Origin of Money Laundering

Today money has become important than oxygen. Surviving without

money has become literally impossible. Everyone is in the race to earn
money. People use different ways and means to acquire money. There
are people who resort to legal ways of earning money while there are
others who can go to any extent to acquire wealth. Such people mainly
engage in illegal and unethical activities and commit various frauds or
corruption schemes. If caught, they face serious consequences.

In order to acquire wealth below the table and declare its source as
legitimate, people indulge in an activity called as money laundering.
Money Laundering is spreading like a virus in the global financial
institutions.

History of Money Laundering

Historically, money laundering is in existence since at-least 2000 years.
Chinese merchants cycled money through various businesses and
complex financial transactions to hide the income from government
bureaucrats. But the term gained glamour only when the accountant of
Al-Capone found it difficult to explain the source of money obtained
from illegal activities. This accountant purchased cash-only
laundromats and used them as a front in order to disguise the source
of the dirty money they were getting from prostitution, bootlegged
liquor sales and other criminal activities
A common belief is that the term ‘money laundering’ originated
because Italian members of the mafia in the United States, such as Al
Capone .

Amount of cash flowing into the laundromat operations was hard for
law enforcement to monitor, which means a lot of cash could sneak
past the system unnoticed.

Indiaforensic, which imparts training and certifications on Anti Money

Laundering, defines money laundering as any procedure that cleans
funds of their criminal origins, permitting them to be utilized inside the
financial system.

The laundering of illegal money occurs when the perpetrators move

the ill-gotten cash through one or more several legitimate businesses
or the bank accounts of the non-suspecting individuals to legitimize the
illegally obtained amount of money.

Capone’s connection to laundromats may have given us the glamorous

phrasing, however the act was going on from a long time before the
twentieth century.

Frauds have been happening since a very long time. Whenever a

person uses some new ways to commit a fraud, it comes into limelight.
This is exactly what happened in the case of money laundering. If it
wouldn’t have been Al Capone, then today the money laundering fraud
would have had some different name.

https://indiaforensic.com/certifications/origin-of-money-laundering/
CA Mayur Joshi

http://www.mayurjoshi.com
CA Mayur Joshi is a Forensic Accounting evangelist in India. He is the co-founder of
Indiaforensic and is author of 7 books on forensic accounting, fraud investigations and
money laundering.

The History Of Money Laundering

Money laundering is a practice almost as old time itself. From as
early as 2000 BCE, wealthy Chinese merchants would move their
profits outside of China, as the government did not support
commercial trading. They would then reinvest their smuggled funds
into other enterprises, a technique still used today.

So what exactly is money

laundering?
Money Laundering is the process of introducing illegally obtained
money back into the economy. Sometimes this occurs through a
series of complex bank or commercial transfers, and other times it’s
as simple as a cash transaction.

The goal is to exchange the illegally acquired money (dirty money)

for legally acquired money (clean money), and therefore, avoid
suspicion from law enforcement. Money laundering is also a key
ingredient in terrorist financing, and has important consequences
from a compliance perspective.

According to the United Nations Office on Drugs and Crime, an

estimated $2 trillion is laundered every year. Due to the scale and
importance of the problem, comprehensive Anti-Money Laundering
(AML) and Counter Terrorist Financing (CTF) regulation has been
implemented by countries all over the world.
The 1920s: Al Capone & the
Prohibition Era
In the US, money laundering took off in the 1920s during the
prohibition era. As alcohol was made illegal in the US, a profitable
black market soon arose to fill the boozy gap. Organized crime
boomed as the demand for alcohol rose.

You may have heard of Al Capone, who was a major mob boss in
Chicago. It is rumored that the term “money laundering” originated
from Capone, as he set up laundromats across the city in order to
disguise the origin of the money earned from alcohol sales. Any illicit
profits would simply be added to the revenue generated by the
laundromats and thus re-introduced into the financial system.

Prior to the 1980s, money laundering was barely considered a crime;

tax evasion was the more serious offense, something that Al Capone
was actually sent to jail for. As the 20th century progressed, the drug
trade proved to be one of the biggest sources of money laundering.

However, prior to 1986, drug dealers were able to retain their assets
in the US and would have access to their profits once they left jail. At
the time, the drug trade itself was considered the bigger issue,
money laundering was just an unfortunate side effect. However, the
war on drugs was about to change that.

