What is money laundering?

In simple terms, money laundering is a process which criminals use to make it look like the money they have is legitimately earned. What they’re doing is taking ‘dirty money’ and effectively ‘cleaning’ it.

When they make money, criminals need to disguise how and why it came into their hands. Money laundering lets them do that, by making it look like the money they have is from a legal source.

In the UK, money laundering is a very real problem. It’s estimated that over £12 billion in criminal cash is generated annually, with more than £100 billion laundered through the country or UK-registered companies each year.

This has far reaching consequences,from inflating property prices to undermining legitimate businesses and eroding trust in financial institutions.

How does money laundering work?

Money laundering tends to be a three-step process, but it can often be much more complicated. Criminals want to make it as difficult as possible for the authorities to trace the source of the money, so the more complex the laundering, the less likely they are to be found out.

The 3 stages of money laundering

Placement

This is when the criminals' money enters the real world in cash. For the criminals, this is often the most dangerous stage as they're depositing huge sums of physical money. This is because most of the activities they’re involved in, such as weapons or drugs, aren’t paid for with cards.

Criminals will then look to place their money into circulation in bulk. To do this, they can:

• Deposit small sums into bank accounts: Large amounts of cash are broken into less noticeable deposits to avoid drawing attention
• Blend cash into business takings: Cash-only businesses are used to disguise illicit money as part of legitimate revenue
• Exchange money into a different currency: Criminals may convert cash into foreign currencies to obscure its origin
• Invest in property or high-value goods: Funds are used to purchase real estate or luxury items. They can then sell these assets for what appears to be legitimate money, effectively ‘cleaning’ the funds.
• Repay or give loans: Illicit funds are cycled through loans to make the transactions appear legitimate

By employing these techniques, criminals aim to disguise the origin of their money and introduce it into the financial system.

Layering

The money switches hands – and sometimes countries – to further hide its original source. 

Think of this stage like a street trick with three cups – the money is moved around so frequently, and at such a fast pace, it’s nearly impossible to know where it started.

Criminals employ various techniques during this stage, including:

• Transferring funds across multiple accounts: Money is moved between numerous bank accounts, often disguised as loans or payments for goods and services.
• Moving money offshore: Funds are transferred to countries with weak anti-money laundering (AML) regulations or limited international cooperation.
• Reselling high-value goods: Luxury items are bought and quickly resold, integrating proceeds into legitimate channels.

In recent years, criminals have also exploited cryptocurrencies for layering purposes:

• Chain hopping: An example is Converting one cryptocurrency to another 
• Mixing or tumbling: Blending transactions through multiple crypto exchanges to obscure the owner and transaction history.

These methods ensure the origin of the money becomes increasingly difficult to trace as it moves through complex layers of financial transactions.

Integration

The final stage of money laundering is integration, where laundered money is reintroduced into the economy as seemingly legitimate money. Once this is complete, the criminal can spend the money without raising suspicion. 

Criminals use a variety of methods to integrate laundered money, including:

• Purchasing high-value items: Investments in property, art, or luxury goods are common tactics to legitimise illicit funds.
• Business ventures: Criminals may invest in companies, the profits from that business now appear legitimate.

Successful integration makes it extremely challenging to trace the origin of the money or link it to previous laundering stages.

Why do banks need to do anti-money laundering checks?

It's a legal requirement, financial institutions are required to actively work to prevent money laundering. Failure to do so could result in fines and damage to their reputation. 

These checks maintain the integrity of the financial system. 

What are anti-money laundering (AML) checks?

Businesses are legally obligated to conduct anti-money laundering checks if their business is covered by the Money Laundering Regulations. These checks involve verifying customer identities and monitoring transactions to ensure the legitimacy of their customers.

One part of the customer due diligence process will require a business to check whether a customer is who they say they are. This is usually done by asking for proof of identity and proof of address. Additionally, the business may also check the electoral register. 

Evidence for proof of identity:

• Current signed passport
• Full driving licence
• Birth certificate

Evidence for proof of address:

• Full driving licence
• A recent utility or council tax bill, or a mortgage statement
• A recent bank statement