Money Laundering 101
In this Compliance Clip (video), Adam provides an overview of money laundering and gives a big picture illustration of how it applies to financial institutions. This foundational explanation of money laundering gives a great practical example of how money laundering can occur and discusses the three steps illicit “actors” use to launder money in the US financial system. This clip would be a great training resource for anyone who is new to BSA to help them understand what money laundering is. In fact, Adam took these slides directly from our BSA Bootcamp, which is a 3 1/2 hour video webinar that provides a foundational overview of all BSA rules and regulations. For more foundational BSA training just like this, our BSA Bootcamp is available in our store here: www.compliancecohort.com/video-webinar-bsa-bootcamp
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to discuss money laundering.
Money laundering is something that relates back to the Bank Secrecy Act. In fact, this is an exact topic and these are slides that come right out our BSA Bootcamp, which is a great foundational BSA training program.
What is money laundering? I just want to talk about what money laundering is. Money laundering is the act of taking dirty money and conducting transactions in a way that prevents red flags, essentially cleaning the money, so that it appears to be legitimate and avoid suspicion by the financial institution and by law enforcement and other authorities. The process is you're essentially taking dirty money, somehow cleaning it or laundering it and then making it have the appearance that it is, in fact, clean. So that's the process.
The best example I have for this is an example of maybe a privately-owned ATM. Let's say we have a privately owned ATM and we have a drug dealer, Bob, right? Every drug dealer is named Bob, right? Bob the Tomato, I don't know, whatever. Bob is our drug dealer, and he actually sells some illegal stuff, whatever he decides to sell, but he also has some legitimate businesses. And his legitimate businesses are a convenience store. So he operates a convenience store and he also has an ATM inside that convenience store, that he uses to create other revenue and also “launder” his money as you'll see in this example. So what essentially happens is Bob has his dealers come in, they bring him cash from the stuff that they sold. They bring it to Bob in his back room. He takes his money, puts it in his vault. You kind of have to imagine this backroom of a convenience store. You know, the secret room that has the glass that you could only see one way through and you can't ever see in there. But Bob's back there, he takes money, puts it into his vault, pulls out a bag or whatever, gives it to his dealer. Next dealer comes in, gives him the money, he takes it, he puts it in his vault, gives him a bag or whatever, and they go on to sell more stuff.
Well, Bob, at some point, is going to have so much money he doesn't know what to do with it. So one thing he does is he takes his privately-owned ATM, takes the stacks of 20s that are dirty money because they came from illicit or illegal proceeds just a few minutes ago, takes those 20s puts them in the ATM. Now as I'm driving by, I see out in his parking lot somebody's selling smoked chicken on this smoker and it looks amazing. And I'm basically drawn in like a bug in the light, because of the smell of the smoked chicken. Some of you have experienced this. I know you have. So I pull over, I go to buy it, but I realize it's way overpriced and I don't have enough money in my wallet so I go into the convenience store because there's a sign that says ATM, take out my debit card, pull some money out. At that point, I'm pulling out money that 15 minutes ago, these $20 bills were illegal money that had come in from drug sales.
Now when I have it in my hand by taking it out of the ATM, this money is now essentially clean or has the appearance of being clean. And it is clean for me because it came through a payroll system, right? It was through payroll that money was legitimately coming out of the money on my account and that's one way that the money can essentially be laundered. Does that make sense? I think so.
To explain this another way, what the regulators do is they talk about having three different steps for money laundering. The first step is called placement. What happens in the placement phase of money laundering is where the illicit actor that's, what they call them, illicit actors, but they're talking about illicit actors and the illicit actors introduce funds in one of three ways. They either co-mingle funds with legitimate funds. They structure the funds which means that they structure their transaction in a way to avoid suspicion. So instead of bringing in $30,000 in cash in one day, they'll spread it out over the course of a month and bring that cash in smaller deposits or they'll maybe do it in increments of $9,000, which is an obvious form of structuring, trying to place the money in. Or they'll also spread it out geographically. If there's multiple branches in your organization, they may be taking it to a branch in Columbus, in Cleveland, in Akron and spreading it out through the state of Ohio by placing it that way. That's the first step, placement.
The second step to money laundering is called layering. This is where they're essentially trying to launder it to make it have the appearance of clean. And in this process, they're moving funds around the financial system. They often have complex transactions, and some examples here are purchasing smaller dollar monetary instruments or doing multiple transfers or even having wire transfers. And they're trying to move it around so that it is confusing and it's going through this laundering process. The final step then of money laundering, of course, is integration, and this ultimately creates an appearance of legal funds, and it could include the purchase of real estate or other assets or some different things, purchase of a monetary instrument, a loan where they essentially have a deposit secured loan where the cash is still in the bank. But then the loan goes out and the loan money is used elsewhere.
So there's lots of different ways, but it's essentially those three steps, placement, layering and integration.
That is money laundering 101. I hope you enjoyed this Compliance Clip.