The Hows and Whys of Money Laundering

Eileen Meng Lu  |

Money laundering is the process whereby criminals hide their dirty cash obtained via illegal schemes. The purpose of money laundering is to transform illegal money to “clean” and legitimate cash. Understanding the process of money laundering allows us to have a better knowledge of the comprehensive financial world.

The Harm Money Laundering Causes

Money laundering is illegal, obviously, and the harms it inflicts on the society are varied.

First of all, civilization and social benefits can only happen when people pay taxes, and a direct side effect of money laundering is tax loss. Laundering money is untaxed, so the rest of the society has to ultimately make up that loss.

Aside from the loss of taxes, money laundering can also harm the normal operation of economy. When massive piles of dirty cash finds its way into certain part of the economy that creates the illusion of demand for “front” sectors of business, This in turn  arouses the attention of law enforcement. Once law enforcement starts to investigate, that money will disappear in a short time, which breaks the balance of financial sector.

How Criminals Launder Money

Banks, Domestic and Foreign  

The most direct way to hide dirty money is make small withdrawals and deposits from the bank. The method is referred to as “structuring” or “smurfing.” All banks are required to report transactions involving amounts over $10,000 to the Financial Crimes Enforcement Network( FinCEN), so criminals usually split their dirty cash and deposit and withdraw small bills per time across several bank accounts to prevent being investigated. This could happen when the amount of cash is not so large that won’t get much attention.

The US is one of the few countries require report of large amount transactions. For developing countries that are in the process of establishing comprehensive regulations, money launderers may take advantage of less regulated banks. In the 1990s, large amount of dirty cash entered banks in the developing Baltic states, and bank patrons had to cover that with their own clean money to prevent losing insurance as a result of investigations into the dirty money. This ultimately led to collapse of banks.

Using foreign banks is also a common way for hiding money without alerting one’s own country. Switzerland is an ideal choice for money launders because of its stringent secrecy laws. However, recently transactions are easier to be exposed in Swiss banks because of the pressure by the U.S. government. Hong Kong, Aruba, Ghana, and many other countries are also popular sources for money laundering.

Offshore banks are also a heaven for money laundering and tax evasion. These banks develop international networks for drug traffickers. Nearly 40 countries in the world are considered secrecy and tax havens. IMF applies “major offshore centers” to these countries: the Bahamas, Bahrain, the Cayman Islands, Hong Kong, the Netherlands Antilles, Panama and Singapore. Smaller offshore centers include Dublin, Cyprus, Madeira, Malta, Malaysia's Labaun Island, and Thailand's Bangkok International Banking Facility.

However, no matter how careful they are, money laundering through legitimate banks leaves a paper trail, which might backfire years later. Rather than use legal banks, some cautious money lauders choose “underground” banks. Without government investigation and paper trails, such banks operate based on trust, family ties, or local social structures, such as the “hawala” in India and Pakistan, and “fie chen” or “flying money” in China.

Virtual Currency— Bitcoin & Game Currency

Recent years have seen virtual currency become a favored method for transferring and laundering cash outside of the prying eyes of regulators.

The cryptocurrency Bitcoin functions as storage of wealth, like a “digital wallet” or a virtual bank account. It serves as a platform for users to exchange for goods and services. Bitcoin users range from common people who dislike inflationary “fiat” currency, to idelogical aficianados, to drug dealers who prefer to get paid without leaving a paper trail.

Unlike stock market or any most other value transactions, the bitcoin exchange does not need middle men, which means no banks, no inspection, and no need to give out your real information. Therefore, from buying drugs to guns, you can buy almost anything from the internet netherworld with safe, untraceable virtual currency. Through this process, dirty cash and bitcoins can be shuffled around, and then exchanged for clean money. Usually there will be around 1% transaction fee for the service of converting from bitcoin to clean money.   

Indeed, recently the virtual peer-to-peer currency is seeking to expand its payment usage to real world. In July Hong Kong ANX Bitcoin Exchange issued a bitcoin debit card to make purchases at retailers and online merchants. Cardholders and also withdraw cash at ATMs in the world. The action has aroused speculation and suspicion.

Because its “totally virtual” nature, although many users use Bitcoin as investments, the future of Bitcoin tends to look like a money laundering one.  

