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Money Laundering and Cryptocurrency – A brief insight

By Tenzing Wangchuk


Call it The Cayman Island’s cash or how my Asian nail saloon is showing three times the profit for half the business it does, from the newsroom debates on 2G “Ghotala” to Walter White serving delicious chicken for Los Pollos Hermanos the word ‘Money Laundering’ has certainly made its way into our daily lives and is clearly here to stay. The Cambridge dictionary defines it as, the crime of moving money that has been obtained illegally through banks and other businesses to make it seem as if the money has been obtained legally. The criminal activities include drug trafficking, international terrorism, embezzlement. The cash thus generated from all of these activities goes through layers of transactions disguising its source or even changing its form and moving from one fund to another, in the end, getting itself completely cleaned and ready to be used. The United Nations Office on Drugs and Crime (UNODC) estimates that between 2 and 5% of global GDP is laundered each year. To better explain the mechanism behind it let us take an example of Mr. Gus Fring who heads a drug racket based on cash transactions which he gets directly from his buyers. He also owns a restaurant and has hired a top-notch lawyer, to aid him through his laundering process.

Steps to launder money

Step 1: Placement: This is the 1st step into laundering the money process where the money enters the financial system. The placement stage focuses the funds to be a better liquid asset therefore they are illegally placed into financial institutions via deposits or wire transfers. Placement relieves the criminals of the physical form of cash and adds it to the legitimate financial system. Placement is carried out by loan repayment, gambling, currency smuggling, and exchanging, blending funds. A look into the Azerbaijani Laundromat incident of 2007 may provide a detailed insight into the placement of money and how banks and offshore companies function. For Mr. Gus placement of his money would mean creating fake receipts of earning and transactions from his restaurant ranging from profits to bills of repair paid to over the actual amount after proper accounting.

Step 2: Layering: This is the second stage where the funds must be moved to a separate safe destination to reduce its chances of detection and the connection to its source while also making it convenient to utilize. The layering of funds may take place in several ways such as using several bank accounts, using professional individuals, using companies and trusts to create a network of transactions from one account to the other so that the source of the money cannot be traced under layers of transactions ad can be finally used as legitimate funds. Layering for Mr. Gus would be handled by his layer whereupon he would wire the money through many accounts, create new payment receipts of his restaurant or if need be purchase assets and make investments on behalf of his spouse on some foreign companies.

Step 3: Integration: So by now your illegal money has been made untraceable and its pathway has been concealed under layers of well-woven layers of transactions by your lawyer, well the only thing left for you to do is to now reintroduce it back into the financial system which may be by purchasing art, property, jewelry or even reinvesting back into your business as receipts or grants made by offshore accounts. With proper placement, layering, and integration the money laundered can be made untraceable on paper with the added benefit of the process able to continue on and on without the notice of tax officials like the real-life case of Al Capone who used Laundromats to clean his money resulting in many crackdowns on such organizations. “Cause it’s a million times worse to be a tax fraud than a drug dealer”.

Methods of Money Laundering

Shell Companies: A Shell Company simply put is a company that exists merely on paper without any actual active business operations or employees but has a functioning bank account and investments which remain for long periods and assets which are boil down to trademarks or patents. Most Shell companies operate on an offshore basis for its owners with the tax filings, income proofs based to hide the illegal transactions of the owner. The offshore nature of the company makes its records difficult for law enforcement to access for audit and control. The 11.5 million leaked encrypted confidential data of the Panama-based law firm Mossack Fonseca on 16th of April 2016, famously termed as the Panama papers exposed a network of more than 2,14,000 people including public officials, celebrities, and people in very high places of 200 different countries who were using this company for tax evasion, fraud, and avoidance of international payments.

Casinos and Gambling Centres: Casinos are a common target of money laundering especially the ones which deal with large sums of transactions and have open access to people without proper regulations. Individuals can use illicit cash to purchase chips to be used in the casino, after some play they may decide to cash in their chips and take payments in form of cheques directly into their respective accounts with placement, layering, and integration of funds occurring under one roof and without much hassle making casinos a hub for money launders. The casinos in Macau flourish with the funds they receive from money launders who indulge in illegal activities such as trade-in drugs, counterfeit goods and medicines, kidnapping, and trafficking of wildlife and timber, with proceeds laundered through poorly regulated casinos or the formal banking system in Singapore and Hong Kong. In a report back in 2019 revealed 81 countries had vulnerabilities concerning the regulations of casinos in Macau despite many initiatives being taken up since 2007, it still remains the hotbed for money laundering.

Cash Smuggling: This method includes the transport of large amounts of physical cash across borders illegally. Cash smuggling may occur via cash getting transported by a person or concealment of it in goods that are transported over borders using boats or private planes.

