Money laundering is the concealment, conversion, transfer or disguise of any property that represents proceeds from criminal activity. It can also be defined as legitimizing funds used in or resulting from criminal activity. Put differently it is cleaning dirty money.
People launder money in an attempt to explain that they acquired their wealth legitimately. In some countries it is now considered a criminal activity and therefore people launder in an attempt to evade the legal systems.
The money laundering process can be summarized in three main stages i.e. placement, layering and integration. This summary is for ease of understanding because the process is normally complicated and there are no straight forward rules or ways in which laundering is done.
Placement involves getting the money into the financial system either through banks or businesses or converting it into assets, which can be resold. The purpose is to avoid holding conspicuous sums of money by altering their form and location as much as possible. An example in a banking scenario is where there are substantial increases of deposits of an account within a short
time, sometimes even using numerous deposit slips of small amounts, especially if they are transferred out of the account within a short time.
Once the money has entered into the financial system, the launderers usually want to pass through a series of financial transactions (layers) to make audit trail very difficult. An example is once the money is placed, the owner comes and converts it into traveller’s cheques, letters of credit, bank drafts etc. A typical case in banking is a customer who constantly pays in cash to cover
requests for bank drafts, money transfers or other negotiable instruments.
This is the stage when the cleaned money is put back to the system. At this stage it is extremely difficult to distinguish it from clean (legitimate) money. For example paying inflated or false invoices for exports/imports will immediately integrate the money into the economy.
In some countries, it is prohibited by law and it is a punishable offence.The people who launder money through business compete unfairly with the legitimate businesses. This is because they will go to any length to make sure their business survives hence strategies like cutting prices below market levels is common. This can eventually put honest people out of business.
The people involved often either buy off or threaten to kill any body who comes their way to hinder their business. Bankers, lawyers and accountants who in one way or another may have to see this malpractice, in the ordinary course of their work are very susceptible.
Such crime only leads to more crime and corruption. A spiral of crime and corruption develops regulators and law enforcement agencies become compromised. If ignored, they soon gain respectability within the society and in so doing even commit more crimes. An example in Uganda is people who donate a lot of money to charitable causes are often held with very high esteem. If a business or company is involved in money laundering and it is eventually unearthed, they can lose reputation and eventually profits because people will be reluctant to do business with them.
There is increasing international pressure, and some countries have enacted laws that have extra-territorial dimension. Powerful countries like the US, Germany and Britain often exert a lot of pressure on the countries concerned and could even threaten them with sanctions.
The following measures are suggested as a way of fighting against money laundering: