Washing dirty money involves three basic steps: placement, layering, and integration.
In the first stage, the dirty money’s illicit origin is attempted to be hidden by changing its form by having this money invested in cash-intensive businesses. Next, a number of shell companies are set up in countries known for strong bank secrecy laws or for lax enforcement of money laundering statutes. Then the dirty money is circulated within these shell companies until they appear clean.
For circulating this money, two age-old methods are used. The first is the loan-back system and the other the double invoicing system. With a loan-back, the criminal puts the funds in an offshore entity that he owns and then ‘loans’ them back to himself. According to researchers, this technique works because it is hard to determine who actually controls offshore accounts in some countries.
In double invoicing – a method for moving funds into or out of a country-an offshore entity keeps the proverbial two sets of books. To move ‘clean’ funds into say, Singapore, a Singaporean exporter overcharges for goods or service. To move funds out of Singapore, a Singaporean importer is overcharged.
Other ‘layering’ techniques involve buying big items like stocks, luxury cars, travel tickets. The integration stage is the final point when the money is moved into mainstream economic activities – typically business investments, real estate, or luxury goods purchase.
Money laundering is said to have potentially devastating economic, security, and social consequences. It provides the funds needed to finance drug dealers, terrorists, illegal arms deals, corrupt public officials, and others to operate and expand their criminal enterprise.
Because money laundering relies to some extent on existing financial systems and operations, the criminal’s choice of money laundering vehicles is limited only by his or her creativity. Money is laundered through currency exchange houses, stock brokerage houses, gold dealers, gambling houses, automobile dealerships, insurance companies, and trading companies. Private banking facilities, offshore banking, shell corporations, free trade zones, wire systems, and trade financing all can mask illegal activities.