Money laundering

Money laundering is a criminal activity. Bankrate explains how it works.

What is money laundering?

Money laundering is the practice of making money that was gained through criminal means, such as smuggling weapons, look as if it came from a legitimate business activity.

Deeper definition

Money laundering often involves financial institutions to make the money look as if it came from a legal source. Instead of depositing a large sum of money all at once at a bank, a money launderer will deposit small sums over time to avoid drawing attention. Money earned illegally may be taken to a country where money laundering laws aren’t as strictly enforced, but this often requires smuggling cash across national borders.

There are three steps in money laundering:

  • Placement. This refers to introducing the dirty money into the financial system by depositing it into a bank or using it for a business.
  • Layering. This is using tricky accounting methods to conceal the source of the money.
  • Integration. This is when the dirty money makes its way back into the economy as legitimate funds.

One common way to launder money is to set up a legitimate business, called a “front,” and pad each day’s earnings. The business merges the illegal funds with the business’ legitimate funds to conceal the source of the dirty money. By falsifying the earnings, the business mingles the legitimate funds with the illegal funds so that it’s difficult to distinguish between the two.

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Money laundering example

A couple earn a large sum of money through drug trafficking and need a way to disguise the source of their income. They decide to open a restaurant with the dirty money. Each day, when they record their earnings in the books, they pad what they claim to have made. Over time, their drug money is incorporated into their legitimate earnings and the couple are able to start spending the money without any record of how they truly obtained it. The drug money has been laundered.

Laundering money isn’t the only illegal way to handle cash. Here are six other money habits that are against the law.

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