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JOSS:
Journal of Social Science
BEHIND CLOSED DOORS: THE SECRET WORLD OF MONEY
LAUNDERING
Md Arman
1
, Ikhsan Nendi
2
M.B.A. student, School of Business Administration, University of Asia Pacific Bangladesh,
Politeknik Siber Cerdika Internasional Indonesia
Email : rubelbdbha[email protected], nen[email protected]
KEYWORDS
Money
Laundering,
Methods, Threat,
Nations, Economy
ARTICLE INFO
Accepted:
March 09 2023
Revised:
April 15 2023
Approved:
Mei 10 2023
ABSTRACT
Money laundering is a global issue that significantly threatens the
integrity of financial systems and economies worldwide. This paper
presents a theoretical description of money laundering and outlines
the structured activities involved in the process. Additionally, it
explores the electronic methods employed in money laundering,
highlighting the various functions carried out using electronic gadgets
and the internet. The author emphasizes the importance of
understanding the characteristics, reasons, and negative impacts of
money laundering on businesses and economies to gain a clear
perspective on the issue. Money laundering is a criminal act in most
countries, and economically developed nations have established
strong barriers against it. However, the practice persists, and the paper
examines how launderers circumvent these barriers and employ
innovative, illegal methods to convert their illicit money into
legitimate funds. The study found that money launderers employ
various techniques to evade detection and prosecution, including
layering, integration, and placement. Electronic money laundering is
also a growing concern, with online platforms, digital currencies, and
anonymous payment systems providing new avenues for launderers
to conceal their activities. This paper provides an overview of money
laundering and its detrimental effects on the global economy. It
underscores the need for continued efforts by governments, financial
institutions, and law enforcement agencies to combat this menace.
Additionally, it highlights the importance of vigilance and developing
innovative strategies to detect and prevent money laundering.
INTRODUCTION
The term "Money Laundering" comes from the United States and refers to the Mafia's
attempt to "launder" illegal money through cash-intensive washing salons controlled by
company acquisitions or business formations (Schneider & Windischbauer, 2008). Money
laundering happens outside of the typical range of economic data by definition. However, as
with other areas of illicit business activity, preliminary estimates have been proposed to provide
some measures for the situation. Illicit sources are estimated to account for two to five per cent
of global GDP. According to 1996 data, the amount of money laundered varied between 590
billion and 1.5 trillion U.S. dollars. The lower amount is about similar to the value of the size
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of Spain's economic output. A large portion of the revenue comes from drug dealing,
prostitution, illegal arms sales, smuggling, or any organized crime. Tax fraud, market
manipulation, extortion, and cyber fraud schemes can also generate huge profits, creating an
incentive to "validate" illicit earnings through money laundering. Most unlawful transactions
are completed in cash since there is the least chance of leaving one's mark; nonetheless, there
is a clear trend to exploit the internet to conduct illegitimate transactions in the form of Online
Banking, Cyber Money, and Electronic Purses. A huge proportion of crimes aim to make
money for the individual or group who commits the act. Money laundering is the processing
of unlawful profits to conceal their illegal origin. This procedure is crucial since it allows the
launderers to earn without risking their source.
METHOD RESEARCH
Qualitative research was conducted using meta-data from past research literature and
scholarly articles. To identify previous research studies for inclusion in the meta-analysis, the
researcher searched several business-oriented databases using related keywords: money
laundering, process, anti-money laundering, etc. The researcher is well aware of the content
validity because it is one of the key concerns in meta-data analysis (Schriesheim et al., 1993).
The deductive approach generated the list of proposed items by reviewing the previous
literature (Aboul-Ela, 2014). The researcher also reviewed the reference lists of other
summaries to identify relevant articles missed in the computerized search.
Using these search procedures, the researcher randomly identified over 50 studies and
screened them to determine their relevance. The researcher excluded some studies which are
repeated in the topics. After evaluating the studies based on the inclusion criteria, 16 and 5
reports were selected. All studies included in the meta-analysis are appended in the reference
section.
