What is money laundering?

Money laundering is the process by which individuals conceal illegal financial gains, making it appear as though they were obtained legitimately. Money laundering allows criminals to benefit from their crimes, perpetuating illegal activities that harm society.

Organised crime poses one of the greatest economic threats globally. At its core, money laundering is caused by and funds many types of organised crime, from the drug trade and human smuggling to terrorism and arms dealing.

Most regulated professionals don’t want to play even a small part in this process or encourage these activities. We must not lose sight of the fact that this could be any of your clients, as the perpetrator or the victim.

As a professional in a regulated industry, it’s essential to understand the meaning of money laundering and why criminals may try to use your services to facilitate it. You can then embed anti-money laundering measures into your work, protecting your business, clients and colleagues.

Understanding the technical definition of money laundering

To give you a description of money laundering in its simplest terms, it is doing just about anything with the proceeds of crime in any form. Whether that’s hiding, transferring, spending or converting them. This also includes planning or assisting someone in laundering criminal proceeds, knowingly or unknowingly.

In legal terms, FATF Recommendation 3 requires countries to criminalise money laundering, defining it as:

• concealing, disguising, converting, transferring, or removing proceeds of crime;
• assisting someone in acquiring, retaining, or controlling proceeds of crime;
• acquiring, retaining, or using proceeds of crime.

Illegally reducing liabilities is also considered proceeds of crime. For example, if a client reduces their tax liability by misreporting income the saved amount becomes proceeds of crime and using it constitutes money laundering.

Countries build this into their own legislation using their own terminology. In the UK, for example, this sits in the Proceeds of Crime Act 2002 Part 7, where the same proceeds are referred to as “criminal property.”

Criminals are determined to profit from their illegal activities, even if it means accepting a loss in value to make their gains appear legitimate.

The primary purpose of money laundering laws globally is to prevent offenders from enjoying the financial benefits of their crimes. By cutting off their access to these proceeds, the incentive to commit such crimes in the first place is significantly reduced.

The process of money laundering

The process of laundering money allows criminals to hide the illegal origins of their proceeds. The aim is to make these funds appear legitimate so they can be used freely. The United Nations Office on Drugs and Crime estimates that over $2 trillion, around 2–5% of global GDP, is laundered annually.

Criminals use increasingly sophisticated methods to launder money. This includes taking advantage of businesses that fail to meet their AML obligations. Understanding the processes criminals use is critical.

These are just a few examples of money laundering methods:

• Smurfing: This method involves breaking a large sum of illicit money into smaller, less conspicuous amounts to avoid detection. Criminals often get help from associates, family members or friends, sometimes across multiple countries, to deposit these smaller sums into various accounts. The funds are then consolidated and transferred back to the criminal’s account to appear legitimate.
• Round tripping: In this scheme, funds are circulated through a complex network of accounts, individuals and shell companies, often in countries with weak AML regulations, before being returned to the original owner as ‘clean’ money. The aim is to create a convoluted trail that is difficult for authorities to trace.
• Shell companies: These are businesses that exist only on paper, with no real operations or assets. Criminals exploit these entities to disguise the origins of illegal funds. For instance, one shell company might transfer funds to another, ostensibly as payments for non-existent goods or services. Both companies could be controlled by the same criminal group, creating an illusion of legitimate transactions.
• Reselling assets: Criminals purchase high-value items, such as property, luxury vehicles, jewellery or artwork, using illicit cash. They then quickly resell these assets, often at a loss, to convert the funds into legitimate-looking bank transactions. Effectively this ‘cleans’ the money.
• Cryptocurrencies: Virtual currencies like Bitcoin and Ethereum are an attractive avenue for money laundering due to their minimal regulation and the anonymity they offer. Unlike traditional financial systems, cryptocurrencies allow criminals to move large sums across borders with limited oversight.
• Trade-based money laundering: This method involves manipulating the value of goods or invoices in trade transactions to obscure the movement of illicit funds. By routing money through international trade and involving multiple individuals or businesses, criminals can bypass conventional AML measures and make the transactions appear legitimate.

These examples highlight why professionals must remain vigilant. Criminal methods constantly evolve, making it vital for regulated businesses to stay ahead of the threat.

Why are professionals of interest to money launderers?

Regulated professionals act as critical ‘gatekeepers’ and the first line of defence against criminal proceeds entering their country’s financial system. This means they must guard against their services being misused to advance illegal activities.

These same services can be exploited by money launderers when professionals fail to adhere to their anti-money laundering (AML) obligations or do not maintain sufficient vigilance.

How could your business be targeted for money laundering?

• Holding illicit funds in bank accounts or using complex business structures to obscure the true ownership of criminal proceeds.
• Introducing clients who are actually involved in money laundering to other professionals, or setting up legal entities that facilitate laundering activities.
• Buying, selling or transferring ownership of properties and businesses to legitimise illegal earnings.

The role of ‘professional enablers’

The fight against money laundering hinges on professionals identifying, reporting and disrupting illegal financial activity.

FATF identifies lawyers, accountants, trust and company service providers, high-value dealers and real estate agents as gatekeepers to the financial system, and flags exactly why that role carries risk:

“Corruption and money laundering are inextricably linked. Corrupt actors must launder bribes and misappropriated funds to enjoy their criminal profits. Through their role as gatekeepers to the financial system, non-financial professionals can facilitate, unwittingly or wittingly, high-level corruption.”

By acting negligently in meeting their obligations, many professionals facilitate money laundering without even knowing they’re doing so. Regardless of intent, these professionals help criminal proceeds integrate into the global financial system under the guise of legitimate business.

To combat this threat, it’s essential for all regulated professionals to fully understand who their clients are, what their services are being used for and how to implement appropriate safeguards. By taking the necessary steps, you can prevent your services from being exploited and contribute to the wider effort to disrupt organised crime.

Why is money laundering relevant to you?

As a regulated professional, you’re legally required to comply with anti-money laundering legislation in your jurisdiction. Even unintentional involvement in money laundering could lead to financial penalties, reputational damage or even imprisonment.

Please do not pretend to yourself that your services could never be used to launder money. Everyday activities, such as signing off accounts, handling client funds or setting up new companies, could inadvertently facilitate money laundering. Examples include:

• processing false invoices;
• signing off false accounts;
• managing property transactions;
• setting up a new company;
• dealing with tax refunds or mortgage applications.

And the list goes on.

FATF requires the same customer due diligence, record-keeping and reporting obligations that apply to banks to be extended to your sector too. 

Recommendations 22 and 23 set these out for what FATF calls designated non-financial businesses and professions (DNFBPs), a category that includes lawyers, accountants, trust and company service providers, high-value dealers and real estate agents. 

Countries incorporate these requirements into their own domestic legislation. In the UK, for example, this sits in the Money Laundering Regulations 2017 and its later amendments.

As a regulated professional, your AML responsibilities go far beyond mere box-ticking. They form part of a much larger effort to combat organised crime. While your role may seem small, every regulated professional has an important part to play in preventing criminal proceeds from being legitimised and disrupting illegal activities.