arrow left facebook twitter linkedin medium menu play circle

Live Webinar on Feb 28: Authorized Push Payments (APP) Fraud: Trends, Risks, and Your Defense Playbook

Digital Fraud Wiki

Your source for the latest fraud intelligence, insights, research, and commentary.

Money Laundering 101: Definition, Examples, and Prevention

Criminals run an endless number of frauds, scams, and schemes to trick victims out of their money. But once the fraudster gets the dough, they need to erase the paper trail. That’s where money laundering comes in—and why it’s one of the most expensive financial schemes in the world. In fact, the UN estimates criminals launder more than a trillion dollars every year.

Here’s how money laundering works, how to spot it, and how financial institutions aim to prevent it from happening.

What is money laundering?

Money laundering is the criminal process of disguising the source of illegal funds so they appear legitimate. Like a regular laundry removes stains and dirt, money laundering cleans “dirty” money by washing away traces of its illegal source. It’s a near essential part of any financial fraud so criminals can enjoy their illicit profits without attracting suspicion.

The 3 stages of money laundering: placement, layering, integration

Placement

First, criminals need a way to introduce or “place” their illicit funds into the financial system. Typically they get the funds in cash, then deposit them into a bank. But depositing a huge amount at once will set off anti-money laundering (AML) warnings, so criminals use creative placement techniques.

Some common methods are:

  • Smuggling the cash to deposit at a financial institution in another country
  • Recruiting “smurfs” who disperse the large amounts and deposit them in smaller transactions
  • Using money mule scams to have victims unknowingly move illicit funds
  • Buying high value goods and reselling them to get clean profit
  • Adding dirty cash into clean cash flow of existing legitimate businesses
  • Creating shell companies and wiring money through business accounts

Layering

The idea behind the layering stage is to create even more transactions to cover the dirty money’s true origin. By ‘layering” placements and extractions, criminals create what looks like a legitimate paper trail for their cash. Layering is key to avoiding AML checks and uses many of the same placement techniques listed above.

Integration

In the final stage, the “cleaned” money goes back into the economy as seemingly legitimate. The money can be invested or withdrawn and used by criminals for legitimate transactions. If the placement and layering steps worked, the laundered funds now appear to be part of the legal financial system and can be used without raising suspicion.

Common money laundering schemes

Money laundering schemes are nothing if not creative. Criminals are always coming up with new methods to evade AML detection.
Smurfing, smuggling, money mules, and shell companies and businesses are all common laundering methods.

Some other common examples of money laundering are:

  • Trade-Based Money Laundering (TBML) – manipulating trade transactions, like charging too much or too little on an invoice.
  • Real Estate Investment – investing in property that can later be sold to “clean” the money.
  • Gambling – using casinos or online gambling platforms to convert illicit funds into chips or credits, then cashing out with apparent winnings.
  • Cryptocurrencies – converting dirty cash to digital currencies, then obscuring the origin of funds through complex transactions.
  • Round-Tripping – sending money offshore to have it returned as a foreign direct investment or loan.

Is money laundering a felony?

Money laundering can classify as a felony. But it depends on the jurisdiction and the specific laws in the country where it happens. In many countries, money laundering is a serious criminal offense and classified as a felony.

In the US, money laundering is a felony if the accused knows that the money involved in a financial transaction came from some unlawful activity. Some states combine their charges with federal ones, adding more punishment for money launderers.

Money laundering can also be part of larger felony charges like racketeering or other financial frauds that raise the overall charges to a felony level.

How to detect money laundering

Financial institutions use tools, investigators, and machine learning to catch money laundering. Most of these tools fall under the anti-money laundering umbrella of requirements. AML is so important that all financial institutions in the US must follow this law or face fines that can reach the billions.

Many AML systems use transaction monitoring to check customer transactions in real-time. These systems analyze things like transaction patterns, amounts, and frequencies, to spot and flag suspicious activity. These monitoring tools also compare known customer behavior against new suspicious actions. Anomalies to how a person would usually transact set off alarms.

Predefined red flag indicators also help spot activity that signals money laundering. These indicators see unusual transaction patterns, such as structuring and smurfing.

When financial institutions see suspicious transactions, they file suspicious activity reports (SARs). SARs provide law enforcement agencies with information on potentially illicit activities.

How AI prevents money laundering

Artificial intelligence can detect fraud patterns and anomalies at a massive scale. It looks at huge datasets to spot even the smallest group of transactions that reveal complex money laundering schemes. Through unsupervised machine learning, it can uncover hidden connections between accounts and individuals.

AI is also skilled at reducing false positives. This is critical for financial institutions because they need to catch money launderers without harming good customer experience.

To learn about how best in class AI-powered AML platforms work—and which top FIs use them—set up a time to talk to our team of experts.