What is Money Laundering?

The scale of money laundering is difficult to assess. The Organisation for Economic Co-operation and Development (OECD) data reports revealed that about £1.8tn is laundered globally each year, some 3% of total Gross Domestic Product (GDP).

According to their figures, the highest amount of money is laundered each year in the US, with £216.5bn laundered annually. The UK is second highest with an estimated £88bn worth of money cleaned by criminals annually.

The top five countries in terms of value of money laundered are:

• US – £216.5bn.
• UK – £88bn.
• France – £54.5bn.
• Germany – £51.3bn.
• Canada – £25.6bn.

The United Nations Office on Drugs and Crime (UNODC) puts that figure at an estimate of between 2% and 5% of global GDP laundered each year. That is between EUR 715 billion and EUR 1.87 trillion each year.

Money laundering and its links to organised crime is a serious global problem. The National Crime Agency (NCA) reports that money laundering costs the UK more than £100 billion a year and that there are 4,542 known organised crime groups operating in the UK.

What is money laundering?

The definition of money laundering is broad. In UK law money laundering is defined in the Proceeds of Crimes Act 2002 (POCA) part 7, and includes “all forms of handling or possessing criminal property, including possessing the proceeds of one’s own crime, and facilitating any handling or possession of criminal property”.

The Institute of Financial Accountants’ (IFA) definition is “Money laundering is a process whereby criminals:

• Retain, disguise and conceal the proceeds of their crimes.
• Raise, consolidate or retain funds for use in financing terrorism”.

In simple terms, money laundering disguises the origins of the money or goods by generating the appearance of legitimacy for the illicit gains.

Money laundering is not a new phenomenon. Over 100 years ago, during the prohibition period in the US, organised crime gangs profited enormously from ‘bootlegging’ – the illegal manufacture, distribution and sale of alcohol – during the 13-year nationwide alcohol ban.

To hide the source of their ill-gotten wealth from the authorities, these crime gangs known as crime syndicates, engaged in legitimate business operations such as laundries. This may well be the origin of the term money laundering, which is used to describe the process that turns ‘dirty’ money into funds that appear lawful and can therefore be spent as if they were from legal sources.

What is anti-money laundering?

Anti-Money Laundering (AML) is the overall term to describe the group of laws, processes and regulations used to prevent the illegal generation of income. The United States was one of the first nations to enact anti-money laundering legislation when it established the Bank Secrecy Act (BSA) in 1970.

In 1989, multiple countries and organisations, on the initiative of the G7, formed the global Financial Action Task Force (FATF). Its mission is to devise and promote international standards to prevent money laundering and to develop policies to combat money laundering. The UK became a member of the FATF in 1990.

Following the 9/11 attacks on the US, the FATF expanded its mandate to include AML and combatting terrorist financing. Inter-agency co-operation was improved, lines of communication between law enforcement and financial institutions were increased, and financial reporting requirements for international transactions were expanded.

The aim of anti-money laundering (AML) is to deter criminals from feeding their illicit funds into the financial system. In the UK some businesses and individuals must register with a supervisory authority to follow anti-money laundering regulations (these regulations are examined later in this article).

The primary purpose of AML regulations is to prevent money laundering. Regulators publish a series of procedures to achieve this goal and companies have to comply with these procedures. One of these procedures is the Know Your Customer (KYC). The control processes implemented in the Know Your Customer due diligence checklist ensures that the business has the necessary information about the customer to open an account and determine the customer’s risk level.

It can be complicated for companies to comply with AML legislation and regulations. New regulations are imposed continuously to keep up with the sophisticated methods that the criminals are using, and regulatory authorities increase audits and raise penalties to combat money laundering activities, so companies must prioritise AML compliance.

Most companies will appoint an AML compliance officer to provide compliance policies and processes in relation to customer due diligence and monitoring for the company to follow. The compliance officer interprets and complies with the regulations and regulates any of their company’s activities that violate these regulations and they are also able to detect any financial irregularities or crimes.

