Introduction

Money laundering wreaks havoc on businesses, investment climates, and overall economic progress. It fosters crime and corruption, severely hampers the efficiency of the economy's genuine sectors, and triggers a cascade of adverse effects.

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Its global impact is staggering. An estimated 2 to 5% of the world's GDP gets laundered annually, amounting to a colossal $754 billion to $2 trillion.
In most jurisdictions, money laundering is a grave offence that carries imprisonment and hefty fines. In the Australia, involvement in money laundering can lead to penalties as high as $333,000 and up to 25 years behind bars.

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Many businesses might be unaware they're being used for money laundering. While not all companies are necessarily held accountable for money laundering conducted through them, entities obligated under anti-money laundering (AML) regulations, like banks, are responsible. If the crime is discovered during audits, it can result in severe consequences.

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To shield your business from criminals and regulatory penalties, let's delve into what money laundering entails, typical schemes, and preventive measures.

What it is and why it matters

Money laundering (ML) involves hiding the source of money acquired through illegal activities like drug trafficking, bribery, or fraud. It aims to integrate illicit funds into the financial system as 'clean' money, allowing criminals to use it without drawing unwanted attention from authorities.
The fight against money laundering often intersects with efforts against terrorist financing (TF) because both involve redistributing funds.

Eurojust's report indicates a significant rise in money laundering cases since 2016, with projections suggesting further growth.

According to the FATF, around $1.6 trillion is laundered annually from lower-income countries, mainly due to political corruption. This corruption exacerbates poverty in these areas and contributes to environmental damage and economic stagnation.

Due to the vital link between money laundering and corruption, any initiatives to curb the spread of illicit money play a critical role in reducing global corruption levels.

The 3 stages of laundering money

Stage 1: Placement

Illegally depositing funds into the financial system can occur directly or indirectly. During the placement stage, a prevalent method involves breaking down large amounts of cash into smaller, less suspicious sums. These can then be deposited into one or multiple bank accounts, a tactic commonly known as 'smurfing.' Smurfing often involves the use of money service businesses.

Other techniques employed during the placement phase include:

1. False invoicing: Generating invoices for non-existent goods or services through over-invoicing or pseudo-invoicing.

2. Mixing illegal money with legitimate funds.

3. Purchasing foreign currency.

4. Buying securities or insurance using cash.

5. Engaging in gambling or betting on sports events.

Stage 2: Layering

"Layering" refers to separating illicit money from its origin and creating multiple transaction layers to confound audits. It aims to obscure the source of unlawfully obtained assets. This intricate phase involves numerous transactions, often including international money transfers.

For layering, money can be routed through the buying and selling of investments or a sequence of bank accounts across various countries. Typically, these funds find their way into jurisdictions with lenient anti-money laundering (AML) regulations or ones that don't cooperate with AML investigations.

Common examples of layering include:

1. Investing in real estate.
2. Trading high-value goods.
3. Transferring funds internationally.
4. Chain-hopping involves the conversion of one cryptocurrency to another and moving crypto across different blockchains, among others.

The distinction between placement and layering lies in their functions: while placement introduces illicit funds into the financial system, layering conceals their origins through intricate transactions and financial manoeuvres.

Stage 3: Integration

Following placement and layering, criminals integrate, or "return," illicit funds to themselves legitimately. Successful integration means the funds are seamlessly blended into the lawful financial system and can be used without suspicion.

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The primary goal is to integrate the money without alerting law enforcement. Methods for achieving this include purchasing property, art, jewellery, or luxury automobiles, among other high-value items.

The Impact

Money laundering carries several adverse consequences for businesses, such as:

1. Revenue loss
2. Damage to reputation
3. Imposition of multimillion-dollar fines or regulatory license suspension

Furthermore, on a global scale, money laundering has detrimental socio-economic effects, including:

1. Fostering corruption
2. Escalating crime rates
3. Eroding trust among foreign investors
4. Exacerbating wealth disparity
5. Hindering economic growth

Detection & Prevention

A robust anti-money laundering (AML) compliance program is crucial to ensure business safety. This program outlines how the company identifies, assesses, and reports financial crimes, incorporating the following measures:

1. Customer Due Diligence (CDD): Conducting checks on customers before granting access to services, verifying their identity, and assessing potential involvement in criminal activities.

2. Enhanced Due Diligence (EDD): This process involves additional checks in high-risk situations and focuses on investigating the source of clients' funds to prevent their illegal origins.

3. Ongoing customer monitoring: Continuously assessing customer activity and transactions for risk management purposes.

4. Independent AML audits: Conduct audits to identify and rectify any deficiencies or failures in AML strategies before regulatory inspections to avoid fines.

5. Transaction monitoring: Employing ongoing security measures to detect suspicious transactions, using reliable software to spot unusual patterns or questionable transfers in digital or fiat currencies.

Failure to monitor transactions exposes businesses to the risks of money laundering, fraud, and other crimes on their platforms. Consequently, governments have tightened AML regulations, imposing hefty penalties and reputational damage on non-compliant businesses.

For instance:

- Crown Melbourne and Crown Perth faced repercussions for neglecting effective AML processes, the Federal Court of Australia ordered Crown to pay the $450 million penalty for its breaches of the Act.

- On 24 September 2020 AUSTRAC and Westpac jointly filed in the Federal Court an agreed statement of facts including agreeing on a proposed civil penalty of $1.3 billion.