By Patricia Jones Money laundering is the process of disguising money or property obtained from crime so that it appears to come from a lawful source. It is illegal because it helps criminals hide their profits, avoid detection, enjoy the benefits of illegal activity and finance further crimes.
In the United States, federal money-laundering laws mainly appear in 18 U.S.C. §§ 1956 and 1957. States also have their own money-laundering laws, so the exact charge and penalty can depend on where the conduct occurred.
A Simple Example of Money Laundering
Suppose someone obtains $100,000 through fraud. Depositing the entire amount while honestly identifying it as fraud proceeds would expose the crime. The person may instead try to make the money appear to be legitimate business income, investment returns or payments for services that never occurred.
The fraud generated the illegal money. The later transactions designed to hide its source may create a separate money-laundering offence.
Money laundering does not actually make the money lawful. It merely creates records, transactions or explanations intended to make the criminal proceeds look legitimate.
The Three Stages of Money Laundering
FinCEN, the U.S. Treasury agency responsible for protecting the financial system from illicit finance, describes money laundering as commonly involving three stages: placement, layering and integration. Not every case uses all three stages, and they may overlap.
Placement
Placement occurs when illegal proceeds are first introduced into the legitimate financial system.
For example, cash may be deposited, exchanged for financial instruments or mixed with money from a real business. This stage can be risky for the offender because unusually large or unexplained cash transactions may attract attention.
Layering
Layering involves moving the money through a series of transactions to make its original source difficult to trace.
The funds might be transferred between accounts, businesses, assets or countries. The purpose is to create distance between the money and the crime that produced it.
Integration
Integration occurs when the funds return to the offender in a form that appears legitimate.
The money might appear to be business revenue, a loan, proceeds from selling property or investment income. At this stage, the offender may try to spend or invest the funds without openly connecting them to the original crime.
What Crimes Can Produce Laundered Money?
Money laundering must generally involve proceeds associated with criminal activity. Federal law identifies many offences that can qualify as “specified unlawful activity.”
Examples can include:
- Drug trafficking
- Fraud and scams
- Bribery and corruption
- Robbery or theft
- Human trafficking
- Illegal gambling
- Extortion
- Counterfeiting
- Certain cybercrimes
- Terrorist financing
- Some foreign criminal offences
A person does not necessarily have to know the exact crime that produced the money. For certain federal charges, it may be sufficient that the person knew the property represented proceeds from some form of unlawful activity.
Why Is Money Laundering Illegal?
Money laundering allows criminals to benefit from offences that might otherwise produce money they cannot safely use.
If offenders could freely disguise criminal profits, they could purchase property, expand illegal operations, corrupt officials, fund organized criminal groups and conceal evidence from investigators.
The law therefore targets both the original crime and the financial transactions used to promote or conceal it. The Department of Justice describes its enforcement objective as taking the profit out of crime, protecting the financial system and pursuing people who hide profits for criminal organizations.
Money laundering can also make it harder to identify victims, recover stolen funds and determine who controls criminal organizations. It may allow an illegal operation to appear financially legitimate while honest businesses must compete with enterprises supported by hidden criminal money.
Is Handling Criminal Money Always Money Laundering?
No. The government must prove the legal elements of the particular offence charged.
Under 18 U.S.C. § 1956, prosecutors generally must show that the accused knew the property represented criminal proceeds and conducted or attempted a qualifying transaction with a prohibited purpose. That purpose may include promoting criminal activity, concealing the money’s source or ownership, committing certain tax offences or avoiding a legally required transaction report.
A person who unknowingly receives money connected to a crime is not automatically a money launderer. Knowledge and intent are important in many cases.
However, deliberate ignorance or suspicious conduct may be used as evidence. A person cannot necessarily avoid responsibility by refusing to ask obvious questions while intentionally helping someone disguise unexplained criminal funds.
What Is the $10,000 Rule?
It is a common misunderstanding that depositing or spending more than $10,000 is automatically illegal. It is not.
Financial institutions generally must report cash transactions exceeding $10,000 in one business day, including multiple transactions that the institution knows are connected. Businesses receiving more than $10,000 in cash through one transaction or related transactions generally must file Form 8300. These reports do not mean that the customer committed a crime. Many large cash transactions are lawful.
Federal law separately prohibits knowingly conducting certain monetary transactions involving more than $10,000 in criminally derived property. Under 18 U.S.C. § 1957, the transaction must involve property obtained from a criminal offence and meet the statute’s other requirements.
Is Breaking Deposits Into Smaller Amounts Legal?
Dividing cash into smaller transactions for an innocent reason is not automatically illegal. However, deliberately breaking up transactions to avoid federal reporting requirements is called structuring, and structuring is illegal.
For example, repeatedly depositing amounts just below $10,000 with the purpose of preventing a bank from filing a Currency Transaction Report can lead to an investigation. The IRS explains that structuring can be illegal even when the money itself came from a lawful source.
Therefore, someone should not attempt to avoid a report simply because they believe a large transaction may attract attention. The report itself is a routine legal requirement and does not establish guilt.
Can Businesses Be Used for Money Laundering?
Yes. A legitimate business can be misused to conceal illegal proceeds.
A criminal may falsely describe illegal money as customer payments, create fake invoices, record nonexistent sales or use companies that have little genuine activity. Real estate, financial accounts and digital assets can also be misused to disguise ownership or move criminal proceeds.
However, owning a cash-based business, making international transfers, purchasing cryptocurrency or creating a company is not automatically suspicious or illegal. These activities become legally problematic when they are knowingly used to hide, move or promote criminal proceeds.
What Are the Federal Penalties?
A conviction under 18 U.S.C. § 1956 can result in imprisonment for up to 20 years. The statute also authorizes a fine of up to $500,000 or twice the value of the property involved, whichever is greater, depending on the offence.
A conviction under 18 U.S.C. § 1957, involving certain transactions of more than $10,000 in criminally derived property, can result in imprisonment for up to 10 years and substantial fines.
The government may also seek forfeiture of money, property or assets connected to the offence. A person may face separate charges for the original criminal activity and for laundering its proceeds.
Is Money Laundering the Same as Tax Evasion?
No. They are different offences, although the same conduct may sometimes involve both.
Tax evasion generally involves deliberately avoiding legally owed taxes. Money laundering focuses on criminal proceeds and prohibited financial transactions, such as concealing the money’s source or promoting further illegal activity.
A person can commit tax evasion without laundering money, and someone can launder money even when tax avoidance is not the main purpose. Federal money-laundering law does, however, include certain transactions conducted with the intent to violate specified federal tax laws.
Therefore, money laundering is illegal because it converts the profits of crime into assets that appear legitimate, makes criminal activity harder to detect and allows offenders to preserve or expand their operations.