Companies’ practices will vary depending on the nature of the money laundering risks they face and the type of products or services that they sell.

For example, a large retail bank with many customers will likely need to develop or purchase customer monitoring software, but a smaller organisation may be able to monitor its customers using a low-tech solution. Without these controls, for example inadequate or no process for reporting knowledge or suspicions of money laundering, companies will be at risk of committing money laundering offences.

Companies that fail to comply with AML regulations and fail to implement AML controls are at risk of facing hefty fines. A startling example is that of the case of Standard Bank PLC which was fined £7.6m for failures in its anti-money laundering controls.

What is the purpose of money laundering?

Money laundering legitimises the proceeds of crime and allows drug gangs, human traffickers and other criminals to expand and benefit from their operations.

Examples of offences that are linked to money laundering include, but are not limited to:

• Tax evasion.
• Theft.
• Fraud.
• Bribery.
• Corruption.
• Smuggling.
• Modern slavery.
• Human trafficking.
• Drug trafficking.
• Illegal arms sales.

In order to benefit freely from the proceeds of their crime, the criminals must therefore conceal the illicit origin of these funds and they do this by laundering the money.

For individuals or entities involved in the financing of terrorism, their purpose for laundering money is not necessarily to conceal the sources of the money but to conceal both the financing and the nature of the financed activity.

How is money laundered?

There are many ways that money is laundered by criminals. Methods can range from the purchase and resale of a luxury item such as a high-end car, artwork or jewellery, to passing money through a complex international web of legitimate businesses and shell companies.

Money launderers might, for example, run money through a legitimate cash-based business or find a way to transfer cash into foreign countries to deposit it. They will often deposit it in smaller amounts or may buy other cash alternatives, such as virtual currencies known as cryptocurrencies such as Bitcoins.

Criminals use money from criminal activity, mix it in with funds that were earned legitimately, and then it is filtered back to its original source often to be used to finance the continued operation of criminal organisations.

Many of the methods applied by criminals to launder money or finance terrorism involve the use of the financial system to transfer funds. Financial institutions, in particular banks, are most vulnerable to abuse for that purpose.

Why is money laundered?

Rather than keeping the large amounts of cash that these illicit operations generate, the criminals mask the source of the illegal gains so that it makes it far more difficult for the authorities to successfully prosecute the criminals and for them to be able to seize back dirty money under the Proceeds of Crime Act 2002 (POCA).

The result is that dirty money appears clean and this can frustrate the efforts of law enforcement agencies to bring the criminals to justice.

What are the different methods of money laundering?

There are as many as twelve, possibly more, defined methods of money laundering, which fit into four generic typologies.

These are:

• Bank methods.
• Smurfing, also known as structuring.
• Currency exchanges.
• Double-invoicing.

Bank methods include techniques such as multiple participants transferring illicit funds – sometimes recruited without knowing that they are breaking the law – through their accounts via online resources, or even through courier services, on behalf of criminal entities, usually for a stipend of the money involved.

Smurfing/structuring is when illicitly obtained funds are broken down into small amounts and then deposited into and transferred between multiple accounts.

Currency exchanges can involve cash-in-hand payments of wages to unregistered workers, often using illegally obtained and untaxed funds, or using casinos to swap illegally acquired cash for gambling chips; playing the tables or machines for a short period, then cashing the chips for a cheque or receipt. The cash is then claimed as a return from gambling.

Double-invoicing is a trade-based money laundering method.

What is trade-based money laundering?

Trade-based money laundering methods take advantage of the complexity of international trading systems. It generally involves giving false information on imports and exports.

Typically trade-based money laundering involves altering invoices or business documents in order to disguise dirty money as business profits. Because the money has a paper trail, the bank does not suspect the profits as ‘dirty money’. However, if the business documents show an unexplainable, substantial profit increase, the bank may see it as a red flag and investigate further.

Three very common methods of trade-based money laundering relate directly to invoicing, and these are called:

• Over-invoicing.
• Under-invoicing.
• Multiple-invoicing.

They relate directly to charging a different amount than is due for the goods or services in question.

