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ML: Money Laundering

Definition

Money laundering is the process by which criminals convert illicit proceeds into assets or funds that appear legitimate, so that the origin, ownership, or destination of those proceeds becomes obscured. It typically involves three successive phases: Placement, layering, and integration, and is a foundational enabler of organised crime, corruption, tax evasion, and terrorist financing.

In the context of AML/CFT frameworks, money laundering poses serious risks to financial institutions, ecosystems, and jurisdictions because it undermines financial integrity, facilitates crime, and can lead to regulatory, reputational, and operational consequences.

Explanation

The term “money laundering” metaphorically refers to the transformation of “dirty money” obtained from criminal activity into “clean money” that appears lawful and can be freely used.

At its core, the process involves disguising the true source, movement, and ultimate use of illicit funds.

The complexity of these flows varies from simple cash-based layering to sophisticated cross‐border networks involving shell companies, trade mis-invoicing, convertible virtual assets, and hidden beneficial ownership.

Financial institutions, payment service providers, fintechs, virtual asset service providers (VASPs), and other regulated entities form critical avenues through which illicit funds may be channelled, intentionally or inadvertently.

As such, monitoring, detection, and disruption of money laundering are key components of AML/CFT compliance.

While controls cannot eradicate money laundering, they can raise the cost and risk to perpetrators, restrict access to the legitimate financial system, and enable enforcement and forensic efforts.

Money Laundering in AML/CFT Frameworks

Money laundering intersects with AML/CFT regimes in multiple ways, particularly in customer due diligence, transaction monitoring, sanctions screening, and reporting obligations.

Some of the key connections are:

  • Customer onboarding and KYC processes must address potential money laundering risks such as beneficial-ownership obscuration, shell entities, and high-risk geographies.

  • Transaction monitoring systems must detect unusual patterns consistent with layering and integration, including rapid fund movement, round-trip flows, or transactions inconsistent with the business profile.

  • Cross-border correspondent banking and payment networks often introduce heightened risk of money laundering due to jurisdictional gaps, anonymity, and regulatory arbitrage.

  • Suspicious transaction reporting frameworks require institutions to submit reports when they detect indicators of money laundering or unusual activity.

  • Regulators use mutual evaluations, risk assessments, and sanctions regimes to hold institutions accountable for weak anti-money-laundering controls.

Key Components of Money Laundering

Victimisation and Predicate Crimes

Money laundering always begins with the generation of illicit proceeds from predicate crimes. Typical offences include:

  • Drug trafficking and narcotics operations.
  • Fraud, bribery, or corruption.
  • Illicit trade, human trafficking, or smuggling networks.
  • Tax evasion, ransom payments, or extortion.

Three Stages of Money Laundering

The classic model of laundering comprises:

  • Placement: Introducing illicit funds into the financial system or economy (for example, depositing cash into bank accounts, buying convertible assets).
  • Layering: Concealing the source by moving funds through complex transactions, geographic transfers, and ownership changes.
  • Integration: Reintroducing cleaned funds into the legitimate economy, for example, through real estate, business investment, or legitimate bank transactions.

Common Methods and Techniques

Criminals employ a range of methods to launder funds, including:

  • Use of shell companies, trusts, or nominee structures to obscure beneficial ownership.
  • Trade‐based laundering, such as over-invoicing, under-invoicing, or phantom shipments.
  • Digitally-enabled methods such as virtual asset transfers, peer-to-peer wallets, and crypto mixers.
  • Cash‐intensive businesses and structured deposits below reporting thresholds (structuring).
  • Use of correspondent banking, foreign branches or jurisdictions with weak regulation.

Risk Indicators and Red Flags

Some indicators that may suggest money laundering include:

  • Large cash deposits are inconsistent with the known customer profile.
  • Rapid movement of funds through multiple accounts with no clear economic purpose.
  • Use of multiple shell entities, nominee directors, or opaque ownership.
  • Transactions routed through high-risk jurisdictions only to return to the origin (round-trip).
  • Sudden increase in account activity following a period of dormancy.

