What is money laundering, and how does it work?

The term may be over 100 years old – but it still begs the question: what is money laundering exactly? How do we spot it and how do we prevent it? Read 

Money laundering can simply be explained as when you try to hide that the money originates from an illegal act. When money laundering, the perpetrator attempts to make money earned through a criminal act appear as "clean" legal money.

The Money Laundering Act states that money laundering occurs when:

• Unauthorisedly receiving or obtaining for oneself or others a share in financial benefits obtained through a criminal offence.
  
• Unauthorised concealing, storing, transporting, assisting in the disposal, or otherwise acting to secure the financial proceeds from a criminal offence.
  
• Attempt or complicity in such dispositions.

Thereby, money laundering means that you financially secure yourself a profit as a result of a criminal act. Various things can give benefit from a criminal act. It can, for example, be that you get money or something else of value from criminal acts. It can be drug trafficking, human trafficking, arms smuggling, or robbery. But it can also be money obtained through embezzlement, tax evasion, fraud, corruption, or insider trading.

What characterises money laundering, and how do you spot it?

To use the proceeds of the criminal act, you must make the proceeds look like they were acquired legally - also known as laundering the money - This can be done in different ways, e.g., to obscure the origin of the funds or change the identity of the capital.

Money laundering transactions can be different, and thereby money laundering can also be divided into several phases. What generally characterises money laundering is that you want to make the proceeds look legal. And precisely, this form of money laundering can usually be divided into three phases:

Placement

In the placement phase, also called the first phase, the illegal proceeds need to be placed somewhere. The money can, e.g., be placed in the financial system. The deposit can be a cash deposit to a bank or money exchanged for another currency.

Blurring

In the obfuscation phase, which is the second phase, the illicit proceeds must be separated from their source; this can, e.g., happen through transactions or by an electronic transfer abroad. Often this happens by using a company without activity.

Application

In the phase of Application, referred to as the third phase, the illegal proceeds must return to the originating perpetrator. A reversal can do this activity in the form of a changed dividend that appears legal; this takes the form of a chargeback as payment for, e.g., fictitious loans or the pay of fictitious invoices.

A well-known phenomenon - money laundering

All citizens in society are familiar to one degree or another with the concept of "undeclared work." It is a general term for the situation where goods are delivered or services offered between two parties. The parties have agreed that none of them will pay VAT, even if the delivery is subject to VAT.

When you have done "undeclared work," you often get money or something else of value for the work. This money must be laundered in more significant sums to hide the criminal act.

Often this happens to criminals who deal in euphoric drugs. Here, large sums of money are paid in cash for illegal goods.

Phase 1: This black cash is physically deposited into a bank where it is often mixed with clean money – this is designed to confuse.

Phase 2: The mixed money is transferred electronically to an account abroad.

Phase 3: The money is returned to the original account as payment for fictitious loans or bills.

The black money has been washed white, and the criminal act is no longer traceable in the capital.

Why is it essential to fight money laundering? 

Society must fight money laundering; this is important, as this type of crime makes it more challenging to detect criminal acts. In addition, it is not seen as a recognised act in a society that you, as a criminal, obtain a good profit from a criminal act. With both money laundering and the financing of terror, we see clear tendencies to create a great deal of concern and insecurity in society. They can thereby create a problem for the citizen's safety.

The 5th Money Laundering Directive 

Back in 2018, the 5th Money Laundering Directive entered into force. The objectives of this directive were;

• To increase transparency in connection with companies' ownership
• To strengthen the control of risky third countries
• To address the risks associated with prepaid cards and virtual currencies
• To enhance cooperation between national financial intelligence units
• And to improve collaboration and exchange of information between Anti-Money Laundering Supervisory Authorities and the European Central Bank.

In addition, in October 2018, they supplemented the directive with a new order to ensure the measures to combat money laundering under criminal law. These rules were precisely an attempt to create a balance between the need for increased security and the protection of the fundamental rights to the economic freedoms that the citizens of society have.

What can Creditro do to prevent money laundering?

We work hard to give criminals harsh money laundering and terrorist financing conditions. Our dream is to create a society where money laundering and fraud are a thing of the past. With our platform, we have prepared a system to ensure that our customers can quickly get through the requirements of the Money Laundering Act, i.a., compose a recommended risk score for your clients concerning money laundering and terrorist financing.

In the system, we ask the right questions to your clients and ensure that the correct checks are carried out and documented. In doing so, we give you a better guarantee of not being involved in money laundering or terrorist financing.