In simple terms, money laundering is said to occur when money obtained from illicit activities is made to appear as legitimate money. The purpose of money laundering is to conceal the trail of ill-gotten funds so that criminals can use them for personal consumption or investment.
Money laundering can occur in different ways, but the basic premise for it is that a party has obtained proceeds by illicit means. In everyday speech, it is said that someone who profits in this way is considered to have "dirty money” in their possession. This can occur, for example, through the sale of drugs or tax law violations.
Money laundering takes various forms and can be simple, e.g. it can involve the purchase of real estate with ill-gotten gains. It can also sometimes be a complex interaction of many different factors aimed at concealing the trail of the funds. In more complex cases, the financial system is often abused to launder money, as will be explained in greater detail below. In these cases it is not a single action, but a process that is often divided into three steps:
1. Transfer
The first step in the process is called the transfer and involves transferring the dirty money into the financial system. This can be done directly, such as by depositing money into bank accounts, but also by using companies that operate legally. The company then issues false invoices, e.g. for a specific service that was never provided or a product that was never delivered. In this regard, it should be noted that when it comes to illegal proceeds, such as in drug trafficking, the means of payment is often cash. Companies that deal heavily in cash are therefore often abused in such a way that illegal funds are mixed with the company’s other revenue, which may have been legally obtained.
2. Structuring
The next step in the process involves structuring the funds to separate them from their illicit origins and cover their trail. This is done in various ways, such as through complex transactions, repeated transfers, domestically and internationally, investments and loans. The purpose of this is to make it more difficult for banks and the police to trace the illegal funds. Structuring is often carried out in several countries with, for example, strict bank secrecy rules and where many parties may be involved in the process.
3. Utilisation
The third and final step in the process involves the illegal funds being integrated with other funds that have been acquired legally. The purpose of the integration is to make it more difficult for banks and the police to identify which funds are ill-gotten. In this way, parties can utilise the illicit funds by, for example, investing in financial instruments, vehicles or real estate.
Anti-money laundering measures
In order to combat money laundering, extensive legislation has been enacted that parties who may be misused for the purpose of money laundering must comply with. The legislation provides for measures against money laundering and is intended to make it more difficult for criminals who profit illegally to carry out their criminal activities.
How does the Central Bank monitor measures against money laundering and terrorist financing?
The Central Bank monitors to ensure that obliged entities, i.e. entities that engage in activities that may be misused for money laundering or terrorist financing, comply with the legal requirements that apply at any given time regarding measures against money laundering and terrorist financing.
The aim of the rules is to, among other things, ensure that these parties know the identity of their customers and their activities and that they immediately report to the appropriate authorities if they suspect or become aware of such illegal activities.
The discussion in this article is largely based on an article written by Helga Rut Eysteinsdóttir, a lawyer in the field of legal supervision and on-site inspections at the Central Bank of Iceland - What is money laundering? (in Icelandic).