What is Money Laundering? (2024)

Money laundering is the process of taking large amounts of illegally obtained funds and making their source seem legitimate. Money earned through criminal activity is considered “dirty,” and through money laundering it becomes “clean.” Once cleaned, the money can be used without being traced back to the criminal activities it originated from.

Money laundering occurs in connection with all types of profit-generating crime. Some experts estimate that over $1 trillion is laundered every year. Practitioners of money laundering include organized criminal groups like drug traffickers as well as government officials and major financial institutions. Whistleblowers can play a key role in the detection of money laundering and opportunities exist for them to be rewarded for their disclosures. Under certain whistleblower reward laws, including the AML Act, whistleblowers are entitled to awards of up to 30% of the funds recovered by the government in connection to their disclosure. These laws also offer anti-retaliation protections to AML whistleblowers.

• Money laundering is the illegal process of making money earned from criminal activity seem legitimate.
• There are three main steps to money laundering: placement, layering, and integration.
• There are many types of money laundering and money laundering occurs in connection with a wide range of criminal activity.
• Some studies estimate that over $1 trillion USD is laundered globally each year.
• Whistleblowers are key in exposing money laundering, and can be rewarded for their disclosures.

There are three main steps to money laundering: placement, layering, and integration.

In the placement phase, the illegally obtained money is introduced into the financial system. For example, the funds may be deposited into a bank or added to the accounts of an existing business.

Layering involves carrying out a series of complex financial transactions in order to obscure the illegal source of the funds. An example of layering would be placing funds into the stock market and shuffling it around through a number of transactions or foreign currency exchanges.

Finally, during integration, the newly “cleaned” money reenters the legitimate economy. An example of integration would be using laundered money to make a large business investment.

Money laundering occurs in many different forms ranging in complexity. A common type is called “smurfing” or “structuring.” In smurfing, the illegally obtained funds are broken up into smaller amounts. These smaller amounts are deposited separately and often into various bank accounts in order to avoid suspicion of money laundering.

Other types of money laundering include smuggling bulk amounts of cash into other countries, using cash-intensive legitimate businesses as fronts, utilizing shell companies and trusts, and gambling at casinos.

The growth of online banking and cryptocurrencies have opened up new avenues for money laundering. The relative anonymity of these methods means that electronic money laundering is often difficult to detect.

Money laundering occurs all over the globe and appears in connection with all types of profit-generating crime. Practitioners of money laundering range from organized crime groups and drug traffickers to government officials and financial institutions.

Given the clandestine nature of money laundering it is hard to know how much money is laundered each year. Some estimates place the total amount of money laundered globally each year at 2-5% of global GDP, or $800 billion-$2 trillion in USD. It is also estimated that approximately $300 billion USD was laundered in the United States in 2019.

Laws and policies to police money laundering exist on both the national and international level. In recent decades, there has been an uptick in efforts to uncover and prevent money laundering. New legislation has been passed, and new enforcement efforts have been launched.

The first major anti-money laundering law in the United States was the Bank Secrecy Act (BSA) of 1970. The law instituted a number of recordkeeping standards for banks and requires financial institutions to inform the Department of Treasury of large or suspicious bank deposits. It was not until the passage of the Money Laundering Control Act in 1986, however, that money laundering itself became illegal.

In 1987, the G-7 formed the Financial Action Task Force (FATF) to police money laundering on an international scale. There are currently 39 member nations in the FATF which examines money laundering techniques and trends, reviews the enforcement and prevention actions which have already been taken at a national or international level, and establishes the steps that still need to be taken to combat money laundering.

In 2021, the United States passed the Anti-Money Laundering Act (AML Act) which contains numerous amendments to the BSA and other anti-money laundering laws. The law aimed to modernize reporting requirements and to expand the authority of investigative and enforcement efforts.

The AML Act includes a whistleblower reward provision modeled on those of the Dodd-Frank Act. As originally passed, however, the law contained a number of loopholes which undermined its efficacy.

In late 2022, Congress passed the AML Whistleblower Improvement Act to address the shortcomings of the AML Act and create a highly effective whistleblower award program for AML whistleblowers. The law instituted a mandatory award minimum meaning that all qualified whistleblowers are entitled to an award of 10-30% of the sanctions collected in the enforcement action connected to their disclosure. The law alsoincludes anti-retaliation protections for whistleblowers disclosing money laundering violations.

Whistleblowers can play a key role in the detection of money laundering. Money laundering is difficult to detect, particularly when financial institutions are complicit in the illegal activity. Thus, insiders are often the only way authorities can be alerted of money laundering violations.

Under the AML Act, as reformed by the AML Whistleblower Improvement Act, U.S. authorities incentivize AML whistleblowing through mandatory monetary awards and anti-retaliation protections. Qualified AML whistleblowers, individuals who provide authorities with original information about money laundering violations which leads to a successful enforcement action, are entitled to an award of 10-30% of the sanctions collected by the government in the case.

Whistleblowers do not need to be U.S. citizens or located within the U.S. to qualify for awards under the AML Act.

The AML Act also extends anti-retaliation protections to money laundering whistleblowers, ensuring that they cannot be fired or otherwise discriminated against for blowing the whistle. However, the law does not extend anti-retaliation protections to employees of Federal Deposit Insurance Corporation (FDIC) or Credit Union insured institutions.

Whistleblowers are able to make disclosures anonymously by hiring a whistleblower attorney. Contacting an experienced whistleblower attorney before making a disclosure can help ensure a whistleblower is fully protected under the law and eligible for the largest award possible.

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  Howard Wilkinson

  On September 19, 2018, news broke of $230 billion money laundering scheme. The scheme moved rubles out of Russia, converted them to dollars at the Estonian branch of Danske Bank, and then moved the dollars to New York with the assistance of three correspondent banks (Bank of America, J.P Morgan, and Deutsche Bank).

  Danske Bank admitted all of its internal controls designed to prevent money laundering had failed. The bank also revealed that the scheme had been reported to the highest levels of the bank by a whistleblower over four years before. The whistleblower’s identity was required to be secret. But it took only days for his name to leak out.

  Soon the entire international banking world learned that the former Danske Bank manager Howard Wilkinson had exposed the largest money laundering scheme in history, and that the bank had tried to cover it up.

  Case Study