Other methods related directly to trade-based money laundering include:

• To misrepresent the quality of the goods in question to leave a gap between value or cost and the amount paid.
• The over-valuation of goods, and/or phantom shipments, where no goods move at all.

Trade-based money laundering is highly adaptive and can exploit any sector or commodity. It has been reported that trade-based money laundering has increased since the COVID-19 pandemic as national lockdowns have made it harder for criminals to move cash across borders.

As a consequence, there has been a trend that trade-based money laundering is on the rise in cashless societies and those that have been highly impacted by national lockdowns and Brexit.

The three stages of money laundering

The money laundering process most commonly occurs in three key stages: placement, layering and integration. Each individual money laundering stage can be extremely complex due to the criminal activity involved.

What is placement in money laundering?

The first stage of money laundering is known as placement; this is where dirty money is placed into the legal, financial systems. After getting hold of illegally acquired funds through criminal activities such as theft, drugs, bribery and corruption, financial criminals move the cash from its source.

This is where the criminal money is laundered and disguised by being placed into a legitimate financial system, such as in offshore accounts.

Criminals are vulnerable during the first stage because they are moving a large amount of money and placing it directly into the financial system. There are several ways the dirty money can enter the financial system.

At this placement stage they might:

• Create false invoices – Invoice fraud is the most common technique used for transferring dirty money. This can be done by over-invoicing or under-invoicing, falsely describing goods or services, and phantom shipping – this is where no items have been shipped and the fraudulent documentation was produced to justify the payment abroad.
• Put money into cash-based businesses – Businesses then blend illegal funds with legitimate takings. This is normally done through cash businesses such as tanning salons, car washes, casinos and strip clubs, as they have little or no variable costs. As highlighted earlier, in the time of the mobsters in the prohibition era, laundries were used.
• Open foreign bank accounts – This is where the criminals will use ‘Smurfs’ to open and deposit small amounts into one or multiple bank accounts. Smurfs also carry small sums of cash abroad, below the customs declaration threshold, and then this cash is paid into foreign bank accounts before sending it back home. These are often long-term processes.
• Create offshore companies and use offshore accounts – These are bank accounts opened in a country outside of where an individual resides such as the Cayman Islands. Laundered money is often hidden through offshore accounts as this process easily hides the identity of the real beneficial owners and is a way to evade paying tax to HMRC.

What is layering in money laundering?

The second stage of money laundering is known as layering. This is a complex web of transactions to move money into the financial system. Layering frequently takes place across borders to make it more difficult for UK-based anti-money laundering officials to detect criminal activity. It often involves breaking down large bulk funds into a series of smaller transactions. The idea is that these smaller transactions fall under the threshold of anti-money laundering regulations and won’t set off any red flags to authorities.

Once the funds have been placed into the financial system, the criminals make it difficult for authorities to detect laundering activity. They do this by obscuring the audit trail through the strategic layering of financial transactions and fraudulent bookkeeping. They often move money electronically between different countries using loopholes in the legislation.

Some of the strategies that the criminals can use include, but are not limited to:

• Trading in international markets.
• Purchasing foreign money orders.
• Trading in foreign currencies.
• Converting money into financial instruments such as stocks.
• Purchasing and selling luxury assets such as jewellery, art, cars etc.
• Investing in property, land or shell companies with a functional front.

What is integration in money laundering?

The final stage of money laundering is integration. This is when the laundered funds are integrated back into the criminal’s legitimate financial accounts. Integration is done very carefully from legitimate sources to create a plausible explanation for where the money has come from. At this stage, it is very difficult to distinguish between legal and illegal wealth.

As with earlier stages, integration typically involves a series of smaller transactions. For example, the dirty funds might have been used to purchase a luxury asset such as jewellery or property. The luxury asset can then be sold, and this creates a trail of legitimately sourced funds.

How does money laundering affect a business?

