What is Money Laundering with Example?
The unlawful procedure which comprises hiding the proceeds from illegal activity simply by putting them through a convoluted series of repetitive nature of financial transactions can be explained as money laundering. The primary goal of conducting these sorts of transactions is to hide the actual source of money and provide the impression that it comes from reliable or legal sources altogether.
Let us take an example for better understanding, consider a criminal group who is engaged in drug trafficking related activities and their major goal is to hide money coming from it. Since drug sales revenues are illegal, the criminals are unable to deposit the money into banks without drawing attention at the same time.
There are high chances that they can open a front company that looks authentic, like a restaurant or a shop as a safe alternative. After then, the illegal funds are progressively incorporated into the lawful cash flow of that particular company. The main purpose of doing all of this procedure is to eventually blend in with legal company profits, thereby becoming “clean” or “laundered.”
The Stages of Money Laundering
There are generally 3 stages regarding what is money laundering with example which are as explain follow for better understanding:
Placement: The procedure of putting illegal money into the financial system is the first step where scammers might deposit modest sums of money in different banks or buy valuable items such as jewelry, cars, or real estate in this process in order to evade identification.
Layering: Then comes the second step of procedure in which layering takes place the moment once the funds have entered into the financial system of that particular company. Step of this sort has further necessitated the construction of mesh financial transactions in order to get away with recognition. For example, there are chances that the money might get moved between several bank accounts or perhaps involving other nations and organizations with a hidden agenda of making it more difficult to identify the initial source respectively.
Integration: Last but not the least, integration has been the last phase of money laundering where the laundered money is put back into the economy which is the basic motto of performing these all procedures. At this stage, this normally gets done with an aim that money should look legal in its nature and is utilized for investments, real estate purchases, and other ostensibly legal uses also.
Examples of Money Laundering
Let us have look at some actual situations to gain a clear understanding of money laundering which are explained as follow:
Example of Money Laundering by Smurfing or Structuring
“Smurfing,” has been an alternative name for structuring which can be a typical example of money laundering itself. The procedure of smurfing is more prone to take place when the large sums of money are divided up into smaller pieces with a hidden agenda to make them appear less dubious deposits. Let us say that someone has made illegal money through deception and doing the same process as explained before. The person divides the money into smaller deposits then dispersed across several banks and places rather than putting the whole amount into one bank account with an aim to get away from discovery by legal authorities.
Example of Money Laundering Through Trade
The process of such a nature where money laundering gets done with the help of trade has further necessitated the falsifying of trade transactions and invoices in order to launder money smoothly. For instance, there is a criminal company which might over- or under-invoice products when it comes to executing international commerce operations. Assume that Company B in Country Y purchases machinery from Company A in Country X. The Company A charges Company B much more than the true amount through purposefully inflating their invoices. Then, Company B will pay the exaggerated sum under the pretense of a legal transaction so the illegal funds go into another jurisdiction without much hassle.
Consequences of Money Laundering
Money laundering has serious repercussions that impact entire economies as well as financial institutions:
Economic instability:
It has been noticed that there is a widespread amount of money laundering that has skewed overall economic data and led to economic instability altogether.
Government revenue loss:
The illegal financial flows and the concealing of taxable incomes might end up causing the governments to lose a substantial amount of tax revenue also.
Funding of criminal activities:
There are high chances that laundered funds are frequently used to fund certain criminal activities, such as organized crime, drug trafficking, terrorism and more.
Financial institution harm:
There are banks and other financial organizations who unknowingly play a role in money laundering that end up the risks like harsh fines, harm to their reputation, and a decline in confidence from regulators and clients as well.
