What is money laundering?

Money laundering is the process of hiding the criminal origins of money, making it appear legally earned. It’s how criminals move illicit profits into the financial system without raising suspicion. Without laundering, dirty money from drug trafficking, fraud, and organised crime would be useless, as law enforcement could easily trace it back to its source.

Authorities and financial institutions work relentlessly to detect and prevent money laundering, but criminals constantly adapt, finding new ways to slip their money into the system unnoticed. Here’s everything you need to know.

Definition of money laundering in simple words

Imagine you steal a bag of cash. Walking into a bank and depositing it outright would be suspicious. But what if you buy a luxury car with the stolen money and then sell that car for a clean bank transfer? Now, the money appears legitimate. That’s money laundering: turning criminal cash into seemingly legal funds.

Criminals use all kinds of methods to achieve this, from buying expensive goods to running fake businesses that mix illicit funds with legal transactions. The goal? Erase all traces of crime and make the money look like it came from an honest source.

Why is money laundering done?

Money is power - but only if it can be used freely. Criminal organisations, corrupt officials, and fraudsters generate huge sums of illegal profits, but spending that money openly would immediately raise red flags.

Money laundering allows them to blend illicit funds with legitimate ones, moving seamlessly through the economy without drawing attention. Once “clean”, the money can be used for anything, from luxury homes and businesses to funding more crime. Without money laundering, criminal empires would collapse under the weight of their own profits.

How money laundering works (step-by-step)

Money laundering is a calculated, multi-step process designed to erase all traces of wrongdoing. Here’s how it works:

• Placement: The dirty money enters the financial system. Criminals deposit large sums into banks, funnel cash through businesses, or purchase high-value assets like real estate or luxury goods.
• Layering: This is where the deception happens. The money is shuffled through a maze of transactions: wired across borders, converted into different currencies, or split into multiple accounts, making it harder to trace.
• Integration: The final step brings the money back into the legitimate economy. After being disguised through various transactions, it re-emerges as seemingly lawful income, ready to be spent without suspicion.

Each stage is carefully designed to avoid detection, allowing criminals to enjoy their illicit profits under the illusion of legitimacy.

Example of money laundering

Picture this: A criminal empire earns millions from illegal drug sales. Instead of depositing piles of cash directly into a bank, they buy a chain of coffee shops. They inflate daily sales, mix illegal money with real earnings, and soon, those millions look like they came from selling lattes. On paper, everything seems legitimate, but in reality, the money has been laundered.

The role of banks in money laundering

Banks play a crucial role in both detecting and, unfortunately, sometimes facilitating money laundering. Criminals often exploit financial institutions by moving illicit funds through layers of transactions: wiring money between accounts, using shell companies, or depositing small amounts to avoid suspicion. Without strict monitoring and compliance measures, dirty money can pass through the system undetected, blending into the legitimate economy.

The most common ways of laundering money

Money laundering has evolved beyond cash-filled briefcases. Today, criminals exploit modern financial systems, technology, and even luxury assets to move dirty money discreetly.

Investments 

Legitimate-looking investments are a perfect disguise. Criminals buy stocks, bonds, or properties, letting the value grow before selling them off as clean income.

Cryptocurrency

With decentralised networks and anonymous transactions, cryptocurrencies offer criminals a fast, untraceable way to move dirty money across borders.

Cryptocurrency is a growing avenue for money laundering, with anonymous transactions making detection difficult. Trapets' screening tools help businesses monitor crypto transactions, detect illicit funds, and comply with evolving regulations.

Luxury items

Buying expensive assets like paintings, yachts, or jewellery makes it easy to convert illicit funds into wealth that appreciates over time. Sell it later, and the money looks clean.

Buying and selling

Illicit money often moves through sham businesses that generate fake sales, allowing dirty cash to blend in with real revenue.

Gambling

Casinos provide a perfect way to mix illegal money with real winnings. Criminals place bets, cash out, and claim the earnings as gambling profits.

How can companies identify and prevent money laundering?

Companies aren’t just at risk of being used for laundering; they also face severe fines and reputational damage if they fail to prevent it. The solution? A strong anti-money laundering (AML) programme.

Detecting money laundering is no easy task, as criminals use sophisticated layering techniques to hide illicit funds. Trapets Transaction Monitoring automates transaction monitoring, flags suspicious patterns, and ensures compliance with global regulations. With risk scoring and automated reporting, businesses can stay ahead of financial crime.

Prevent money laundering with AML detection

Money laundering is evolving, meaning that your AML strategy should, too. Trapets provides transaction monitoring, KYC verification, and risk analysis to help businesses stay compliant and fight financial crime. Protect your business today.