How is money really being laundered?

Cryptocurrencies lure buyers of all ages. Investors appreciate them for their anonymity or cheap and fast money transfers. Unfortunately, more and more often we hear that cryptocurrencies are being exploited by criminals who utilise them for unethical purposes. Online banking seems to be a conducive space for fraudsters who take advantage of technological gaps or ignorance of financial institutions’ users. These criminals extort and steal confidential data linked with bank accounts or digital wallets. Such data is enough to carry out a money-laundering process on accounts of unaware and unsuspecting owners.

Money laundering is not only a financial criminal offence – it is also a tool that fosters other felonies such as political crimes or financing terrorism.

What exactly is money laundering?

Money laundering is an activity aimed at covering up the source of the money. It’s most often used to hide illegal income obtained for instance from corruption or drug trafficking.

Concealing the source of income by means of cryptocurrencies is quite complex and risky compared to the conventional methods. Digital currency transactions are, contrary to the popular belief, much more transparent than fiat currency exchanges. Cryptocurrency transactions are recorded in a public ledger ensuring the transparency of the trades. This idea is clearly the opposite of money laundering, which intends to obscure the transaction’s trail.

What does the money laundering process look like?

Revenue derived from illegal sources is introduced to the general financial circulation. The entire procedure breaks down into three main stages:

Placement

The first stage is the placement of the “dirty” money. It is physically introduced into the banking system in order to exchange cash for other tangible assets. The following methods can be used at this stage: smurfing – making a series of smaller deposits to a specific bank account for amounts that are below the reporting threshold; structuring—several fictitious people make payments for relatively low amounts that are below the regulatory reporting limits; exchanging money by people hired to exchange currency without registration; blending both the “clean” and “dirty” money in places where numerous unregistered cash transactions are made every day, such as restaurants.

Layering

The second stage of money laundering is layering, i.e., concealing the source of the money. Its purpose is to further move the money away from its illegal source. It is precisely in this phase that cryptocurrencies may temporarily come into play. They might be used for multiple fiat-crypto and crypto-fiat exchanges. The essence of the second phase is to conceal the source of the money, which is why numerous financial operations are carried out. As a result, the relationship between the turnover and its source is no longer visible or traceable.

Integration

The final step is to integrate the “laundered” money disguised as legal income back into the financial system. The funds have the appearance of having been derived from legal sources, as they already have documents issued by relevant financial institutions, for instance, banks. Fictitious purchase and sale transactions between people involved in the whole illicit procedure are just one example illustrating how money’s certificates of origin can be obtained.

Do banks launder money?

In 2018 the AML (Anti-Money Laundering) Act entered into force. It defines a set of rules aiming to prevent the introduction of illegally obtained money into circulation. The Act covers various financial activities as well as businesses in order to counteract money laundering. Any failure to comply with the Act results in high fines.

It is difficult to establish how exactly banks launder money. Nevertheless, thanks to affairs concerning institutions like BOŚ Bank or ING Bank, the fact that it happens is undeniable.

As ‘Dziennik Gazeta Prawna’ reports, proceedings are pending against Bank Ochrony Środowiska, which is a bank controlled by the State Treasury. A year after an inspection by the GIIF (General Inspector of Financial Information) in March 2019, the proceedings were initiated against the institution. They revolve around suspected laundering of money from the United States and huge amounts of money are involved. This of course concerns customers of state financial institutions since the body that has access to their cash is suspected of illegal activities.

In 2018, ING Bank was fined 775 million euros for negligence leading to money laundering taking place at this very institution. This might be unsettling for users of traditional institutions, which by definition should guarantee security and regular controls to prevent illegal procedures. After these events, banks have been forced to introduce verification of transfers, which in turn causes users to complain about problems with freezing their assets in bank accounts. Besides, the practice of banks asking about the source of the money is gradually becoming commonplace.

What are the consequences of money laundering?

Money laundering is an illegal procedure that leads to many negative consequences. In addition to the most important repercussions, i.e., befitting penalties for complicity (including reckless complicity), this practice also has its consequences on a global scale. Money laundering is punishable by imprisonment of up to 8 years, but so is the practice of banks and other institutions aiding and abetting money laundering. Complicity can be defined as the act of procuring, facilitating, or advising the commission of acts considered to be the laundering of money obtained from illicit sources. State financial systems are hit by massive instability, with tax systems being particularly affected, and the mechanisms of the market economy are shaken. Countries with a high record of money laundering undermine their credibility in a global context (this applies not only to the entire state as such, but also to its institutions, banking systems, or the entrepreneurs themselves). Combatting money laundering also means preventing corruption among politicians or officials.

Every modern business entity, including traditional financial institutions, cares not only about generating income, but also about establishing its positive image in the context of conducted activities. Therefore, their decision-makers are prepared to potentially cover up abuses such as money laundering in order to build or maintain their reputation.

It is important to bear in mind that virtual currencies in the context of money laundering only appear in the layering stage, fiat money in the form of cash is mainly used for this purpose specifically. Companies associated with cryptocurrencies such as Kanga Exchange warn against money laundering through virtual currencies, introduce campaigns to discourage the idea, but also have special procedures in place to verify if the transactions performed by the user resemble money laundering (e.g., repeated low deposits, not exceeding the verification threshold characteristic for layering and allowing the users to remain anonymous). After a thorough analysis of the topic, we can ask ourselves whether the aggression aimed at cryptocurrencies in the context of money laundering is fair? Or maybe it all just stems from the need to divert attention from the existing problem, propelled by the ignorance and fear of new technology, i.e., blockchain?

Zuzanna Kwiecień
for Kanga Exchange

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