Money laundering remains one of the most pervasive threats to global financial stability, quietly enabling organised crime, political corruption and terrorist financing.
Despite extensive regulation and technological advances, criminals continue to exploit financial loopholes to disguise illicit gains, said SmartSearch.
Understanding how laundering works, and the wider repercussions, is key to appreciating why AML regimes exist and why compliance remains a priority for financial institutions worldwide.
At its simplest, money laundering refers to the process by which illegal proceeds are disguised as legitimate income. These funds might come from drug trafficking, asset theft, fraud, bribery, insider trading or people smuggling. Criminals depend on laundering to access the profits of these activities and to fuel further criminal networks.
Money laundering typically unfolds in three stages. Placement involves distancing illegal proceeds from their criminal origin by pushing cash into the financial system. Layering follows, obscuring its trail through complex movement across accounts, jurisdictions and transactions. Finally, integration – sometimes described as extraction – enables criminals to access and enjoy their money as though it were legitimately earned.
The criminal playbook for placement varies widely. Fraudulent invoicing enables dirty cash to flow under the guise of legitimate trade. Professional intermediaries may channel illicit funds through aborted transactions that later return as “clean” cash. Criminals frequently use cash-intensive businesses such as car washes or salons to mix illegal takings with genuine customer payments, while offshore banking and smurfing – breaking large deposits into smaller ones – also remain common strategies.
Layering techniques are increasingly sophisticated, bolstered by global financial connectivity. Funds may be moved rapidly across borders, shifted repeatedly between institutions or embedded within complex financial products such as insurance policies or securities. High-value purchases of art, property or luxury vehicles allow criminals to park and later resell assets for clean proceeds.
Shell companies and anonymous investment vehicles still feature heavily, and crypto assets present new challenges due to pseudonymity and decentralised structures. Chainalysis estimates that $22.2bn was laundered through cryptocurrency in 2023, double the $11.1bn seen in 2019, with forecasts suggesting 2024 could exceed $51bn.
Integration effectively completes the cycle. Criminals sell properties, flip luxury items or channel funds into pensions, investments or business ventures, ultimately producing returns that appear legitimate. Inflated trade invoices can also justify large payments that disguise illicit enrichment.
The scale of the threat is difficult to overstate. The United Nations estimates that between 2% and 5% of global GDP – the equivalent of $800bn to $2tn annually – is laundered each year. Far from being a victimless crime, money laundering fuels violence, undermines institutions and destabilises entire economies. It finances drug cartels, entrenches human trafficking networks, drives corruption in politics and business and widens inequality by enabling criminal monopolies that undercut legitimate industry. Terrorist organisations rely on laundered proceeds for recruitment, transport, logistics and attacks, posing risks to national and global security.
International efforts to counter money laundering began in earnest with the establishment of the Financial Action Task Force (FATF) in 1989. FATF’s mandate was to co-ordinate global AML responses and set standards for governments, including its now-familiar AML recommendations. More than 200 jurisdictions have committed to these requirements, which continue to evolve to reflect new threats such as shell companies and crypto misuse.
In the UK, AML responsibilities are spread across supervisory bodies including the Financial Conduct Authority (FCA), HMRC and the Gambling Commission. Domestic legislation, notably the Proceeds of Crime Act (POCA) and Money Laundering Regulations (MLR), forms the backbone of the national AML regime, largely aligned with – and in some areas exceeding – the EU’s 6th AML Directive despite Brexit.
To meet their obligations, regulated firms must undertake a suite of measures. Customer due diligence requires businesses to verify identities, often using biometric tools and cross-referencing public records. Identifying the ultimate beneficial owner (UBO) is critical to prevent criminals obscuring control through corporate structures. Sanctions screening and politically exposed person (PEP) checks assess heightened risks, while enhanced due diligence (EDD) explores deeper when concerns arise. Source of funds analysis helps ensure wealth origins are legitimate, and suspicious activity reporting (SAR) flags potential offences to authorities. Finally, AML compliance does not end at onboarding; firms must monitor customers continually, storing records and reassessing risk where needed.
As the techniques used for laundering evolve, regulators and financial institutions face an ongoing challenge – innovating AML safeguards fast enough to disrupt criminal adaptation. With billions at stake, effective AML oversight plays a pivotal role not only in financial integrity but also in protecting societies from the expanding consequences of organised crime.
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