Money Laundering

Definition: Money laundering can be understood as an act of concealing the identity or source of money obtained illegally, to make them appear to have obtained out of legal sources.

Simply put, money laundering is the process of disguising the origin, i.e. the source from which money is received due to criminal activity, changing its form and transferring them into a location where they are less likely to be noticed.

Money Laundering

In this process, the black or illegal money arising from criminal activity is turned into white or legal money through transfers involving deposits into foreign banks or investing into legitimate businesses.

Criminal activity includes illegal arms selling, smuggling, human trafficking, drug trafficking, terrorist activity, prostitution rings, bribery, embezzlement, financial crimes, etc.

Stages of Money Laundering

Money Laundering Stages

  1. Placement: In the first stage, the money launderer injects the proceeds of criminal activity to the financial system. And this is done by dividing the large sum of money into smaller amounts and deposited into bank accounts or by buying financial instruments which are collected later on and deposited into bank accounts.
  2. Layering: At this stage, the money introduced in the economy is then covered by means of a number of conversions of the funds, to change its form and to make it difficult to find out the original source of the money. This can be done by spreading it over various complex transactions in a number of bank accounts internationally.
  3. Integration: When the criminal gains arising from the previous stages are successfully processed, then the funds are reintroduced in the financial system legally, i.e. in a way that the original connection with the crime is wiped out and the offender invests the funds into real estate, business ventures, film industry etc.

Basically, money laundering is a sole process, but it is classified into three stages.

Methods of Money Laundering

  • Bribery and Corruption
  • Drug trafficking
  • Shell companies and trusts
  • Cash Smuggling
  • Structuring
  • Investment in real estate
  • Investment in stock market
  • Kidnapping and extortion
  • Black salaries

Apart from these methods, there are other methods too such as round tripping, bank capture, trade-based laundering, etc.

Impact of Money Laundering on Economic Development

Money Laundering is a burning issue in many countries of the world. Primarily, those countries are prone to money laundering whose financial centre is developing and do not have effective control over it.

On the other hand, if we talk about those economies which have well developed financial centres and an anti-laundering system, are less likely vulnerable to money laundering. However, this does not mean that money laundering does not exist there, because the launderers take advantage of the loopholes in the system and look for the illegal ways to park their money.

Money laundering needs a permanent solution, as it can hamper the growth of the economy which can be seen in the change in cash demand, high inflation and fluctuating interest and exchange rates.

Prevention from Money Laundering

Over the years, the government has made a number of regulations and laws are enacted to fight money laundering. In the year 1989, an international committee is created, namely Financial Action Task Force, shortly known as FATF, by Group of Seven (G-7), to combat this issue globally.

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