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How does money laundering work?

Disclaimer: I don't have any practical experience.

"Money laundering" covers a broad range of practices that disguise the true source or amount of income, or the movement of money between jurisdictions.

Suppose you're a drug dealer. You have lot of cash coming in.  But if you start spending it, the Internal Revenue Service (and the state taxing authority, if any) may be able to show that your lifestyle spending exceeds what your declared income supports.

One option is simply to declare your drug sales as income.  This is what the law requires, and the IRS even has a spot on form 1040 for it.  Publication 17 states:  "Income from illegal activities, such as money from dealing illegal drugs, must be included in your income on Form 1040,  line 21, or on Schedule C or Schedule C-EZ (Form 1040) if from your  self-employment activity. " -- https://www.irs.gov/publications/p17 

While the IRS does maintain confidentiality of tax records, there is certainly some risk in disclosing illegal gains.  You may also arouse the suspicion of local law enforcement if your lifestyle cannot be easily explained.  Your bank may also inquire about the large amounts of cash you attempt to deposit, which must be reported to the federal government.

So, the source of income can be disguised as receipts from a cash-intensive business.  You buy a bar, and all the cash you earn dealing drugs is reported as receipts from the bar.  Maybe the bar makes some legit money, too! But it's not important whether it does or not; from the outside it looks like you're a successful business, and your regular deposits of cash have an explanation.

Of course, if the bar is profitable, you have to pay taxes again.  So maybe you create some fake expenses to offset all that fake profit.  Your money comes in to the bar, gets deposited in the bank, and then paid to a different business also controlled by you.  If you're sophisticated, this second business could be in a different jurisdiction to make the money harder to track.  Maybe you claim to buy lots of expensive imported rum, while the money really goes to an offshore account in a privacy-friendly jurisdiction.  Your bar can also spend "business" money on your personal expenses--- who's to say where that extra large-screen TV ended up?

Perhaps you become a high roller at the local casino.  Your buy-ins are made with cash.  When you turn in your chips, you get a check from the casino instead, which can be deposited in your bank account, and portrayed as gambling winnings.

As you accumulate larger amounts of cash, you need to scale up the laundering operation.  Your bar can't handle millions of dollars, so you invest in high-value assets like real estate or fine art.  A shell company buys an expensive New York apartment with your drug money; when you sell it later, the money is now "clean" and has a legitimate source.   You can even sell the apartment to yourself at an inflated price, or pay the original owner more than the price that gets reported to local taxing authorities, so that there's a bigger "profit" when you flip it a year later.

Once you're big enough, you simply buy a bank.  The bank can then move your cash around without the same sort of scrutiny that would normally be applied.  It doesn't file the required paperwork when you deposit a lot of cash, and can give you "loans" that are just your cash appearing in disguised form. 

There are lots of mechanisms to move cash around besides the ones here, everything from physically smuggling cash to investing in a movie production.  All of these disguise the true ownership and source of cash by making it look like something else: overseas investments, investment returns, inheritance, profits from a legitimate business or real-estate transaction, many small transactions, gambling winnings, etc.  Money laundering moves money from the "illegal" economy into the legitimate financial system, disguises its origin, and makes it available for the criminal to use.

1 Comment

Money laundering is mostly distributed through 3 steps:

the first step is that cash / funds generated from associate activity of crime / crime is born-again into a type that doesn't or doesn't cause suspicion through placement to the national economy in numerous ways that (placement stage);

the second step is to conduct money transactions that area unit complicated, stratified and anonymous with the aim of separating the income from the supply into numerous accounts so the origin of the fund is troublesome to trace, in alternative words concealment or disguising the origin of the assets (coating / layering);

the third step (final) is that the stage within which the actor re-enters funds that have loose their origin into assets that seem legitimate each to be enjoyed directly, invested with in numerous kinds of material and money wealth, accustomed finance legitimate business activities or to refinancing criminal activities (integration stage).


this is however cash is laundered

1. Gambling in casinos

There is no higher thanks to wash cash than at a casino. What you wish is to declare yourself to win gambling at the casino. The trick is simple. merely carrying a traveling bag of pillage, exchange it with some chips on the QT, gambling for whereas|a short time|a minute|a moment|a jiffy|a short while} so exchanging chips with a check while stating that the kick in hand may be a winning result. what quantity cash you wish to scrub during a casino does not matter. the money wash method are often accelerated by involving several players.

2. compounding funds into legitimate businesses

Another common thanks to wash cash is to ascertain variety of companies whose existence is just to combine pillage with legitimate financial gain. The established business itself is legal and legal and operates sort of a business normally. It's simply that, the bourgeois exaggerates the receipt or profit so the pillage are often entered and thought of valid. Businesses that ar altogether keen about the flow of money like nightclubs ar typically targeted by concealment agents as a result of the business makes police investigation the flow of funds terribly tough.

3. Slip funds

A number of banks have enforced anti concealment procedures so it'll be tough for individuals to transfer massive amounts of funds. However, this will be tricked by slippy funds. This follow are often done just by hiring some individuals so the person involved are often asked to assist build some little deposits into variety of accounts for many money cycles before the money is came back to the criminal. This one methodology typically takes longer for washers if the money to be transferred is in massive quantities. The person involved should jazz for days so he's not suspected.

4. Play within the property and assets business

The follow of cash wash utilizes a good network of labor to hold out numerous transactions with totally different bank names and accounts. one amongst the foremost common practices of pillage wash is to stream it to the property or assets business. you'll simply obtain property or land from a customer, however the worth on paper is slightly down. the vendor then agrees to simply accept the prevailing cash distinction - and reserve it. the client then 'sells' the property to a different partner with a better price. Well, this distinction in cash from sales and purchases is pillage that has been cleared.

5. Convert to diamond

This includes the foremost feared ways by the govt., particularly the u. s. government. changing pillage into diamonds is that the best follow to avoid tax bills. Diamonds ar terribly tough to discover, as a result of they're terribly simple to export abroad; and reborn once more into massive amounts of cash. due to the scary impact of diamonds, variety of economic observers say that once a diamond country has become associate investment artifact, the country is wealthy in concealment and high criminals.


In simple words, Money laundering is the process of changing the colour of the money from black to white. There are three stages of money laundering. 

When there are proceeds of the crime available with a person (proceeds of corruption, proceeds of terrorist funding or narcotics proceedings) he is tempted to enter into money laundering transactions

  1. Placement - When the proceeds of crimes are introduced in the bank
  2. Layering - Nature of transactions is disguised
  3. Integration - Finally the money is sent out to the account of ultimate beneficiary