If Bitcoin can stabilize in the future and creep into the legitimate world of finance, the concept of untraceable virtual currency could threaten the normal operation of banks and payment operators like Visa and MasterCard.

Another newly emerging virtual currency for money laundering is in-game currency. Online role paying games provide easy ways for criminals to launder their money. They move dirty cash around online through anonymous transactions using in-game currencies, and thanks to almost zero financial regulations in most of online games, money launderers easily pass dirty money into online account and pull clean ones out of others. Popular online games for money laundering include Second Life and World of Warcraft.

"Buy Dirty, Sell Clean" – The Case of Real Estate

Other than deposit to the bank, money launderers like to purchase some commodity or asset and then sell it to escape paper trail. Put it this way: when someone use dirty cash to buy a house, and sell it, the income then appears to be derived from a legal practice - selling a house. Technically, this method is not paper trail-free, but it will definitely lessen the possibility to trace back.

A popular method is buying real estate in another country. According to the National Association of Realtors 2013 Profile of International Home Buying Activity, buyers of American homes come from 68 countries across the world and make up 7 percent of the total home sales in the US. 53 percent of reported transactions in the study come from just five countries, Canada, China, Mexico, India and United Kingdom.

China as a developing country now shows its amazing RMB power, real estate no exception. Chinese homebuyers accounted for $12.3 billion in sales in 2013, making them the second largest buyers in the world after Canadian buyers, and about 53% of reported purchases by Chinese buyers were just in California. The high median buy price of $425,000 raises some red flags, and while it’s impossible to say how many purchases were used with illicit funds, almost 70% of the purchases were all-cash offers, a stat that topped all other countries. Not to mention the country's own central bank has been accused of money laundering.

Fake Accounts and the "Front Business"

Another method for laundering money is to open businesses to cover dirty cash. Many companies pretend they make less money so that they can pay less tax. But in money laundering cases, dirty accountants log more profits than they really made, and fill the differentials with dirty cash from non-existent sales.

To avoid the paper trail of transactions through banks, these merchants usually operate cash-only. For example, when you sell wine in a bar for $100 a bottle, but you may put $1000 in the books. And the differential of $900 will be clean money that was actually illegally made. This usually more common in bars or casinos where the retail price of a commodity like wine can be much higher than its expected value.

Combating Money Laundering

Law Enforcement

Countries have years of work to combat international money laundering. Globally, Paris-headquartered FATF is an intergovernmental body dedicated to combating money laundering.. As of 2014 its membership includes 36 countries and territories in the world. The organization monitors its country members’ process in implementing anti-money laundering measures, reviews and reports on laundering trends techniques and countermeasures, and promotes the adoption of money laundering measures.

Law enforcement efforts towards discouraging money laundering vary from country to country. In the case of United States of America, money laundering became criminalized in the U.S. in 1986 with the establishment of Money Laundering Control Act. Under Bank Secrecy Act (BSA) there are a series of laws preventing dirty money from entering the financial system in the first place. Regulations include reporting cash transactions in excess of $10,000, as mentioned in the article. The Annunzio-Wylie Anti-Money Laundering Act of 1992 strengthened the BSA, to prevent customers to circumvent the BSA.

For example, making small withdrawals and deposits to lauder money from multiple bank accountants, financial institutions are also required to report abnormal transactions on a Suspicious Activity Report. The Money Laundering Suppression Act of 1994 required banks to review and enhance training and develop anti-money laundering training for examiners. The Money Laundering and Financial Crimes Strategy Act of 1998 again reinstated the importance of develop anti-money laundering examination procedures. Marching into the digital age, The Intelligence Reform & Terrorism Prevention Act of 2004 saw the trend of online money laundering, and, and required financial institutions to report cross-border illegal electronic transactions.

It seems that anti-money laundering measures must evolve with the ever-changing money laundering methods. When it comes to the question of whether villains can always outsmart or justice shall be served one day, the answer is unclear today. The history of money laundering is intertwined with illegal deeds like drug trafficking, illegal merchandising between companies, and even handling dirty money from government corruption. As long as human beings are lured by profits, then getting rid of money laundering seems to be a mission impossible. This could be a challenge for all the countries for a long time to come. 


DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


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