Smurfing: This method consists of a large sum of money that is broken down into smaller divisions in multiple accounts and depositing it in accounts of multiple financial institutions with the main intention of remaining under the radar of the authorities, this method is rather rudimentary as on paper the transactions may not seem much but computers may be able to detect the pattern or the frequent flow of minimal cash inflow.

Cryptocurrency and Money Laundering

With the rise in the global e-commerce market from $2.92 trillion in 2018 to around $3.53 trillion in sales in 2019, and the expected growth by 2022 to be about $5.69 trillion it certainly seems a no brainer for companies to remain ahead of this curve and take an initiative to take their business online. The growth of virtual assets such as Ripple, Litecoin, Monero has certainly paralleled with the e-commerce market not only being used as a medium to partake in exchange but also as an investment option leading to a creation of a more borderless and globalized economy. But with this eminent and rapid growth, the currency has also witnessed its increasing use in illegal activities based off of mostly in the ‘dark-web’, with the anonymity it of users to the absence of strict laws to oversee its functioning cryptocurrency is certainly gaining a name in the world of crime especially in money laundering. In a report by Chainalysis in just 2018 criminal entities moved around $1 billion to a whopping $2.8 billion in Bitcoin in 2019, to exchanges. More than half of that went to the two most popular ones, Binance and Huobi.

Money laundering via cryptocurrency also follows the 3 basic steps as of any money laundering operation i.e. placement, layering, and integration, but the process to carry out these steps has certainly been made easier in the sense of execution and ease of control of funds.

Placement of illegal funds is very simple as cryptocurrencies can be purchased with fiat money via vouchers or gift cards, therefore, making the transactions difficult to trace and monitor. The users of bitcoins cannot be retraced back to real-world individuals or organizations and the transaction remains mostly hidden and it becomes increasingly difficult to detect suspicious activity, identifying users, and obtaining transactions, wherein combating money laundering a big step is identifying the source and the path of the bread trail. Account-opening typically requires detailed personal information for account verification. Launderers may use money laundering intermediaries, with clean records and corroborated employment, with direct deposit, to provide an additional layer of separation. Placement here overcomes the problem of the physical contact with the institutions which had to be previously made with financial institutions when cryptocurrency was absent. Layering is also made simpler for the launders as the transactions occurring can be layered under a web of network-based transactions across borders carried on through a slew of a hidden network that requires the use of highly developed algorithmic detecting software which is simply absent in case of many countries along. Integration of funds is made further simpler with the rise in popularity of cryptocurrency with an array of assets being made available at the disposal of an individual who can easily wire in the wealth into the financial system. Many International Financial institutions have spoken up on the threat cryptocurrencies pose alongside money laundering efforts, Bank of International Settlements warns about its misuse due to the nature of anonymity it provides for its users along with the global reach. Similarly, the International Monetary Fund (IMF) has stressed how cryptocurrencies can be used to mask transactional details, the origins, and target of the transaction potentially felicitating money laundering.

It is very eminent that cryptocurrency is certainly here to stay therefore the government and businesses need to gear themselves up for the ill it brings with it and find ways to counter it instead of ignoring its growing presence. Traditional banks need to rework their Anti-Money Laundering laws and need to shape it to minimize customer risk, with proper transaction monitoring, and sanctions watch-list screening along with training to detect suspicious transactional behavior at the points of purchase and sale between financial institutions and basic crypto exchanges. Collaborative international law, its enforcement, and regulatory partnerships are critical if governments are to overcome this obstacle.

Economic Impacts of Money laundering

Unstable Economic System: Money Laundering can lead to instability in the economic system by leading to a misallocation of resources and investments due to the nature that these entities are interested in the protection of their assets over gaining profits and rewarding institutions that practice the same, leading to instability in the commodity prices. In some countries, for example, entire industries, such as construction and hotels, have been financed not because of actual demand, but because of the short-term interests of money launderers. When these industries no longer suit the money launderers, they abandon them. The uncertain nature of their investments also leads to loss of effect of policies thus implemented by the government often leading to lower tax revenue for the government which punishes the public by a subsequent increase in the tax rates.

Financial loss to private businesses: Money launderers often use companies, which club together with the illegal funds along with the earnings from the business to mask the laundering. In such cases the companies used to launder money can sell or provide goods and services at a price which is much below the market price gaining a competitive edge and tilting the consumers towards itself creating a difficult environment for the other firms in the market. A good example of this would be how the pizza parlors in post-WW1 America which were owned by the Italian mafia were used as hubs for laundering money although pizzas have since been a staple in New York.

Distrust in a country: The image that a country so maintains in the international market plays a vital role in how potential investors view the country as. Nations now cannot simply afford to create a bad public image in the global economy today. Confidence in markets and the potential of one’s investment is tarnished by stains of money laundering. This negative image can cause the country to lose out on vital globalization and trade opportunities which certainly hampers economic development.


Tenzing is a third-year economics honors student at Hansraj College, University of Delhi.

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