There are serious consequences for any organisation found to be money laundering, especially in regulated sectors. The obvious consequences are of course the financial penalties imposed and the possibilities of custodial sentences. However, there are other just as significant outcomes such as the negative media headlines for any company found to be involved in money laundering. Their reputation will probably suffer disreputable damage, with the knock-on effects of losing business, finding it difficult to retain and attract staff, and causing the business sector to lose trust in the business.

For financial institutions, particularly banks, money laundering activities pose threats to the interests of depositors that may arise from banks exposing themselves to direct losses from fraud, perhaps through failure to identify undesirable customers/counterparties. Even inadvertent association with criminals can result in adverse publicity that undermines public confidence in banks, and consequently their stability.

What are the laws and regulations around money laundering?

• The Proceeds of Crime Act 2002 (POCA) and the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017) are the principal laws used to prosecute money laundering. The aim of the POCA was to reform the legislation around proceeds of crime, especially the recovery of criminal assets, making it easier to enforce. It criminalises money laundering and makes it an offence for persons in the regulated sector not to report suspicions regarding money laundering activity. The 2020 National Risk Assessment sets out more details on the POCA.
• The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017) came into force in June 2017. These regulations improve upon and close gaps in the MLR 2007 and the Transfer of Funds (Information on the Payer) Regulations 2007, such as changing the approach to client due diligence. Their aims include stopping criminals from using professional services to launder money by requiring professionals to take a risk-based approach.
• The Criminal Finances Act 2017 (FCA) became law on 27th April 2017 and updates the POCA, the Terrorism Act 2000, and the Anti-Terrorism Crime and Security Act 2001. It provides additional powers to enable law enforcement and prosecution agencies to identify and recover the proceeds of crime, tackle money laundering, tax evasion and corruption, and stop the financing of terrorism.
• The Terrorism Act 2000 (TACT) includes key provisions criminalising the financing of terrorism. These include inviting, providing or receiving money or property with the intention or reasonable suspicion that it will be used for the purposes of terrorism and using or intending to use money or other property for the purposes of terrorism. It introduced a new terrorism stop and search power giving British police the power to stop and search people and vehicles in order to prevent terrorism, without the need for reasonable suspicion a crime has occurred.
• The Sanctions and Anti-Money Laundering Act 2018 (SAMLA) gave the government wider powers to implement a range of sanctions including financial sanctions, trade sanctions and immigration sanctions where appropriate, for the purpose of compliance with the United Nations’ obligations or other international obligations.
  The Act also made new provisions in relation to the detection, investigation and prevention of money laundering and terrorist financing. SAMLA enabled sanctions to continue uninterrupted at the end of the EU exit period.
• The Terrorist Asset-Freezing etc Act 2010 (TAFA) implements obligations placed on the UK by UN Security Council Resolutions. It gives HM Treasury the power to freeze the assets of individuals and groups believed to be involved in terrorism, whether in the UK or abroad, and to deprive them of access to their financial resources.

Certain types of companies in business sectors including accountants, financial service businesses, estate agents and solicitors, have a direct responsibility to implement anti-money laundering procedures, and must have adequate anti-money laundering systems and controls in place under the Money Laundering Regulations 2019 (MLR). Businesses covered by the regulations must be monitored by a supervisory authority.

The Financial Conduct Authority is the supervisory authority for:

• Banks, building societies and credit unions.
• Claims management companies.
• Consumer credit firms.
• Electronic money and payment institutions.
• FCA Innovation Hub.
• Financial advisers.
• General insurers and insurance intermediaries.
• Investment managers.
• Life insurers and pension providers.
• Mortgage lenders and intermediaries.
• Mutual societies.
• Sole advisers.
• Wealth managers.

Her Majesty’s Revenue and Customs (HMRC) is the supervisory authority for:

• Money service businesses not supervised by the Financial Conduct Authority (FCA).
• High value dealers.
• Trust or company service providers not supervised by the FCA or a professional body.
• Accountancy service providers not supervised by a professional body.
• Estate agency businesses.
• Bill payment service providers not supervised by the FCA.
• Telecommunications, digital and IT payment service providers not supervised by the FCA.
• Art market participants.
• Letting agency businesses.

