Money laundering is basically ‘cleaning’ the money which is gained through illegal ways. These illegal ways may include crimes such as terrorist funding and drug trafficking. After laundering the dirty money, it seems like the criminals earned the money legally without committing any crime. Fraud and money laundering are related concepts since criminals need laundering to be able to use the money they earned from fraudulent activities. If there is a fraud, money laundering is at stake too. However, there is a solution for it. There are anti-money laundering/AML tools and software for AML fraud detection. Thanks to these AML tools, money laundering becomes easier to detect and prevent.
Money laundering is a huge issue in the world and statistics demonstrate that. Criminals launder $800 billion - $2 trillion every year all over the world. This amount equates to 2 – 5% of global GDP. There is a term called anti-money laundering to fight money laundering. Anti-money laundering (AML) represents all policies, regulations, processes, and technologies to stop money laundering.
Anti-Money Laundering: Long Story in Short
As mentioned above, anti-money laundering (AML) includes various policies, regulations, procedures, and technologies to fight money laundering and crimes such as fraud, corruption, drug trafficking, financing of terrorism, tax evasion, human trafficking, etc.
Governments, businesses, huge financial institutions, and the banking sector needs AML in place to protect themselves from money laundering and fraudulent activities in general. This is what AML tools are for.
3 Stages of Money Laundering Cycle
There are three stages of money laundering: Placement, layering, integration aka extraction.
Placement is the first step in money laundering and dirty cash enters the legal financial system in this step. Officials can catch criminals who try to launder the money in the placement step as criminals are very vulnerable in this step. They are so vulnerable because putting large amounts of cash into the legal financial system might catch the attention of the authorities. The launderer may use ‘smurfs’ not to exceed the official reporting limit and catch attention. Smurfing is the most commonly used method while cleaning dirty money. This method requires using of many people called smurfs who exchange smaller amounts for highly liquid items.
After the money is in the financial system, there is the layering process to cover the origins of the dirty money. The layering stage is so complex and money can move internationally in this stage. The fundamental goal of the layering stage is to split up the dirty money from its origins. Money launderers might send the money electronically to different countries in this stage. These countries are the countries that let non-residents put their money in the financial institutions of the country.
Moreover, money launderers may move the money electronically by using numerous banks and accounts in this stage. They can also use other people and firms to do the transactions of their illicit money. Money launderers might set up fake firms in offshore countries as another option. These corporations are known as shell corporations. Shell corporations or shell companies exist on paper but they don’t have any employees or offices. Also, they don’t have active business operations and significant assets. Besides, money launderers may move the money electronically by using numerous banks and accounts in this stage its illegal purposes, building these types of corporations might have some legal purposes as well.
The integration/extraction stage is the last stage of the money laundering process. In the integration stage, illicit money returns to the money launderers from sources that seem legitimate. In this stage, illicit money is ready to use for any aim. Criminals might purchase properties, artwork, luxury goods, very expensive cars, etc. The main purpose of the integration stage is to bring together the dirty money with criminals without drawing any suspicions about the origin of the money. It should seem that money is coming from legal origins.
The Importance of AML Fraud Detection and Compliance
AML fraud detection is detecting fraud related to money laundering. There are fraud detection software tools to prevent money laundering. Apart from that, there is also the concept of “AML compliance”. AML compliance is a program that assists organizations including;
- Financial institutions,
- Money service businesses, and
- Insurance firms
in detecting criminal actions like money laundering. AML compliance programs and practices concentrate on implementing methods that prevent criminals from cleaning their dirty money.
AML fraud detection and compliance are so crucial as financial institutions and firms should make sure that they aren’t helping criminals without realizing it. Money laundering cases are harmful to companies in many ways. Just like fraud cases, money laundering cases hurt companies’ reputations as well. Companies lose a high amount of money due to money laundering.
Apart from the money and reputation loss, it also causes customers to lose their trust and loyalty to the firm. Besides, customers start to feel insecure doing business with that company and eventually the firm ends up losing customers as well. Also, money laundering cases will get organizations into legal trouble. They will have to face legal consequences. To prevent all these bad scenarios, firms need to benefit from AML fraud detection tools so that they can protect both themselves and their clients.