Litigation + Valuation Perspectives

Demystifying Valuation, Economic Damages + Forensic Accounting

What is money laundering?

money laundering, fraud, crime, forensic accountingCrime is big business both domestically and across the globe and, as a result, money laundering activities are extensive. In fact, the United Nations Office of Drugs and Crime reports that “[t]he estimated amount of money laundered globally in one year is 2% – 5% of global GDP, or $800 – $2 trillion in current U.S. dollars.” And three years ago, the 2015 National Money Laundering Risk Assessment published by the U.S. Department of Treasury, estimated that approximately $300 million is laundered each year through the United States.

Myth has it that the term money laundering has its roots in the illicit activities of none other than the gangster Al Capone, who used legal, cash-intensive, laundromat (and other) businesses to hide the profits from his many criminal activities. Though Capone did use legitimate businesses as fronts to conceal his illicit “earnings,” the small laundromat operations could not justify the enormous amount of cash generated from his illegal activities. Irrespective of its history, the term money laundering has stuck, in large part because it effectively defines a process by which:

  1. Dirty money obtained from illegal activities,
  2. is disguised, or washed,
  3. such that it looks like clean money originating from legal activities.

The Fraud Triangle, still as relevant as ever

The Association of Certified Fraud Examiners (ACFE) and other organizations break down money laundering and, more specifically, the disguising or washing element into the three following components: (1) placement, (2) layering and (3) integration.

Placement is exactly what it sounds like. It is a general term for introducing the ill-gotten funds into traditional financial institutions. It is, in fact, the stage at which money laundering is most often detected and where most legislation is directed. Placement can be achieved by a variety of means, such as cash deposits into bank accounts and currency exchanges.

Layering (also referred to as structuring) involves steps taken to conceal the money trail and obscure the source of the funds. It typically involves a complex web of transactions, that often includes transfers between personal and business bank accounts both domestically and abroad.

Integration describes the point at which the washed (i.e., laundered) money re-enters the economy from what appear to be legitimate sources so that the criminal can use the money for his or her personal benefit. By way of an example, the criminal might record more income on the books of a legitimate business and pay himself or herself a dividend or distribution from the business in order to access to those funds.

Whether or not Al Capone used laundromats as fronts for disreputable activities, money laundering is widespread. It serves a purpose for criminals who, unlike the rest of us, act as if crime does indeed pay…unless you get caught.

Norman A. Kur, CFE, CMA, AM