Illegal activities often generate huge profits, but they are also ill-gotten gains. In the U.S., money that is earned through illegal activities is considered tainted money and cannot be used for a number of legal activities, including the U.S. banking system. In some cases, income earned through illegal activities can be in excess of several millions of dollars, which means criminals have a vested interest in making the money appear legally earned. In order for criminals to use this money to make purchases such as a home or other investments, they have to have a way to prove (at least on paper) that they earned this money through legal means.
The process of taking "dirty" money (money obtained through illegal activities) and turning it into "clean" money (money that was earned through a legal activity) is called money laundering. Money laundering is a crime in and of itself and to combat it, the U.S. government and various branches of law enforcement have a number of different anti-money laundering protocols in place. Here is an overview of money laundering; what it is, how it works and how the U.S. Government works to stop it.
How Does Money Laundering Work?
In order for criminals to deposit large amounts of money in banks or make large purchases, they have to have a way to show they earned the money through legal means. The most common way of doing this is to buy a legitimate business or series of businesses that generally have a lot of cash flowing through them. The types of businesses they generally target include restaurants, bars and smaller businesses in poorer neighborhoods where people are more likely to pay for services in cash.
Because they need the business to turn dirty money into clean money, but they have to have clean money to buy the business, they will often take out a business loan to pay for the business or put the business into the name of a family member or associate that seems to have the legitimate means to buy it. Other ways of laundering money include depositing only small amounts of cash into a series of different accounts or investing with an investment broker that won't ask too many questions about where the money came from. Ultimately, however, most of these tactics are just a way to set the criminal up as being in a financially sound enough position to start buying legitimate businesses.
Once they own a business, they simply report the profits from the business as being in excess of what they really are. This is why bars and restaurants are such popular choices for money laundering. The business itself may actually be losing money, but their accounting ledger will show a steady income of cash flow. In most cases, businesses will also need a "dirty" accountant to keep two sets of ledgers. One shows the real income of the illegal business and how it is funneled into the legal business, while the other only shows the fabricated income from the legal business. This practice is what is known as "cooking the books" and it is also illegal.
Once this cash has been proven to be (or made to appear to be) legitimate, it can be placed into the banking system, where it can provide legitimate income for the criminal. Once the money has been filtered through the legitimate enterprise, it can be paid out as a salary or dividends to the criminal. They can then use that money to invest in more legitimate enterprises, which helps to further conceal both the dirty money and the criminal himself. On the surface, he may appear to be a wealthy, legitimate and even respected businessman (or woman) when in reality their fortunes were actually made through ill-gotten gains.
There a number of different tactics and protocols that the U.S. government has set in place to stop money laundering. The first and foremost is the U.S. Tax Code. In fact, the practice of money laundering itself came about largely as a result of the infamous takedown of Al Capone by the IRS. Money laundering allows some of the worst criminals to present themselves as honest, tax-paying, law-abiding citizens. Laws that help stop money laundering also seek to expose criminals for what they really are. Since there are only a few ways really to launder money, anti-money laundering laws only need to apply to a few very specific areas. These areas are:
- Accounting: Money from criminal activities still need to be accounted for, which means the accountant needs to be in on the scheme. There are a number of laws and protocols in place to keep accountants from keeping double books and when they do, they are breaking the law.
- Investing: There are a number of laws and regulations that require brokers to do their due diligence to determine where the funds being invested are coming from. Some investment brokers will not follow these laws, guidelines, and protocols when they know or suspect the money is dirty, but when they do, they are breaking the law.
- Banking: Banks are required to report deposits in excess of a certain amount, In addition, they are also responsible for checking the legal identity of anyone that opens an account. This keeps criminals from simply opening up multiple accounts and then funneling money from one account to another. This is why off-shore banking is highly popular among criminals.
Just like the IRS did with Al Capone, many illegal enterprises are brought down by following the trail of money. Most criminals find numerous clever and creative ways of trying to hide the money trail back to the source of the funds (their illegal activities) but forensic accountants and other financial officers are often just as creative in finding ways to expose them.
iovation is a leading provider of fraud prevention and detection solutions as well as advanced multifactor authentication software for online banking, e-commerce, insurance, gambling, online communities, and travel and ticketing organizations.
Ready for the next step?
Fraud Detection & Prevention
Spot user behaviors and device information that’s suspicious, and stop those fraudsters in real time. We track billions of devices and our fraud analysts add evidence to make this intelligence even more effective.