The key to money laundering is making it seem that the money was earned through legal ways whilst keeping the illegal source of the money hidden. If you show up at your local bank with $1.000.000 in cash without an explanation of where the money came from, you can rest assured that the police will be there in seconds. There has to be a logical and legal explanation for why someone has the money he or she has. Through money laundering, you create this explanation, because only when money appears to be legitimate can it be deposited with legitimate institutions (banks) and spent in the regulator economy.
How money laundering works
The process of money laundering usually involves three steps.
Firstly, placement. This is the process of secretly injecting the “dirty money” into the financial system. Placement can take place anywhere that grants access to the financial system.
Secondly, layering. After the “dirty money” is placed it needs to be “layered” meaning that the money needs to be distanced from the illegal source. Layering usually takes place through a series of complex transactions and accounting tricks, all with the intent to mask the illicit source of the money in such a way that the authorities cannot trace it back to its criminal source.
Thirdly, integration. The previously dirty money is now sufficiently cleaned through the layering process and it’s ready to be integrated into the legitimate economy again. The criminal proceeds are now fully cleaned and ready to go back to their criminal owner.
Cryptocurrencies can play a part in part in the process of money laundering. The dirty money is placed by exchanging it for cryptocurrency in jurisdictions with loose KYC procedures and layered through various transactions and protocols, such as mixing services and cross-chain bridges. It’ll come out at the other end as clean, legally obtained crypto. Integration takes place by then simply exchanging the cleaned coins for fiat money at any exchange.
Even more so, cryptocurrencies themselves can be the proceeds of criminal activities and require laundering. Examples are ransomware attacks in which the victims have to pay bitcoin to get back control over their systems or drug dealers selling drugs online and receiving cryptocurrency as payment. To be able to withdraw these “dirty coins” the criminal must, again, launder them so they appear legitimately earned.
Laws & Enforcement
Money laundering is a serious criminal offence. Without this process, criminal organisations would have no way to spend their criminally obtained money. Essentially, if money laundering would be made truly impossible, criminal organisations would cripple almost overnight. Therefore, countries around the globe have already drafted legislation to counter the process of money laundering and they continue to do so in order to keep criminals from enjoying the proceeds of their illicit activities.
Furthermore, most of the world has also come together to form the Financial Action Task Force (FATF). This task force has the goal to monitor money laundering and terrorist financings around the globe and set standards for and give advice to national and international regulators and enforcement agencies.