Money laundering, also known as “cleaning of money,” is the practice of engaging in specific financial transactions in order to conceal the identity, source, or destination of money. Money laundering is a main operation of the underground economy. “Dirty money” is useless to organized crime because it leaves a trail of incriminating evidence. Criminals who wish to benefit from the proceeds of crime have to disguise their illegal revenues without implicating themselves. Therefore, money laundering is a process whereby the origin of funds generated by illegal means such as drug trafficking, gun smuggling, corruption, bribery, embezzlement, fraud, and extortion is concealed. The objective of the operation, which usually takes places in several stages, is to make illegally gained assets appear as though they are derived from a legitimate source. Money laundering is a dynamic process that requires three stages: placement, or moving the funds from direct association with the crime; layering, or disguising the trail to foil pursuit; and integration, or making the money available to the criminal once again with its occupational and geographic origins hidden from view. The consequences of money laundering are detrimental to business, economic development, government, and the rule of law. Money laundering increases the demand for cash, makes interest and exchange rates more volatile, and causes high inflation. The drainage of financial resources from ordinary economic growth is detrimental for the whole economy. Most importantly, money laundering empowers corruption and organized crime.
Money laundering is not a new phenomenon; it is as old as crime itself. However, the forms and dimensions of this type of crime have evolved and have become more sophisticated as a result of the rapid growth of globalization, integration, and economic liberalization, as well as dramatic developments in the provision of financial information, in technology, and in communications. Illegal money can be moved anywhere in the world with speed and ease. Tax havens (offshore centers) that offer stability, quality of service, and bank secrecy allow criminals to shield money in complex networks of shell companies. At the same time, the escalation of the drug market and the globalization of organized crime have led to an increased international awareness of the problem of money laundering. The International Monetary Fund (IMF) estimates that money laundering accounts for between 2 and 5 percent of the world’s Gross Domestic Product (GDP), or about $600 billion annually.
While the term money laundering was once only applied to financial transactions related to organized crime, its definition has expanded. The term today covers any financial transaction that generates an asset or value as the result of an illegal act, including tax evasion or false accounting. Accordingly, in addition to members of organized crime, individuals, small and large businesses, government officials, and even national governments can be considered money launderers. However, the authorities have reacted primarily to the danger of abuse of the financial market by criminal organizations. Over the years, national and international agencies have created a new relationship between law enforcement authorities and those involved in the financial sector, allowing for a united fight against money laundering. In addition, since September 11, 2001, there has been a coordinated attempt, especially in the United States, to cut off terrorist financing. Through the aggressive pursuit of money trails, law enforcement hopes to identify and capture criminals and terrorists and to deny terrorist entities the funds necessary to finance further acts of terror.
SEE ALSO Capital Flight; Corruption; Drug Traffic; Finance
Alldridge, Peter. 2003. Money Laundering Law: Forfeiture, Confiscation, Civil Recovery, Criminal Laundering, and Taxation of the Proceeds of Crime. Oxford: Hart Publishing.
Beare, Margaret E., ed. 2003. Critical Reflections on Transnational Organized Crime, Money Laundering, and Corruption. Toronto: University of Toronto Press.
Camdessus, Michel. 1998. Money Laundering: The Importance of International Countermeasures. Washington, DC: International Monetary Fund.
Jain, Arvind K., ed. 1998. Economics of Corruption. Boston: Kluwer Academic Publishers.
Jain, Arvind K., ed. 2001. The Political Economy of Corruption. London and New York: Routledge.
Naylor, R. T. 1987. Hot Money and the Politics of Debt. New York: Linden Press/Simon and Schuster.
"Money Laundering." International Encyclopedia of the Social Sciences. . Encyclopedia.com. (February 18, 2018). http://www.encyclopedia.com/social-sciences/applied-and-social-sciences-magazines/money-laundering
"Money Laundering." International Encyclopedia of the Social Sciences. . Retrieved February 18, 2018 from Encyclopedia.com: http://www.encyclopedia.com/social-sciences/applied-and-social-sciences-magazines/money-laundering
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The process of taking the proceeds of criminal activity and making them appear legal.