RESULT AND DISCUSSION
Characteristics of Money Laundering
Money laundering refers to any monetary assets (cash and electronic bank transfers) or
their surrogates, along with quasi-assets such as transportable items and real estate, created
either directly or indirectly from illegal actions or designed for the implementation of such an
activity. The process is meant to launder illegal assets into lawful usage. The action is therefore
distinguished by a malicious intention to change, blend, move, redirect, and misrepresent the
real origin or characteristics of incriminated items intentionally and in a structured manner
(Schneider & Windischbauer, 2008).
(Korejo et al., 2022) mentioned that it might be split down to apply to three categories of
characteristics. First, assets obtained as a result of illegal activity related to a specific offence.
Second, the worth of the asset in question, and finally, assets comparable in worth maintained
inside the nation and taken or held just outside of the nation. In other words, money laundering
refers to the intentional creation of all financial and non-financial assets obtained either directly
or indirectly from any illegal behaviour; the former refers to cash or soft-electronic fund
transfer or their replacements, while the latter contains portable commodities and immovable
estates. Furthermore, such illegal activity is aimed at realizing an asset. Additionally, such
illegal activity is aimed at realizing an asset. As a result, acts are distinguished by an unlawful
purpose to meticulously transform, blend, hide, and mislead the true source or form of the items
engaged in the unlawful activity.
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As previously said, the resultant offences have been continuously extended to the crime
of money laundering; thus, it is essential to investigate this expanding worldwide legal
mechanism combatting money laundering.
Reason Behind Money Laundering
According to various estimates, the entire revenue of organized crime ranges from $500
billion to 2.1 trillion USD. Some estimate that the global value of money laundering ranges
from $400 billion to USD 2.85 trillion. Money laundering is considered necessary by
launderers because cash is used in practically all unlawful transactions since it puts no
transaction marks such as records or proof. Drug trafficking is vital, with a total income of
$500-1,000 billion USD, amounting to about 9% of global commerce (UNODC, 2009) The
illegal drug industry is massive in scope. The amount, assessed at market prices, exceeds the
G.D.P. of 88% of the world's nations. These enormous sales volumes and earnings from drug
trafficking must be laundered because one million USD in 20-dollar bills weigh around 55 kg;
the same amount in five-dollar bills weighs 220 kg (Schneider & Windischbauer, 2008).
According to (Blum et al., 1998), who also identified that self-employed farmers are
somehow responsible for money laundering, one of the ten essential rules of money laundering
is: the more the business structure of production and distribution of non-financial goods and
services is dominated by small and independent firms or self-employed individuals; the more
difficult the job of separating legal from illegal transactions.
(Hendriyetty & Grewal, 2017) mentioned that Self-employed individuals and small local
firms are not regulated in emerging economies and consequently operate unofficially; thus,
they are classified as part of the shadow economy. Money launderers utilize business
enterprises in the shadow economy as routes to disguise their illicit earnings in the early stages
of money laundering. (Blum et al., 1998) mentioned that underground operations are either
criminal or unofficial enterprises that engage in several stages with a legitimate business.
The shadow economy mostly comprises tiny, independent businesses or self-employed
people. They typically keep their enterprises small to escape the official inspection and the
need to register in the official sector. As a result, the number of tiny and independent businesses
will grow, which will be utilized by money launderers to conceal their unlawful operations and
give them a legal outlook. As a result, the larger the shadow economy, the more challenging it
is to discover money laundering since it is impossible to distinguish between legitimate and
criminal activities.
Even though small, self-employed or individual businesses typically run the shadow
economy, small businesses are an easy scapegoat for extortion by huge corporations that are
more competent at skirting the law by abusing small businesses. This informal sector serves as
a conduit for money laundering operations. Because it is challenging to do careful research on
operations in an economy with a larger level of interaction between documented and
undocumented, official and unofficial, and underground and above-board activities,
determining the origins of funds will become increasingly complex (Blum et al., 1998).