Examples of Money Laundering Scenarios

Real Estate Investment Laundering

A criminal group buys high-value real estate property through a shell company, pays in cash or via layered funds, then sells the asset and injects the proceeds as legitimate corporate income.

Digital Asset Conversion and Mixing

Illicit funds are converted into cryptocurrencies, sent through mixing services, then transferred back to fiat currency via online exchanges, masking origin and enabling global value transfer.

Trade-Based Money Laundering (TBML)

An exporter over-invoices shipments to a partner company, transfers the excess value back via banking channels labelled as payment for goods, thereby disguising illicit profit movement.

Correspondent Banking Abuse

A small bank in a regulated jurisdiction receives inbound funds from a high-risk correspondent institution. The funds are rapidly transferred out to several shell accounts in jurisdictions with weak AML regimes, then returned to the original network.

Mule Networks and Layering

Cash-intensive businesses recruit account holders (mules) to deposit illicit cash, then transfer it online in smaller amounts to multiple destinations, effectively layering and integrating proceeds.

Impact on Financial Institutions

Money laundering presents major consequences for institutions and the broader financial system:

  • Regulatory sanctions, fines, or restrictions may be imposed for AML failures.
  • Reputational damage can erode customer confidence, correspondent relationships, or investor trust.
  • Operational costs increase due to enhanced monitoring, investigations, filings, and technology investment.
  • Correspondent banking relationships may be terminated by larger banks if a smaller institution is perceived as vulnerable to money laundering risks.
  • Legal exposure through asset seizure, civil litigation, or complicity in criminal networks.

Challenges in Detecting & Preventing Money Laundering

Despite regulatory frameworks and advanced technology, money laundering remains difficult to eradicate. Key challenges include:

  • Emerging technologies (cryptocurrencies, decentralized finance, peer-to-peer platforms) continuously expand risk surfaces.
  • Globalisation and digitalisation enable rapid cross-border flows that evade local controls.
  • Sophisticated criminals use layered networks, shell firms, and complex ownership to disguise proceeds.
  • High volume and velocity of financial transactions make it difficult to detect all red flags without high false-positive rates.
  • Resource constraints and data quality issues hamper effective monitoring in many institutions.

Regulatory Oversight and Governance

Global and national oversight frameworks play a central role in combating money laundering:

  • The Financial Action Task Force (FATF) sets international standards and monitors member jurisdictions for compliance.
  • National regulators and financial intelligence units (FIUs) enforce AML laws and supervise reporting entities.
  • Internal governance within institutions must include board oversight, first/second/third line of defence models, and continuous audit and improvement of AML controls.
  • Compliance programmes should integrate risk assessments, KYC/EDD processes, transaction monitoring, and suspicious activity reporting.

Importance of Addressing Money Laundering in AML/CFT Compliance

Addressing money laundering effectively is central to maintaining the integrity of the financial system and protecting the institution from financial crime risk.

It enables institutions to:

  • Prevent the facilitation of criminal enterprises and terrorist financing.
  • Meet regulatory obligations for risk-based controls, reporting, and transparency.
  • Protect reputational capital and sustain access to strategic banking relationships.
  • Allocate resources proportionately to residual risk and adapt to evolving typologies.
  • Support intelligence-led AML frameworks that combine data analytics, typologies, and rule-based controls.

Money laundering is not a static problem—it evolves with financial innovation, regulatory change, and shifting criminal behaviour.

Institutions must maintain adaptable, intelligence-driven AML/CFT programmes to stay ahead of threats.

Related Terms

  • Predicate Offence
  • Structuring
  • Shell Company
  • Trade-Based Money Laundering (TBML)
  • Beneficial Ownership
  • Virtual Asset Service Provider (VASP)

References

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