The Gambling Commission is the supervisory authority for:

• Arcades.
• Betting.
• Bingo.
• Casino.
• Game and Betting hosts.
• Gambling software.
• Lotteries.
• Machines.

Some designated professional bodies also act as supervisory authorities.

These are:

• Association of Accounting Technicians.
• Association of Chartered Certified Accountants.
• Association of International Accountants.
• Association of Taxation Technicians.
• Chartered Institute of Legal Executives.
• Chartered Institute of Management Accountants.
• Chartered Institute of Taxation.
• Council for Licensed Conveyors.
• Faculty of Advocates.
• Faculty Office of the Archbishop of Canterbury.
• General Council of the Bar.
• General Council of the Bar of Northern Ireland.
• Insolvency Practitioners Association.
• Institute of Certified Bookkeepers.
• Institute of Chartered Accountants in England and Wales.
• Institute of Chartered Accountants in Ireland.
• Institute of Chartered Accountants of Scotland.
• Institute of Financial Accountants.
• International Association of Bookkeepers.
• Law Society.
• Law Society of Scotland.
• Law Society of Northern Ireland.

What are the penalties for being involved in money laundering?

The principal money laundering offences created by the Proceeds of Crime Act 2002 (POCA) are:

• The concealing offence (POCA 2002, s 327).
• The arranging offence (POCA 2002, s 328).
• The acquisition, use or possession offence (POCA 2002, s 329).

The maximum sentence for any of the above offences is 14 years’ imprisonment following conviction on indictment or a fine or both and 12 months’ imprisonment or a fine or both summarily. Where an offence was committed in England and Wales before 2 May 2022, the maximum custodial sentence following summary conviction is six months.

Under POCA 2002, certain offences are created for those people working in both the regulated sector and non-regulated sector who have knowledge/suspicion of money laundering but who fail to disclose this information to the appropriate authorities.

There are four separate offences relating to the failure to disclose information under POCA 2002:

• Failure to disclose to a nominated officer or other authorised person when operating in the regulated sector.
• Failure to disclose, on the part of a nominated officer operating in the regulated sector.
• Failure to disclose, on the part of a nominated officer operating in the non-regulated sector.
• Failure to make disclosure otherwise than in the form prescribed (this offence is triable summarily only and the maximum penalty is a fine).

For the purposes of the other three either way offences, a jury would need to be satisfied that the accused either knew or suspected that another person was engaged in money laundering, on the part of the accused. An either way offence is a criminal offence that can be heard in the magistrates’ court or Crown Court.

A person convicted of an offence under these provisions would on indictment be liable to imprisonment for a term not exceeding five years or to a fine or to both and summarily to 12 months’ imprisonment or to a fine or to both. Where an offence was committed in England and Wales before 2 May 2022, the maximum custodial sentence following summary conviction is six months.

The Sentencing Council has produced offence specific guidelines for fraud, bribery and money laundering offences to assist in the sentencing of individual and corporate offenders respectively and which summarise the steps which the courts must follow when determining an appropriate sentence for a money laundering offence. For detailed information, see the Sentencing Guidelines for Corporate Offenders—Money laundering checklist.

The Crown Prosecution Service (CPS) usually prosecutes money laundering cases, although if the case is linked to serious fraud or corruption, the Serious Fraud Office (SFO) may lead the investigation and any subsequent prosecution. Generally, more serious cases of money laundering will be heard in the Crown Court with lesser offences decided in the magistrates’ court. This is because the magistrates’ court does not have the same sentencing powers as the Crown Court.

If someone has been accused of money laundering and the case is being tried at the magistrates’ court, the maximum prison sentence they can expect is 6 months or 12 months if they are being tried for more than one offence. Fines are not capped at the magistrates’ court, so the fine they can receive can be unlimited.

If someone is found guilty of money laundering in the Crown Court, the maximum prison sentence that can be imposed is 14 years. All offences are graded A, B or C according to severity; however, the minimum level of severity for money laundering offences is B, Medium Culpability.