Furthermore, money laundering promotes the growth of the shadow economy. Because
utilizing legitimate means to shift funds is risky, particularly with the anti-money laundering
system in place, money launderers will shift their money to the informal economy. In the
underground economy, unconventional financial transactions and tangible cash transfers are
preferred (Hendriyetty & Grewal, 2017).
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Negative Impact of Money Laundering
On Business
The reputation of the financial services and banking industry is strongly reliant on the
notion that it operates within a system of high legal, professional, and moral codes. A business
institution's image for transparency is one of its most precious assets. Suppose money from
illegal activity is easily processed through a specific institution, either because its professionals
or managers have been bribed or because the organization turns a blind eye to the questionable
nature of these monies. In that case, the organization may be drawn into active collaboration
with criminals and become part of the illicit network. Indications of this collusion will harm
the views of other financial intermediaries, regulatory bodies, and regular customers (FATF).
On Economy
Launderers constantly search for new ways to launder their money. As established
financial centres or developed nations build strong anti-money laundering policies, economies
with expanding or emerging financial centres but insufficient regulations are especially
vulnerable. Money launderers will target variations of anti-money laundering policies among
countries by transforming their networks to different nations with financial systems that are
weak or ineffective defences. Many may claim that emerging economies cannot expect to be
overly demanding about the funding sources they receive. However, deferring consequences is
risky. The longer it is delayed, the more established and organized crime occurs. Foreign direct
investment is depressed whenever a nation's commercial and economic sectors are considered
under the influence and dominance of organized crime, just as when a private financial
institution's credibility is harmed (FATF).
Financial market imbalances put the international economy's stability at risk. Economic
problems are hence worsened if not caused. Furthermore, money laundering involves
penetrating legal, and economic systems and crowding cutthroat competition. Additionally, the
"dollarization" of the economy limits the budgetary and financial political reach of national
governments and banks, respectively. Aside from that, financially impoverished nations that
primarily provide financial services risk economic (and hence political) reliance. Measures to
fight money laundering boost the cost of legitimate activity and interfere with them in the
capital markets.
Steps Of Money Laundering
Money Laundering follows three steps.
Placement
The launderer inserts unlawful funds into the economic system at the first or placement
stage of money laundering. This might be accomplished by dividing large quantities of cash
into smaller sums deposited directly into a bank account or by obtaining a series of financial
instruments (cheques, money orders, etc.) that are subsequently collected and transferred into
banks in different areas. There is an elevated chance of being revealed at this point. The
placement stage is divided into two sub-sections as follows.
Primary deposit
This refers to the quick transfer of criminal income into a legal, economic system without
drawing the notice of governmental authorities. Limited quantities are undercut with
"structuring" and "smurfing" to escape detection, reporting responsibilities, and paperwork
requirements. Furthermore, funds are carefully divided into small quantities to allow payment
in multiple financial institutions below relevant recognition and disclosure limits. For example,
savings accounts of up to 15,000 euros are exempt from these requirements in Austria
(Schneider & Windischbauer, 2008).
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Another technique of placement includes exerting an effect on economic sector
institutions in terms of acquiring existing banks or establishing new banks in offshore nations
("company havens" or "bank havens"). Furthermore, coworker corruption is a regularly utilized
criminal tool to place incriminated funds: endeavours are made to socialize with bank personnel
to permit immediate penetration of funds without drawing the attention of regulatory agencies.
Depositing cash into bank accounts abroad allows participation in the economic or financial
cycle.
Secondary deposit
Secondary deposits, as opposed to primary deposits, are a passive penetration of the
liquidity into the Financial sector and hence a transformation into book money via the
interconnectivity of a real or legal entity. This occurs either by modifying the channel, in which
incriminated funds are turned into other resources, or through leads, who act on their behalf
but trade for the account of a third party or grant the use of their name to execute out (realize)
an account opening, the formation of a company, or the conclusion of an insurance scheme.
Forward displacement of the money laundering site onto life insurance companies,
financial service providers, and exchange offices can also result in indirect placement.