Laundering allows criminals to transform illegally obtained gain into seemingly legitimate funds. It is a worldwide problem, with approximately $300 billion going through the process annually in the United States. The sale of illegal narcotics accounts for much of this money. Those who commit the underlying criminal activity may attempt to launder the money themselves, but increasingly a new class of criminals provides laundering services to organized crime. This new class consists of lawyers, bankers, and accountants.
Criminals want their illegal funds laundered because they can then move their money through society freely, without fear that the funds will be traced to their criminal deeds. In addition, laundering prevents the funds from being confiscated by the police.
Money laundering usually consists of three steps: placement, layering, and integration. Placement is the depositing of funds in financial institutions or the conversion of cash into negotiable instruments. Placement is the most difficult step. The easiest way to begin laundering large amounts of cash is to deposit them into a financial institution. However, under the federal Bank Secrecy Act of 1970 (BSA), 31 U.S.C.A. §§ 5311 et seq., financial institutions are required to report deposits of more than $10,000 in cash made by an individual in a single day. To disguise criminal activity, launderers route cash through a "front" operation; that is, a business such as a check-cashing service or a jewelry store. Another option is to convert the cash into negotiable instruments, such as cashier's checks, money orders, or traveler's checks.
Layering involves the wire transfer of funds through a series of accounts in an attempt to hide the funds' true origins. This often means transferring funds to countries outside the United States that have strict bank-secrecy laws. Such countries include the Cayman Islands, the Bahamas, and Panama. Once deposited in a foreign bank, the funds can be moved through accounts of "shell" corporations, which exist solely for laundering purposes. The high daily volume of wire transfers makes it difficult for law enforcement agencies to trace these transactions.
Integration involves the movement of layered funds, which are no longer traceable to their criminal origin, into the financial world, where they are mixed with funds of legitimate origin.
Many banks did not comply with the BSA during the 1970s and early 1980s. Following several federal investigations where it was revealed that banks had failed to report billions of dollars of cash transactions, reporting requirements were strengthened. Congress also enacted the Money Laundering Control Act of 1986 (MLCA), 18 U.S.C.A. §§ 1956 et seq. This statute criminalizes money laundering itself. It centers its attention on the criminals and conspirators who seek to launder the proceeds of illegal activity, including merchants, bankers, and members of the professions who assist criminals with money laundering. Another provision of the MLCA authorizes the government to confiscate all property that is traceable to violations of laws against money laundering.
After the september 11th attacks on the United States in 2001, the federal government began to investigate more closely the connection between terrorism and the sale of illegal drugs. According to President george w. bush, "[T]errorists use drug profits to fund their cells to commit acts of murder. If you quit drugs, you join the fight against terror in America." Terrorists have laundered money through such foreign countries as Colombia and Afghanistan. In September 2002, the drug enforcement administration opened a museum exhibit in New York entitled "Target America: Traffickers, Terrorists and You" in an effort to educate the American public about the connection between drug sales and terrorism.
Lilley, Peter. 2003. Dirty Dealing: The Untold Truth about Global Money Laundering. 2d ed. Sterling, Va.: Kogan Page.
Sulltzer, Scott. 1995. "Money Laundering: The Scope of the Problem and Attempts to Combat It." Tennessee Law Review 63.
U.S. Department of the Treasury. 2000. The National Money Laundering Strategy for 2000. Washington, D.C.: Department of the Treasury.
Vukson, William B.Z., ed. 2003. Organized Crime & Money Laundering. Toronto, Ont.: G.7 Report Inc.
Woods, Brett F. 1998. The Art & Science of Money Laundering: Inside the Commerce of the International Narcotics Traffickers. Boulder, Colo.: Paladin Press.
"Money Laundering." West's Encyclopedia of American Law. . Encyclopedia.com. (February 18, 2018). http://www.encyclopedia.com/law/encyclopedias-almanacs-transcripts-and-maps/money-laundering
"Money Laundering." West's Encyclopedia of American Law. . Retrieved February 18, 2018 from Encyclopedia.com: http://www.encyclopedia.com/law/encyclopedias-almanacs-transcripts-and-maps/money-laundering