Illegal arms sales, smuggling, and organised crime such as drug trafficking, people trafficking and prostitution rings, can generate huge amounts of money, as can ‘white collar crimes’ including insider trading, bribery and computer fraud schemes.
Those involved in these types of unlawful activities need to be able to ‘legitimise’ their ill-gotten gains so that they can benefit from the money they are earning – and in some cases, access it in order to fund other organised crime, such as terrorism.
Money laundering is the process by which criminals attempt to integrate illegally obtained cash into the financial system so that it appears to have been earned legitimately, and to access cash to fund other illegal activities.
Money laundering typically has three stages:
To truly understand how money launderers are able to clean their dirty cash, it is important not only to understand the three stages of money laundering, but also, how these stages are being achieved in practice.
The United Nations estimates that the amount of money laundered globally every year is between two and five per cent of global GDP, which in monetary terms is between $800 billion and $2 trillion in US dollars.
And while many people think of money laundering as a purely financial crime – and often even see it as a victimless crime – that could not be further from the truth. As we touched on earlier, money laundering only exists because of crime – without the initial crime, there would be no illicit funds generated to launder.
And once money laundering systems exist, they continue to operate, continually providing criminal organisations with the means to expand their operations and exert influence over legitimate businesses and institutions and trap vulnerable people into an inescapable life of crime.
Money laundering bankrolls gangs that take advantage of people living in areas where jobs and services are scarce. The criminal income promised to them eases their money problems but pulls them deep into illicit networks and weakens their community ties. As crime pays and punishment feels remote, social norms erode, inequality widens, and a self‑reinforcing cycle of dislocation and violence takes hold.
Traffickers rely on laundered cash to buy transport, documents, and bribe officials. The victims- often forced into labour or the sex trade - generate steady profits that are recycled into still‑larger operations. This means that money launderers are turning human misery into a scalable business, negatively impacting individuals, families and sometimes entire communities.
At the “placement” stage, money launderers need to use professional businesses – either complicitly or unconsciously – to clean their cash. Once corruption becomes routine, honest businesses lose out, public trust collapses and the entire system becomes vulnerable.
The drugs trade produces fast cash, at scale, and money laundering enables this cash to be quickly converted, into profits and also, influence. At the same time, drugs dealing creates addiction, health problems and associated crimes – violence, criminal damage, theft etc..
Because crime syndicates use front companies – such as hair salons, nail bars, car washes etc - to hide their illegitimate profits, they are able to undercut legitimate firms in the same sectors. And as their legitimate competitors start to fold, the illegitimate front companies gradually achieve a monopoly and entire sectors end up being controlled by criminals, diverting money away from genuine economic growth and towards funding more crime.
The role of money laundering in political corruption should not be understated, as it enables corrupt officials and politicians to conceal their illegal gains and avoid accountability for their actions. Corrupt practices such as embezzlement, bribery and kickbacks are often facilitated by money laundering schemes; politicians then start making policies that favour the interests of their criminal backers, which can reduce the public’s trust in government institutions and undermine democratic processes.
Anyone linked to terrorism will be blacklisted in terms of being able to access legitimate funds, with screening processes identifying them as either very high risk or sanctioned – which means it is illegal to do business with them. This means that to be able to fund their illegal activities they need access to cash, and that is where money laundering comes in. It enables criminals to finance terrorist organisations by providing a way for them to disguise their sources of funding and move money across borders without detection. Terrorist groups use laundered funds to finance recruitment, training and the planning and execution of terrorist attacks, which poses a significant threat to global security.
Money laundering has been an issue for many years, but the first XX response was in 1989, when the Financial Action Task Force on money laundering (FATF) was established to be a global money laundering and terrorist financing watchdog.
FATF’s role was to develop a co-ordinated international response to the global threat of money laundering and set international standards to detect and prevent it, and this included developing a set of recommendations for governments across the world to implement in order to establish effective AML programs.
Now, more than 200 countries and jurisdictions are committed to FATF’s recommendations - these are regularly reviewed to ensure they are addressing any new risks, which over the years have included shell companies and most recently, the use of cryptocurrencies.
Individual countries also have their own AML rules; in the UK, ‘regulated firms’ - those to whom AML regulations apply - must follow the guidelines set out by the Financial Conduct Authority (FCA), and the EU’s 5th Anti-Money Laundering Directive (5MLD).
As the UK is no longer a part of the EU, the UK Government opted out of the 6th Money Laundering Directive (6MLD) however, the UK’s domestic AML regulations - The Proceeds of Crime Act (POCA) and the Money Laundering, Terrorist Financing and Transfer of Funds Regulations (MLR) are the core pieces of legislation underpinning the UK's anti-money laundering (AML) framework- largely comply with the requirements laid out in 6MLD, and in some instances, supersede them.
The three main supervisory authorities for AML in the UK are:
As part of their ongoing AML obligations, regulated businesses must carry out certain day-to-day tasks, including conducting Customer Due Diligence and performing risk assessments of their operations. This should include:
The quickest, most efficient and most reliable way to run AML checks is digitally. SmartSearch’s unique platform runs AML checks with identification and verification, PEP and sanction screening, enhanced due diligence and monitoring, within a matter of seconds – all from one place.
As outlined in this Whitepaper, money laundering is not just a financial problem - it has huge and very real impacts on society as a whole. That is why it is absolutely vital that we do everything we can to detect it and put a stop to it.
For businesses in the UK this means taking their AML obligations seriously. Putting in effective AML measures using the most advanced technology to beat the criminals at their own game and help put a stop to money laundering and the heinous crimes it funds.