What is money laundering?
Money laundering is the illegal process of disguising the origins, ownership, and/or destination of funds obtained through criminal activities to make them appear legitimate.
This type of financial crime aims to convert “dirty” money (e.g., funds earned through illicit activities like drug trafficking) into “clean” money by putting it back in circulation within the financial system via financial or non-financial service providers.
The term “money laundering” is believed to originate from Al Capone’s use of his chain of laundromats to process vast amounts of criminally obtained cash in the 1920s. These days, however, financial criminals are more likely to launder money through complex physical and digital channels, including shell companies, cryptocurrency transfers, real-estate investments, peer-to-peer payments, and purchases of high-value goods.
Money laundering has significant social consequences. For example, it may fuel the activities of drug dealers, terrorists, arms dealers, human traffickers, corrupt officials, and other criminals.
In some jurisdictions, like the EU, tax fraud and tax evasion practices (e.g., receiving a large amount of cash and deliberately not acknowledging it as income) are considered predicate offences for money laundering. To protect themselves, their clients, and the integrity of the financial system, institutions must apply strict anti-money laundering (AML) measures.
The 3 stages of money laundering
Money laundering typically involves three stages:
Placement: Introducing illicit money into the financial system through a legitimate financial institution, or another business or operation.
Layering: Hiding the money’s source through multiple, complex transactions.
Integration: Reintroducing the “cleaned” money into the economy so that it can be spent freely.
Placement: Getting the money into the financial system
The first step in turning money from criminal activity into funds with an apparently legitimate source is to inject it into the financial system. This is called placement.
Common placement techniques include:
Smurfing, or breaking up large amounts of cash into smaller deposits that won’t trigger a financial institution’s AML mechanisms
Using cash-intensive and transaction-heavy businesses as fronts (e.g., restaurants or casinos)
Depositing cash across multiple banks
Purchasing high-value assets, like real estate or luxury goods
Blending illegally obtained funds with legitimate money
For example, a criminal who owns a restaurant business might inflate their daily cash turnover by adding funds gained from illegal activities to their legitimately earned income. The illicit funds, gradually deposited in the business’s legitimate bank account, are designed to appear to be ordinary deposits of the restaurant’s proceeds.
Layering: Creating complexity to disguise the source
Through the practice of layering, financial criminals aim to perform plentiful complex financial transactions (i.e., layers). The goal? To hide the origin and destination of illicit funds.
Layering practices may include:
Wire transfers between multiple accounts
Currency exchanges
Crypto transactions
Using offshore bank accounts and shell companies
Creating fake invoices and trade documents to inflate value
Purchasing and selling investments (e.g., from a restaurant business through real estate to precious metals)
Think of someone who’s being followed and tries to shake off their pursuer by taking multiple sharp turns, switching disguises, and hopping between different vehicles. In a basic sense, such diversions are akin to the practice of layering.
To detect unusual patterns that may indicate layering, financial institutions rely on advanced transaction monitoring systems.
Integration: Returning the “cleaned” money to the criminal
Integration is the final stage of the money-laundering process, in which the “cleaned” funds are reintroduced into circulation. At this point, the funds’ origins appear legitimate, and they can be used freely without suspicion. Afterwards, any money generated is returned to the criminal through a seemingly legitimate source.
The integration phase in money laundering is usually the most challenging to detect and prevent, since there is no actual physical evidence that authorities can use to tie the funds to the previous layering and placement phases. As a result, at such an advanced stage, it becomes very difficult to distinguish between legal and illegal funds.
How to prevent money laundering
While preventing money laundering and Combating the Financing of Terrorism (CFT) is a collaborative process involving various public- and private-sector stakeholders on an international level, financial institutions usually play a leading role.
The most effective way to prevent financial crimes such as money laundering is through a comprehensive anti-money laundering (AML) regime based on several components, including:
Adhering to relevant regulations
Using innovative AI-powered technology for securely handling processes like Customer Due Diligence (CDD), Know Your Customer (KYC), and transaction monitoring
Reporting suspicious behaviour or transactions to regulatory authorities in a timely manner
Complying with money laundering regulations
Based on the jurisdiction in which they operate, financial services providers can be subject to different AML/CFT policies, reporting requirements, and procedures. These largely determine the internal controls they apply.
Most money laundering regulations oblige entities to continuously monitor transactions and report any suspicious activities to regulatory authorities.
For example, a typical requirement involves filing Suspicious Activity Reports (SARs) when a transaction appears unusual, lacks a legitimate purpose, or indicates possible money laundering or terrorist financing. Another is submitting Currency Transaction Reports (CTRs) for cash transactions exceeding the established reporting threshold (e.g., $10,000 in the United States under the Bank Secrecy Act).
Non-compliance with regulatory requirements from agencies such as FinCEN (US), the FCA (UK), and the Anti-Money Laundering Authority (EU) can lead to financial penalties and result in legal action or business risk.
Anti-Money Laundering (AML) programs
The specifics of the AML programs that financial entities adopt depend on the requirements of the respective oversight authority. However, in markets like the USA, UK, and EU, AML programs usually accommodate critical components such as Know Your Customer (KYC), Customer Due Diligence (CDD), and Enhanced Due Diligence (EDD).
This way, entities can ensure they have an adequate system to verify customers’ identities and assess risk. Reporting suspicious activities, cross-border fund transfers, beneficial ownership information, and large cryptocurrency transactions are also required in many jurisdictions.
The monitoring is usually continuous and in real-time. All the collected data is submitted to the regulatory authorities in a standardized format, which enables easier cooperation on industry, national, and international levels. This also helps improve transparency and safeguard the integrity of the financial system, minimising the risk of the socioeconomic consequences of financial crimes.
Know Your Customer (KYC) requirements
Know Your Customer (KYC) requirements are essential in the fight against money laundering. In short, they ensure that financial institutions have enough credible proof to verify customers’ identities before providing services.
Proper KYC controls help detect suspicious activities early and prevent criminals from accessing financial or other services to disguise illicit funds or finance terrorism.
KYC involves three key components:
Together, these processes help detect fake identities, shell companies, and sanctioned or politically exposed persons (PEPs) who might pose a money laundering risk.
Money laundering FAQs
How much money is laundered every year?
According to the United Nations Office on Drugs and Crime (UNODC), 2–5% of global GDP is laundered annually, equaling between €715 billion and €1.87 trillion. The IMF and the World Bank estimate the amount of laundered money to be $2–4 trillion per year.
Which industries are most vulnerable to money laundering?
Industries that offer access to the financial system, such as investment and banking services, exchanges, and payment services, are often exploited by criminals looking to “clean” funds from illicit activities. Industries within high-risk jurisdictions, where payments are made predominantly in cash, or those related to selling high-end luxury goods (cars, boats, artwork, etc.), are also highly vulnerable.
How can businesses protect themselves?
The best way for businesses to protect themselves against money laundering is to follow regulatory guidance and adopt strong anti-money laundering (AML) controls. These include technology-led procedures for customer identity verification and authentication, transaction monitoring and AML screening, ongoing KYC, and more.