The 1980s: The War On Drugs

In the 1980s, the war on drugs was at its peak in the US. The
Reagan administration implemented strong laws to prohibit money
laundering as a way of curtailing the sale of illicit narcotics. In 1986,
the US Money Laundering Control Act was one of the first and was
soon followed by similar laws in other countries. Money laundering
became a federal crime for the first time in history. However, it soon
became clear that domestic laws were not enough, since both the
drug trade and money laundering were international crimes.

In 1988, the United Nations implemented the Vienna Convention

Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances,
which aimed to fight the illicit drug trade. Although the Vienna
Convention mostly dealt with drug trafficking, the stated illegality of
money laundering specifically in regards to the drug trade was an
important first step. The Vienna Convention was signed by 171
countries, and implemented by 168 countries.

Shortly after the Vienna Convention, the Financial Action Task

Force (FATF) was established in 1989 at the G7 summit. The
purpose of the FATF is to analyze money laundering trends and
evaluate the combative steps that global governments have taken to
prevent it. The task force made 40 recommendations to be followed
by the involved countries, however not all countries follow all of the
recommendations. Today, the FATF includes 30 different countries
including the US and the UK.

The 2000s: Counter-Terrorist

Financing
The 9/11 terrorist attack had a profound effect on money laundering
regulations, specifically in regards to banks. After 9/11, The Patriot
Act was passed which gave the US government sweeping powers to
fight terrorism. Title III of the Patriot Act directed financial institutions
to expand their AML programs and increase their due diligence
reports on foreign bank accounts.

Essentially, Title III changed parts of the 1986 Money Laundering

Control Act to strengthen banking rules with regards
to international money laundering by improving communication
between law enforcement and financial institutions. Unsurprisingly,
as the US enforced a stricter AML regime, so did the rest of the
world.

The 2010s: Banks take center stage

While it is becoming harder to launder money, it is still a major
problem worldwide. Deutsche Bank is currently under
investigation (sparked by the Panama Papers) for allegedly helping
clients set up offshore accounts to transfer illegally obtained money.
Deutsche Bank is also implicated in the Danske Bank scandal
(outlined in the next paragraph). Additionally, in 2017 the German
institution was fined $630 million by UK and US regulators for being
connected to a Russian money laundering scheme, in which over
$10 billion was moved out of Russia with the help of Deutsche Bank.

In 2018, Danske Bank (Denmark’s largest bank) was found to have

funnelled €200 billion through a local branch in Estonia. Supposedly
15,000 non-resident customers were involved in suspicious
transactions between 2007 and 2015. The bank believed that the
high risks represented by non-resident customers were being
mitigated by their AML procedures, evidently this was not the case.

Warnings started popping up as early as 2007, with a large number

of Russian deposits being flagged, but it wasn’t until 2014, when a
whistleblower contacted senior management, that the problem was
taken seriously. It may be the biggest money laundering scandal ever
in Europe, and as a result, the European Union is working on
legislation to prevent it from happening again.

Banks are not the only target of money laundering. Earlier this year,
the popular online computer game Fortnite (created by Epic Games)
became the target of money laundering cybercriminals.

The game has around 200 million players across the globe, the
majority of them being kids and teenagers who are particularly
vulnerable. Fortnite has its own in-game currency called “V-Bucks”
which is increasingly used as a tool for money laundering. Criminals
use stolen credit cards to purchase V-Bucks, then resell the V-Bucks
at a discount rate to turn a profit. It is unclear how much money had
been laundered this way, and how Epic Games plans to stop it.

Conclusion — The History of Money

Laundering
This history shows us that large scale criminal enterprise requires a
sophisticated money laundering operation. Since the the Patriot Act
passed, this has become increasingly difficult. The international
regulatory landscape is maturing and consequently identifying parties
which aid the flow of dirty money.
As a business owner, you also need to be aware of the growing
desperation and ingenuity of money launderers. The Fortnite case
illustrates how seemingly innocuous fun can be misused to fund
malicious actors.

With this in mind, make sure to screen your customers to ensure they
are not listed on one of the many sanctions lists. This will help you to
protect your business from money laundering and avoid dire
consequences.

Schedule a demo to learn how KYC-Chain can help protect you from
money laundering and terrorist financing.