The least serious money laundering crimes are deemed to be those where the amount laundered equates to £10,000 or less, with a starting point of £5,000; it is given to the court to decide where to place the offence in the category range. Offences involving less than £5,000 receive a more lenient penalty with those involving more than £5,000 potentially invoking a maximum custodial sentence of two years.

The most serious money laundering offences are deemed to be those involving sums of £10 million or more, with £30 million given as the starting point for sentencing. These serious crimes can involve the maximum prison sentence of 14 years.

Fines are calculated as a percentage of weekly income with fines based on 25%–75% of weekly income applicable in the least serious category and 500%–700% in the most serious cases.

When it comes to financial institutions, fines can reach enormous levels. All five of the UK’s biggest banks have been fined in connection with money laundering in the past decade. Most recently Standard Chartered was ordered to pay £842 million to US and UK authorities for various failings, including neglecting to enforce the required levels of anti-money laundering controls.

What is the maximum penalty for assisting a money launderer?

Anyone working in the regulated sector is required under Part 7 of the Proceeds of Crime Act 2002 (POCA) and the Terrorism Act 2000 to submit a Suspicious Activity Report (SAR) in respect of the information that comes to them in the course of their business if they know, or suspect or have reasonable grounds for knowing or suspecting, that a person is engaged in, or attempting, money laundering or terrorist financing.

It is a criminal offence under section 333A of the Proceeds of Crime Act 2002 (POCA) for anyone working in the regulated sector to tell a person that:

• A report has been made that will or is likely to prejudice an investigation by disclosing this information.
• An investigation into money laundering is being considered or carried out if that disclosure will prejudice the investigation.

These are known as the ‘tipping off’ offences. On summary conviction, that is a case heard in the magistrates’ court, a person could face up to three months’ imprisonment or a fine not exceeding level five or both. On conviction on indictment, that is a case that is heard in the Crown Court, the person could face up to two years’ imprisonment or a fine or both.

SARs can also be submitted by private individuals where they have suspicion or knowledge of money laundering or terrorist financing. So even if you are not in the regulated sector, you may still have an obligation to submit a SAR. You may commit an offence if you have knowledge or suspicion of money laundering activity or criminal property, do something to assist another in dealing with it, and fail to make a SAR. Submitting a SAR protects you, your organisation and UK financial institutions from the risk of laundering the proceeds of crime.

The easiest way to submit a SAR is with the secure SAR Online system. SAR Online is free, negates the need for paper-based reporting, provides an instant acknowledgement and reference number (reports submitted manually do not receive an acknowledgement) and reports can be made 24/7. Online reports will also be processed more quickly, particularly if a defence against money laundering is sought.

Why is it important to combat money laundering?

Every year millions of pounds sterling, euros and dollars’ worth of money laundering and terrorist financing crimes are committed through financial systems. Money laundering activities ensure the growth of crime and terrorist organisations.

An effective anti-money laundering / counter financing of terrorism framework must therefore address both risk issues. It must prevent, detect and punish illegal funds entering the financial system and the funding of terrorist individuals, organisations and/or activities. The problem is a global one; money launderers and terrorist financiers exploit loopholes and differences among national AML/CFT systems and move their funds to or through jurisdictions with weak or ineffective legal and institutional frameworks.

Financial resources must be blocked to stop the growth of crime and terrorist organisations. Regulatory bodies around the world are working to prevent money laundering and terrorism financing. With the AML Know Your Customer requirements published for an effective fight against money laundering and terrorist financing, all institutions’ risk-based approaches, especially financial institutions, are compulsory. Therefore, organisations must ensure AML and KYC compliance and play an active role in fighting financial crimes.

Combatting money laundering will assist in tackling crimes of all types and also help to support the integrity of national economies and financial systems. The International Monetary Fund (IMF) is especially concerned about the possible consequences of money laundering and the financing of terrorism on its members’ economies. It states that “The application of strict Customer Due Diligence (CDD) by financial institutions and a high degree of transparency is crucial to fight money laundering and the financing of terrorism effectively”.