Suppose you are a small-time drug dealer selling dime bags to kids. You probably don't have to be too concerned about all the 5 and 10 dollar bills you accumulate - you'll just buy more stuff to sell from your next higher-ups with the stacks of cash. So, somewhere up the criminal food chain, there will exist (a) a middle-management drug lord, whose job it is to "clean" loads of this dirty money.

Alternatively, suppose you are (b) a gang leader of a bunch of crooks collecting protection money from local businesses, so you're receiving thousands of dollars in cash every week.

Or perhaps you are (c) a Russian mobster selling cheap, lethal, illegally distilled vodka to Siberian peasants, or maybe you're in cahoots with the government and no one is supposed to know (including the government, some of whom most definitely do, and some who most definitely do not).

Money laundering works basically the same way for all three. Having lots of cash is contraindicated. Money that comes from criminal activity (drugs, hot goods, etc) is usually in cash. If the IRS or INTERPOL smells lots of cash on you they'll start investigating where it comes from, which, as a criminal, is against your career strategy. Owning a business, however, is fine. Owning a profitable business is even better, so long as the profits are not so sky-high that even a retarded monkey could tell that there is some alternative source of revenue.

So, in the case of (a), the middle management drug lord may set up a crappy restaurant that no one goes to or a laundromat (ha ha!) to account for all the little bills coming in. Miraculously, the initial seedy capital suddenly becomes money spent by honest punters wanting clean knickers.

(b) your gang will probably own a bar, or a number of bars, and you might even sabotage the Interact machine that previous honest bar owners or managers (who you have possibly had rubbed out) installed, so that more people will spend cash, and the volume should be such that it easily masks a few extra bills here and there. You will of course pay for all deliveries and services for your business in cash.

(c) one of the many sneaky Russian schemes is to buy luxury goods in dirty cash and then sell them for clean cash. Sotheby's, Christies, fashion houses and many exclusive auto dealerships have a $50,000 U.S. cash cap - any larger (and many smaller) cash payments are reported and scrutinized.

Another brilliant Eastern European trick is to set up a Linux starter kit distribution site with e-commerce functionality, not only suckering people into paying for free software, but also giving you the option to vastly inflate your volume of customers.

Following recent events Money Laundering has gained a much higher profile in the press and in the minds of those involved in the financial services industry. Money Laundering itself can take many forms and throughout the process is not restricted solely to money but to all assets.

There have been a few high profile cases, the most high profile being that of Sani Abacha, the President of Nigeria, who plundered $4 billion from the country’s treasury and successfully laundered much of it through the US and the UK. It was a great embarrassment to the respective governments and since then they have been cracking down. The FSA have said that they are looking for “heads on spikes”.

There are three main stages in the process of money laundering.

  • Placement - This is the first stage of putting the ill gotten gains into the legal economy. For example making a series of cash deposits at a number of banks or purchasing luxury goods such as cars or gems.
  • Layering - This is the movement of funds through a series of layers to obfuscate its origins.
  • Integration - This is the final stage of, surprisingly enough, integrating the money back into the legitimate economy. This could be through buying investment products or property or simply paying a contractor.

Placement is easiest stage to identify suspicious funds as there are normally fewer levels to trace back through. All banks have strict rules regarding the investigation of the source of cash deposits received. It is not just cash deposits that demand investigation but any unusual asset movement, such as purchasing a large offshore tax structure or any investment of higher value than normal for that account.

Layering can be harder to spot but similar warning signs exist. Abnormal transaction amounts or unusual product demands are suspicious and are investigated. The more layers that assets go through the harder it is to identify the their original source.

Once we get to integration it should be impossible to identify the funds as stemming from illegal activity, if they have been laundered well.


Following last years terrorist attacks a wave of new legislation has been passed in an attempt to crack down on money laundering and on the transfer of funds to terrorist organisations. This is all based on the 40 recommendations of FATF (, the Financial Action Task Force, an organisation set up by the OECD in 1989. These 40 recommendations went on to form the basis of legislation in many countries. In the UK all 40 recommendations are included in various bills but in the US only 17 are complied with and even following recent turmoil their regulation is far less strict than other countries.

The legislation places the burden of responsibility on the individual employees of financial institutions. There are three offences that employees are at risk of committing:

  • Assistance - Punishable by imprisonment of up to 14 years, or a fine, or both.
  • Tipping-off - Punishable by imprisonment of up to five years, or a fine, or both.
  • Non-reporting/Suspicion - Punishable by imprisonment of up to five years, or a fine, or both.
Employees have a duty to report any suspicious transactions to their MLRO (Money Laundering Reporting Officer). If they claim that they didn’t know or didn’t suspect any wrong doing a judge can decide whether they should have known or suspected wrong doing. Tipping-off is fairly complex, it basically involves informing anyone except your direct manager or the MLRO that a report has been made. It only comes into force once the report has been made but even informing fellow employees is included under the offence.

Companies also have a burden placed upon them of conforming to regulations, should they fail to do so the directors and managers could face jail terms. They are also under obligation to train their staff and prove that they are sufficiently competent to perform their job. The penalties for regulatory non-compliance are a maximum of two years imprisonment or a fine, or both.

A Global Problem

It is estimated that around $1.5 trillion is laundered throughout the world. A large proportion of that goes through London. This is largely due to London’s role as “the largest offshore banking centre”1. On top of this the world-wide financial system is currently used with ease by terrorist organisations to collect funds from their various backers. According to the FBI one method used is to set up charitable collections at Mosques ostensibly to be sent back to Pakistan or India or where ever but the administrators slice 10% off and distribute it to terrorist organisations.

1 – In his report on offshore centres Edwards defined them as “net exporters of financial services” and on this basis London is the largest.

An Anti-Money Laundering talk I got at work

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