Money laundering is a process used by offenders who attempt to conceal the true origin and ownership of the proceeds; these proceeds are results of criminal activities. It allows them to maintain control over the proceeds and provide a legitimate cover for their source of income.
The laundering of the proceeds that result from criminal activity is done through the financial system. The people who are involved in such an action exploit the facilities of the financial institutions of the world. Such an action is done easily under these conditions of free movement of capital. Banks involved in such actions risk to lose their market reputation.
Money laundering is accomplished in three stages, involving numerous transactions of the launderers. Here they are:
- Placement – It means a physical disposal of cash proceeds got from illegal activity. Illegal activities like drug trafficking, extortion, generate very volumes of money. People involved in these activities cannot explain the origin and source of these funds to the authorities. There is a constant fear of getting caught. So the immediate requirement is to send this money to a different location using all available means. This stage is characterized by facilitating the process of inducting the criminal money into the legal financial system. Normally, this is done by opening up bank accounts in the names of non-existent people or commercial organizations and depositing the money.
- Layering – It implies a separation of illicit proceeds from their source; there are created complex layers of financial transactions meant to disguise the audit trail and they assure anonymity. This is used to distance the money from the sources. This is achieved by moving the black money from and to offshore bank accounts in the names of shell companies or front companies by using Electronic Funds Transfer (EFT) or by other electronic means. During this process, they make use of the banks wherever possible as in the legal commercial activity.
- Integration – Supposing that the laundering process was successful, the proceeds are placed back into the economy; they re-enter the financial system and seem to be normal business funds. This is achieved by making it appear as legally earned. This is normally accomplished by the launderers by establishing anonymous companies in countries where secrecy is guaranteed. They can then take loans from these companies and bring back the money.