What is money laundering

Security Issues Money laundering

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Investopedia defines money laundering as, "The process of creating the appearance that large amounts of money obtained from serious crimes, such as drug trafficking or terrorist activity, originated from a legitimate source." Simply put, it is washing (laundering) illegal back money by showing it as legitimate gains by moving it into financial system to make the money white.

INTERPOL's definition of money laundering is: "any act or attempted act to conceal or disguise the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources"

Article 1 of EC Directive defines Money Laundering as “The conversion of property, knowing that such property is derived from serious crime, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in committing such an offence(s) to evade the legal consequences of his action, and the concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property, knowing that such property is derived from serious crime.”

Broadly there are three steps to money laundering activity as per the Reserve Bank of India.

1) Placement: "Placement" refers to the physical disposal of bulk cash proceeds derived from illegal activity.

2) Layering: "Layering" refers to the separation of illicit proceeds from their source by creating complex layers of financial transactions. Layering conceals the audit trail and provides anonymity.

3) Integration: "Integration" refers to the re-injection of the laundered proceeds back into the economy in such a way that they re-enter the financial system as normal business funds.

So, simply put, the money is taken from the source and then put into the financial system, via small deposits or demand drafts and like. Then these funds are moved into a number of accounts across several banks across different locations. There are numerous layers of transactions to disguise the original source of money. Then this money is use to buy real assets like property, gold and the gains are made on these assets. At times, black money is also used to create on-paper companies and money is moved via them by making fake bills and invoices.