In the digital world, money laundering has expanded due to the availability of online money transfer services. The digital finance system has made money laundering more challenging. Imposters overlap the system, make tricky transactions using mean methods, and hide them from tax authorities and financial regulators. Due to remote transactions, fraudulents stay anonymous while doing online transactions by using complex financial tools and taking advantage of global digital networks. There are various stages of money laundering involved in this scam. Automated systems are used in the process to evade the authorities.
Risk Index Score of Money Laundering in the U.S.
In 2023, a study categorized countries in Latin America and the Caribbean based on their risk of money laundering and financial scamming. Haiti had the highest risk with a score of 8.25, followed by Nicaragua with 6.42 points. On the other hand, Uruguay had the lowest risk, with a score of 4.08. The study used the Basel AML Index, which covers corruption, financial standards, and the rule of law to measure the risk. The numbers are from trusted sources like the FATF, Transparency International, and the World Bank and are meant to help start more in-depth investigations into these issues.
3 Phases of Money Laundering Explained
Money Laundering is the action taken to transfer illegal money (Black or Dirty money) to appropriate sources, hide the original sources of the funds, and later use it for fraudulent activities. All this process usually covers different stages of money laundering.
The main 3 phases of money laundering are explained below:
1st Phase – Placement in Money Laundering
The placement stage is the first step in money laundering, where illegal money gets into the financial system. Criminals become careful during this stage because they do not want to get caught. They might deposit small amounts of cash to avoid suspicious activity, buy checks or money orders, or use businesses like casinos or car washes to hide the money. After putting money into the system, they hide its origin sources.
2nd Phase – Layering in Money Laundering
Layering is the second step in money laundering, where scammers try to make it hard for authorities to track where the money came from. They do this by moving the money through many different bank accounts in other places, using companies that exist only on paper (called shell companies), or using digital currencies that are hard to trace. The main goal is to mess with transaction history to hide money’s origin. It is difficult for law enforcement to do an investigation. After this stage, criminals can get ready to return their clean money to the regular economy.
3rd Phase – Integration in Money Laundering
Integration is the last step in money laundering. In this stage, the scammer returns the cleaned money to the regular financial system. They might do this by investing in real estate, luxury items, or businesses. Once the money is integrated, it looks like it came from legal sources, making it hard for authorities to announce if it’s legal or illegal. This lets scammers use the money for more illegal activities or to live a lavish lifestyle without getting caught easily. That’s why it’s crucial to have strong anti-money laundering measures and monitor transactions for any signs of suspicious activity.
Examples of Money Laundering in Real Life
There are examples in real life that explain the psychology behind money laundering below:
1st Example: BCCI
Bank of Credit and Commerce International (BCCI) was started by Agha Hassan in 1972 in Luxembourg, and its headquarters is based in Belgium. Instead of growing globally, it was exposed to money laundering activities leading to $23 billion in money transactions. In 1990, it was detected by the investigation team, revealing that they had done illegal transactions and unregistered deposits. Thus, its closure was done in 1991. BCCI mainly used shell companies and bribery to avoid getting caught by the regulators. Therefore, it is considered that banks should comply with AML regulations to protect the financial system.
2nd Example: The Panama Papers
In 2016, the Panama Paper scandal happened and revealed how secret companies were helping influential and wealthy people with tax evasion. Later, the Law firm Mossack Fonseca uncovered their money laundering process and revealed how offshore companies were involved in illegal activities. It also made sure to make the financial system transparent and reliable in the economic system to combat these scams.
AML Rules to Combat Money Laundering
To take action against money laundering, the government has made rules called Anti-Money Laundering (AML) regulations. These rules make sure that financial institutions don’t pursue illegal activities. AML rules protect businesses, firms and users from the harm caused by illegal money.
Regulations of AML
AML compliance study is all about the implementing of regulations and processes to avoid and report money laundering activities which are following:
- Regulating a defined AML policy
- Appointing a compliance officer to oversee the system
- Using advanced techniques to identify suspicious activity
Final words
By complying with AML regulations, businesses can maintain their reputation and can get away with the fines that are charged for doing illegal activities. Make the system reliable and trustworthy. That way, the whole society including users, gets benefits.