Currently, numerous proposals are received through email or posted on websites to work as a
"financial agent," providing banking accounts that are used to send unlawful gains to conceal
transfer methods.
Another method of laundering money is the formation of front firms, which, in contrast
to leading corporate entities, penetrate black money on the bank deposits and hence into the
financial system through simulated turnovers. Cash-intensive businesses (cuisine, shipping
enterprises, vehicle business, hotel industry, auctioneers, and galleries) are required. Partially,
no phantom firm/dummy firm is created, but simply foundational documentation is falsified.
For example, 25,000 life insurance clients are suspected of laundering illicit money with single
payments totalling one billion euros (Schneider & Windischbauer, 2008).
Layering
The second - or layering - stage occurs once the money has entered the financial system.
During this stage, the launderer converts or moves the monies to separate them from their
origin. The monies may be routed through the buying and selling financial items, or the
launderer could easily shift the cash through a network of accounts at multiple organizations
worldwide. Using widely dispersed institutions for laundering is particularly common in
nations unwilling to cooperate with anti-money laundering operations. In other cases, the
launderer may camouflage the movements as purchases for commodities or services, giving
them the appearance of legitimacy.
Integration
After successfully processing the illegal gains through the initial two stages of the money
laundering procedure, the launderer advances the money to the third step, integration, when the
funds are re-introduced into the legal, financial sector. The launderer may decide to invest the
money in the housing market, luxury goods, or business ventures.
Electronic Money Laundering And Steps
When funds are laundered electronically, it is defined as electronic (E) money laundering.
Electronic Placement
In conventional laundering, criminals must give over their money to a bank or convert it
into a product or property, which is then sold and the laundering money is used to finance and
production. These procedures are more difficult to complete since the client identification, and
verification criteria have been met. Most nations limit the number of entries in the cash flow.
Still, with electronic money laundering, the criminal can convert their unlawful earnings into
digital money and cross borders or acquire expensive products since verification is tough and
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it is a low-risk operation. However, it appears that worldwide regulations for them have not
been set.
Electronic Layering
In conventional money laundering, the launderers must use a comma to separate the
occasional source from the first entry and other potential uses. "Money committed to engaging
in a leisure facility or a publicly approved action," for example. Confidentiality and camouflage
of identity are the goals of money launderers, which have typically been challenging. However,
electronic money laundering processes can be done immediately, without a border, and digital
transactions would not be hard. Even in certain nations, opening a bank account with no
physical verification can be done virtually.
Electronic Integrating
In conventional integration, many techniques are followed, such as investing, taking
loans to form coating firms, and fabricating papers, including buy or sale transactions, a high-
risk operation. However, all those processes can be done in a virtual space and with less danger.
Anti-Money Laundering Initiatives
The international community has developed a comprehensive anti-money laundering
legislative framework for over thirty years. The creation of this paradigm was linked to the
United Nations Vienna Convention of 1988, which addressed the problem of narcotics
trafficking profits laundering. Following this, the Palermo Convention of 2000 and the
Convention Against Corruption in 2003 combined enlarged derivative crimes related to the
money laundering offence. As a result, all three Conventions formed the basis for the
globalized structure for countering money laundering. However, the actions of the Financial
Action Task Force have been more essential to the expansion of the international anti-money
laundering legal system (Force et al., 2012).
The United Nations Convention against Illicit Traffic in Narcotic Drugs and
Psychotropic Substances (1988) (Vienna Convention) was the first inter-governmental accord
to demonize money laundering. Still, it is limited to drug-related crimes such as manufacturing,
plantation, acquisition, transfer, ownership, and control. The agreement also compelled
governments to implement global anti-money laundering regulations, including freezing and
relinquishing unlawful gains. However, the phrase "Money Laundering" was not formally
introduced in the Convention. Nonetheless, this document created a broad definition of
"proceeds" of narcotic crimes and was a comprehensive weapon for combating present global
narcotics trafficking; it required nations to prosecute the laundering of drug-related profits and
designated money laundering as an actual criminal act. Under this agreement, "proceeds" are
defined as any property derived or received, directly or indirectly, from the conduct of drug-
related offences (as defined in paragraph (a) of Article 3 of the Convention).
