Money laundering

Money laundering is the process of obscuring the origins of illegally-obtained cash, so that it appears to be legitimate. The goal is to make money appear to have been acquired by legitimate means. This is a common technique in certain industries that generate massive amounts of cash, such as the drug trade, gambling, the smuggling of goods to avoid tariffs, extortion, and kidnapping.

An illegal enterprise could simply retain its cash holdings and use them to make purchases in cash. However, the use of large amounts of cash may come to the attention of the authorities, so criminals are more likely to find ways to insert the cash into the formal financial system. This is typically done by making large numbers of small cash deposits to a variety of banks, so that the amounts deposited fall beneath the minimum reporting threshold for Currency Transaction Reports by the receiving banks. The funds are then shifted through an array of offshore shell companies to obscure the origins of the cash, and then re-inserted into the economy, typically by purchasing assets. These asset purchases may be in the name of a different party or a trust, thereby hiding the true ownership of the asset.

Here are several more specific ways in which cash can be laundered:

  • Commingling of funds. A criminal purchases a business that commonly handles large amounts of cash, such as a car wash, laundromat, or used car lot, and pushes cash into it, typically by recording more sales than are actually occurring. The cash is then a legitimate part of a normal business.

  • Loan to oneself. Cash is transferred to a shell company, which then issues a loan back to the criminal. The proceeds are typically used to buy a business, so that the cash flows from the business can be used to pay back the loan. The criminal even gets to take a tax deduction on the interest paid.

  • Altered invoices. An offshore company sends an invoice to the criminal’s company, where the invoice for goods or services is significantly higher than the cost of the underlying items. The invoice is paid, thereby shifting funds out of the country and into the offshore company, which is also owned by the criminal.

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Money Laundering