Money Laundering Definition
It’s a process used by criminals to convert dirty money into clean money. Dirty money is any money which is generated from illegal activity such as selling drugs, financial crimes, or any other form of crimes.
The 3 Stages of Money Laundering
The money which is generated from illegal activities cannot be deposited into bank that easily since the bank will ask for supporting documents that show from where this money was generated. Suppose that someone generated one million dollars by selling drugs. For this money to be legal, it goes through 3 stages, Placement, Layering and Integration.
Placement Stage
At this stage, the person who generated money from illegal activity will try to deposit the illegal money into a bank account by using a legal business as front. That business may not even exist. For example, he might pretend to own a restaurant, and the restaurant generates $50000 a month. In this situation, the criminal will attach all invoices as evidence to deposit $50000 into the bank.
Layering Stage
In this stage, the illegal money is distributed to multiple other accounts. The reason for this is to make it difficult for authorities to track original source of money.
Integration Stage
At this stage, the illegal money is transferred again to one account that the person will use to buy a legal entity such as a car or real estate. Then he will sell this entity and deposit the generated money to this account again. At this stage, the money is considered legal.
Importance of Knowing Our Customer
We need to be aware that a customer or a supplier is using us as a front-end for money laundering. If the customer is caught doing illegal activities and you are doing business with him, you will be held accountable and considered as participant in money laundering activity.
Importance of Customer Due Diligence
Customer Due Diligence (CDD) is one of the activities that is taken by the organization to obtain as much as information about any third party the organization work with, to help their money laundering risks and money laundering exposure.
This implies that an organization must have procedures to:
- Customer Identification
- Customer Acceptance
- Risk Rating
- Monitoring
- Documentation
Money Laundering Vs Terrorist Financing
The two are usually mixed with each other since both have many similarities. The main difference between the two is that in Terrorist Financing, the end beneficiary is not the same as the person who generated the illegal money.
