Money Laundering: how it is Done

The following are excerpts from Congressional testimony by Steven M. D’Antuono, Section Chief, Criminal Investigative Division, U.S. Federal Bureau of Investigation:


Money laundering involves masking the source of criminally derived proceeds so that the proceeds appear legitimate, or masking the source of monies used to promote illegal conduct. Money laundering generally involves three steps: placing illicit proceeds into the financial system; layering, or the separation of the criminal proceeds from their origin; and integration, or the use of apparently legitimate transactions to disguise the illicit proceeds. Once criminal funds have entered the financial system, the layering and integration phases make it very difficult to track and trace the money.

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Illicit Cash: Cash transactions are particularly vulnerable to money laundering. Cash is anonymous, fungible, and portable; it bears no record of its source, owner, or legitimacy; it is used and held around the world; and is difficult to trace once spent. Additionally, despite its bulk, cash can be easily concealed and transported in large quantities in vehicles, commercial shipments, aircraft, boats, luggage, or packages; in special compartments hidden inside clothing; or in packages wrapped to look like gifts. Criminals regularly attempt to smuggle bulk cash across the United States’ borders using these and other methods. 

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Trade-Based Money Laundering (TBML): Drug trafficking organizations also use money brokers to facilitate TBML. In complex TBML schemes, criminals move merchandise, falsify its value, and misrepresent trade-related financial transactions, often with the assistance of complicit merchants, in an effort to simultaneously disguise the origin of illicit proceeds and integrate them into the market. Once criminals exchange illicit cash for trade goods, it is difficult for law enforcement to trace the source of the illicit funds. 

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Misuse of Banks: U.S. banks handle trillions of dollars of daily transaction volume. Most Americans use depository financial institutions—such as commercial banks, savings and loan associations, and credit unions—to conduct financial transactions. Those who do not have access to these institutions, or who choose not to use depository financial institutions, may conduct financial transactions using money services businesses (MSBs) such as money transmitters, check cashers, currency exchangers, or businesses that sell money orders, prepaid access devices, and traveler’s checks. Some MSBs themselves may also engage the services of depository financial institutions to settle transactions. Banks may also hold accounts with other banks in order to facilitate transactions in the country of the bank where the account is held. For example, some foreign banks establish correspondent relationships with U.S. banks to enable them to conduct business and provide services to their non-U.S. clients in the U.S. without the expense of establishing a presence in the U.S. 

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Obscured Beneficial Ownership: Increasingly, sophisticated criminals seek access to the U.S. financial system by masking the nature, purpose, or ownership of their accounts and the sources of their income through the use of front companies, shell companies, or nominee accounts with unknown beneficial owners. Front companies typically combine illicit proceeds with lawful proceeds from legitimate business operations, obscuring the source, ownership, and control of the illegal funds. Shell companies typically have no physical operations or assets, and may be used only to hold property rights or financial assets. Nominee-held “funnel accounts” may be used to make structured deposits in multiple geographic locations and corresponding structured withdrawals in other locations. All of these methods obscure the true owners and sources of funds. 

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 Misuse of MSBs: While many MSBs engage in legitimate business activities, they, too, can serve as a means for criminals to move money. Although MSBs have customer verification requirements above certain thresholds and other BSA obligations, individuals who use MSBs may do so in a one-off fashion, without establishing an ongoing relationship that banks maintain with their customers, which can make it more difficult to identify money laundering. While MSBs are subject to BSA compliance requirements, some MSBs may fail to register with the proper authorities and thus they are acting as unlicensed MSBs, making it more likely that AML violations at those MSBs go undetected. 

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Prepaid Access Cards: Prepaid access cards, also known as stored value cards, may be used as an alternative to cash. Prepaid access cards provide access to funds that have been paid in advance and can be retrieved or transferred through an electronic device such as a card, code, serial number, mobile identification number, or personal identification number. They function much like traditional debit or credit cards, and can provide portable, and potentially anonymous ways to access funds. 

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Virtual Currencies: Virtual currencies offer yet another alternative to cash. Criminals use virtual currencies to conduct illicit transactions because these currencies offer potential anonymity. This is because virtual currency transactions are not necessarily tied to a real-world identity and enable criminals to quickly move criminal proceeds among countries. 

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Purchase of Real Estate and Other Assets: Criminals also convert their illicit proceeds into clean funds by buying real estate and other assets. Foreign government officials who steal from their own people, extort businesses, or seek and accept bribery payments, in particular, have also used this method to funnel their illicit gains into the U.S. financial system. Recent investigations and prosecutions have revealed that corrupt foreign officials have purchased various U.S. assets to launder the proceeds of their corruption, from luxury real estate and hotels to private jets, artwork, and motion picture companies. The flow of kleptocracy proceeds into the U.S. financial system distorts our markets and threatens the transparency and integrity of our financial system. For example, when criminals use illicit proceeds to buy up real estate, legitimate purchasers—businesses and individuals—are foreclosed from buying or investing in those properties. Moreover, kleptocracy erodes trust in government and private institutions, undermines confidence in the fairness of free and open markets, and breeds contempt for the rule of law, which threatens our national security. 

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