedia – Money Laundering
Quick Reference
- Process of disguising illegal funds.
- Uses complex transactions to obscure origins.
- Controlled through global AML standards.
Frequently Asked Questions (FAQs)
Is money laundering always linked to organized crime?
Mostly, but it can also involve tax evasion, fraud, and cybercrime.
Why is layering important in money laundering?
It makes the money trail harder to trace.
Can cryptocurrency be used for money laundering?
Yes, mixers, tumblers, and privacy coins can facilitate laundering.
