In very simple word Money Laundering can be defined as a measure to convert illicit or illegal fund into legitimate source of Income to deflect suspicion when invested or spent.
This illegal money can be proceed of various illegal transaction generally arises in cash. Few well known examples are bribe of corrupt politician, drug trafficking and illegal gambling. So basically it is the proceeds of crime and corruption.
It impact on the economy of the effected country is worse specially on developing countries like India where inflation is also associated with this but still people involve into it and do it.
Generally money Laundering is three stage process which include –Placement, Layering and Integration.
Placement– It is the first step in Laundering where Launderer place illegal money into the Financial System or institution. For this various innovative method has been developed and launderer developing day by day for placement. Like depositing various small amounts in an account others like currency smugglings, security brokers, blending of funds etc.
Second Step is layering-This process makes laundering more difficult to be trace. Basically this process mitigate audit trail. Some methods are asset brought locally and then sold locally or abroad. When asset brought from illegal money and sold at higher prices thus making difficult to trace
Integration is the third and last step in money laundering. This process ensures that laundered money become part of economy through financial system and appears normal business earning. Again they are various known and unknown way of doing this- like false Import/export invoices, front companies, false loan, foreign banking law & complicity.
These are only basic way which is well known but now days there are various new methods has been developed by Launderer. It has become more difficult to hold those people due to globalisation of transaction and bank secrecy law which not allow disclosing details of their customer.
Use of false import / export invoices is another effective way use by the Launderer to introduce illegal money back into the economy. Overvaluation of entry documents to justify the funds later deposited into the domestic banks or value of funds received from exports.
So to summarize whole process of money laundering starts with the collection of illegal proceeds from various illegal activity. Then next step is the placement of that dirty money into the banking / financial system by various known and unknown method. Then comes the next process of layering, which involves transferring the fund to the accounts of some company through wire transfer involving offshore banking. Then comes the last process of integration which involves introducing those money into the economy of the country by purchasing assets, financial investment and commercial & industrial investments.
One point is important that these are only known process, there are so many less known procedure operating around the world. Now day’s information is available at finger tips due to digitalisation. Launderers are always in search of these methods around the world where law enforcement are not stringent and they can easily avoid the rules & regulation of the country.
Writer is a Chartered Accountant and can be reached firstname.lastname@example.org.