Furthermore, the scope of the offence includes cooperation in concealing or disguising
the illicit activity or origin of the assets (drug revenues). Moreover, money laundering is
committed by aiding any individual in the commission of such an offence or misdemeanour to
avoid the legal consequences of their actions; assisting means any act of invisibility or disguise
of the true origin, disposition, or mobility of assets, recognizing that such assets are acquired
from an offence or offences founded by Article 3 of the U.N. Vienna Convention. Nevertheless,
while the criminalization efforts under the Vienna Convention acknowledged the revenues of
drug-related offences, there were major gaps in the terminology concerning money laundering.
However, its range and applicability were limited to drug-associated money laundering. The
revenues from other offences were still allowed to be washed and so fell inside the instrument's
blind zone (Korejo et al., 2021).
The United Nations Convention on Transnational Organized Crime (Palermo
Convention) is a global pact combating global organized crime signed in Palermo in 2000.
However, it went into effect on September 29, 2003. The Convention was created to encourage
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governments to collaborate more effectively to detect and fight international organized crime.
The Convention was the initial worldwide legally enforceable treaty addressing cross-border
organized crime. The Palermo Convention broadened the criminality realm of "criminal
proceeds" from drug-related offences to proceeds of "severe offences" when the punishment
for the violent act is ultimate liberty forfeiture for four years or more. Besides, under the same
Convention, an essential progression in the crime of money laundering occurred by the
prosecution to a wide range of predicate offences, which include all severe crimes, participation
in a structured terrorist cell, inclusion as an association, bribery, limiting justice, and
engagement of legal entities in violent felonies.
Even though the Convention is a comprehensive framework that establishes a
foundation for handling money laundering and profits of wrongdoing, it has several
shortcomings, including ambiguity in words like "serious offence" and no definition of the
phrase "predicate offence." The treaty also has various flaws in terms of corruption and
malpractice offences.
The Financial Action Task Force (FATF), a 33-member international group combating
money laundering and terrorism funding, aims to guide non-cooperative nations with a "name
and shame" approach by releasing a "blocklist". Furthermore, it attempts to prevent money
laundering globally using conceptual frameworks and 40 international standards suggestions.
No Non-Cooperative Nations and Jurisdictions have been on FATF's list since October 13,
2006.
Suspicious Transaction Model
(Jullum et al., 2020) developed an anti-money laundering model to detect money
laundering using machine learning technology. They displayed the following equation:
L{Yi,f(xi)} = Yi log{f(xi)} + {1-Yi} log{1-f(xi)}
Suppose Yi accepts the value I if transaction I was signalled to the authorities and 0 if it
was not. Let xi indicate vectors comprising the numeric explanatory variables. (Jullum et al.,
2020) try to predict the chances of a transaction being detected, given its explanatory variables
minimizing the logistic loss.
Several research has revealed that there is no perfect method for categorization. (Chen et
al., 2018), (Rivera et al., 2015) (Savage et al., 2016), and (Zhang & Trubey, 2019) all
recommend running many algorithms on the same data set before deciding which one to use.
(Daryadel et al., 2021) suggested four algorithms: logistic regression, random forest, support
vector machines and decision tree.
CONCLUSION
Conjunction with conventional banking and electronic banking, lowering the threat of
illegal activities and the presence of infrastructures and parallel organizations or the non-
utilization of activities in technology make electronic money laundering more readily.
Additionally, the use of private enterprise development and the function of governmental
political analysts is diminishing. Consequently, decentralization will make the money-
laundering schemes more creative and complicated, making them tougher to combat. The
author would like to thank Umama Rashid Lamiya (MSc student, Department of Soil Water
and Environment, University of Dhaka) for helping screen the materials and find the best
resources for this paper. No funding was taken for writing this article, and the author fully
consented to publish it.
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Copyright holders:
Md Arman, Ikhsan Nendi (2023)
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