# What Is Money Laundering?

The prevention of money laundering has become an international effort

> **Definition**
>
> Money laundering involves disguising illegally obtained money or assets to make them appear lawful.

## What Is Money Laundering?

Money laundering is an illegal activity. It makes large amounts of money that's generated by criminal activity such as drug trafficking or terrorist funding appear to have come from a legitimate source. The money from the criminal activity is considered dirty and the process “launders” it to make it appear clean.

Financial institutions employ [anti-money laundering (AML)](https://www.investopedia.com/terms/a/aml.asp) policies to detect and prevent this activity.

### Key Takeaways

*   Money laundering disguises financial assets while protecting the illegal activity that produced them. 
*   Online banking and cryptocurrencies have made it easier for criminals to transfer and withdraw money without detection.
*   The prevention of money laundering has become an international effort that includes terrorist funding among its targets.
*   The financial industry also has its own set of strict anti-money laundering (AML) measures in place.

![Money Laundering Definition](https://www.investopedia.com/thmb/GRaMLOMJUxyvSkzYqILJLr8qC50=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/money-laudering-6cb10f0b844d460a99ab04b349da29ae.png)

*— Investopedia / Julie Bang*

## How Money Laundering Works

Money laundering is essential for criminal organizations that use illegally obtained money. Criminals [deposit money](https://www.investopedia.com/ask/answers/060415/can-foreign-individual-open-savings-account-united-states.asp) in legitimate financial institutions to make it appear as though it comes from legitimate sources. Laundering money typically involves three steps although some stages may be combined or repeated.

*   **Placement:** Injects the “dirty money” into the legitimate financial system.
*   **Layering:** Conceals the source of the money through a series of transactions and bookkeeping tricks.
*   **Integration:** Laundered money is disbursed from the legitimate account.

> **Important**
>
> The Bank Secrecy Act (BSA) requires that financial institutions keep records of cash purchases of negotiable instruments, file reports of cash transactions exceeding $10,000, and report suspicious activity that might signal money laundering.

## Types of Transactions

Money laundering can take one or more forms:  

*   **Structuring or smurfing:** Large allotments of illegally obtained cash are divided into multiple small deposits and spread over many accounts.
*   **“Mules” or cash smugglers:** Cash is smuggled across borders and deposited into foreign accounts.
*   **Investing in commodities:** This uses gems and gold that can be easily moved to other jurisdictions.
*   **Buying and Selling:** Cash is used for quick turnaround investments in assets such as real estate, cars, and boats.
*   **Gambling:** Gambling uses casino transactions to launder money.
*   **[Shell companies](https://www.investopedia.com/terms/s/shellcorporation.asp):** Inactive companies or corporations are established that exist on paper only.

## Electronic Money Laundering

The rise of online banking institutions, anonymous online payment services, and peer-to-peer (P2P) transfers with mobile phones have made detecting the illegal transfer of money increasingly difficult. Proxy servers and anonymous software make integration, the third component of money laundering, difficult to detect because money can be transferred or withdrawn with little or no trace of an internet protocol (IP) address.

Money can be laundered through online auctions and sales, gambling websites, and virtual gaming sites where ill-gotten money is converted into gaming currency and then back into real, usable, and untraceable “clean” money.

Money laundering can also involve [cryptocurrencies](https://www.investopedia.com/terms/c/cryptocurrency.asp) like [Bitcoin](https://www.investopedia.com/terms/b/bitcoin.asp). While not entirely anonymous, these digital assets offer more privacy than traditional currencies, making them appealing for illegal uses such as fraud, ransomware, and the drug trade.  

> **Fast Fact**
>
> AML laws have been slow to catch up to cybercrime because most laws are still based on detecting dirty money as it passes through traditional banking institutions and channels.

## Prevention and Legislation

Global money laundering transactions account for roughly $800 billion to $2 trillion annually or 2% to 5% of global [gross domestic product (GDP)](https://www.investopedia.com/terms/g/gdp.asp), according to the United Nations Office on Drugs and Crime. The [Group of Seven (G-7)](https://www.investopedia.com/terms/g/g7.asp) formed an international committee known as the [Financial Action Task Force (FATF)](https://www.investopedia.com/terms/f/financial-action-task-force-fatf.asp) in 1989 to fight money laundering on an international scale. Its purview was expanded to include terrorist activity in the early 2000s.

The United States passed the [Bank Secrecy Act](https://www.investopedia.com/terms/b/bank_secrecy_act.asp) in 1970 requiring financial institutions to report to the Department of the Treasury on a [suspicious activity report (SAR)](https://www.investopedia.com/terms/s/suspicious-activity-report.asp) all cash transactions above $10,000 or other unusual activity. This information is used by the Financial Crimes Enforcement Network (FinCEN) and is shared with domestic criminal investigators, international bodies, or foreign financial intelligence units.

Money laundering was deemed illegal in the United States in 1986 with the passage of the Money Laundering Control Act. The [USA Patriot Act](https://www.investopedia.com/terms/p/patriotact.asp) expanded money laundering efforts after Sept. 11, 2001.

The Association of Certified Anti-Money Laundering Specialists (ACAMS) offers a professional designation known as a [Certified Anti-Money Laundering Specialist (CAMS)](https://www.investopedia.com/terms/c/cams.asp). These individuals work as brokerage compliance managers, Bank Secrecy Act officers, financial intelligence unit managers, surveillance analysts, and financial crimes investigative analysts.

## What Is an Example of Money Laundering?

Cash earned illegally from selling drugs may be laundered through highly cash-intensive businesses such as a laundromat or restaurant. The illegal cash is mingled with business cash before it's deposited. These types of businesses are often referred to as “fronts.”

## What Are Signs of Money Laundering?

Money laundering red flags include suspicious or secretive behavior by an individual, [making large transactions with cash](https://www.investopedia.com/how-much-cash-can-you-deposit-at-a-bank-8553483), owning a company that seems to serve no real purpose, conducting overly complex transactions, or making several transactions just under the reporting threshold.  

## How Is Real Estate Used for Money Laundering?

Criminals use real estate transactions including undervaluation or overvaluation of properties, buying and selling properties rapidly, using third parties or companies that distance the transaction from the criminal source of the funds, and private sales.

## How Are Cryptocurrencies Used in Money Laundering?

The U.S. Financial Crimes Enforcement Network (FinCEN) has identified [convertible virtual currencies (CVCs)](https://www.investopedia.com/terms/c/convertible-virtual-currency.asp), also known as cryptocurrencies, as a preferred currency in various online illicit activities. Criminals often use mixers and tumblers to obscure the source of funds by blending transactions across multiple wallets.

In October 2023, FinCEN proposed a rule to classify CVC mixing as a primary money laundering concern, requiring financial institutions to flag and report any suspicious activity.

## The Bottom Line

Money laundering disguises [illegally obtained financial assets](https://www.investopedia.com/terms/r/racketeering.asp). Global governments and financial institutions have anti-money laundering measures in place. Online activity and digital assets have added to money laundering transactions.

> **Article Sources**
>
> 1.  United Nations Office on Drugs and Crime. “[Money Laundering](https://www.unodc.org/unodc/en/money-laundering/overview.html).”
>     
> 2.  Office of the Comptroller of the Currency. “[Bank Secrecy Act (BSA)](https://www.occ.treas.gov/topics/supervision-and-examination/bsa/index-bsa.html).”
>     
> 3.  Financial Crimes Enforcement Network. “[History of Anti-Money Laundering Laws](https://www.fincen.gov/history-anti-money-laundering-laws).”
>     
> 4.  Financial Action Task Force. “[History of the FATF](https://www.fatf-gafi.org/en/the-fatf/history-of-the-fatf.html).”
>     
> 5.  Congress.gov. "[U.S. Efforts to Combat Money Laundering, Terrorist Financing, and Other Illicit Financial Threats](https://crsreports.congress.gov/product/pdf/IF/IF11064)."
>     
> 6.  Association of Certified Anti-Money Laundering Specialists. “[Start Your CAMS Journey Today: CAMS Frequently Asked Questions](https://www.acams.org/en/certifications/cams-certification)." Select "The CAMS Certification."
>     
> 7.  Financial Transactions and Reports Analysis Centre of Canada. “[Operational Brief: Indicators of Money Laundering in Financial Transactions Related to Real Estate](https://www.fintrac-canafe.gc.ca/intel/operation/real-eng).”
>     
> 8.  Financial Crimes Enforcement Network. "[FinCEN Proposes New Regulation to Enhance Transparency in Convertible Virtual Currency Mixing and Combat Terrorist Financing.](https://www.fincen.gov/news/news-releases/fincen-proposes-new-regulation-enhance-transparency-convertible-virtual-currency)"