Money laundering is bad

Money laundering simply explained! With many illustrative examples

The Federal Ministry of Finance in Germany estimates that up to 100 billion euros are illegally laundered every year. But what is money laundering anyway, how does it work and what influence does it have on us as private investors?

What is money laundering?

Money laundering is understood to be financial transactions that are designed to hide the origin and existence of money or other assets from illegal transactions in order to then flow it back into the regular economic cycle.

The aim of money laundering is therefore to conceal the origin of illegally acquired money. The illegal money can come, for example, from drug trafficking, extortion, the illegal arms trade or illegal prostitution.

How is illegal money created?

Illegal money arises, for example, when a criminal bribes a politician (corruption). The criminal cannot simply pay the bribe money into the politician's account, as banks become suspicious of large transaction amounts.
Banks even have a duty to report any conspicuous movements of money to the police. In such a case, the police will initiate an investigation and try to clear up the matter.

The origin - Al Capone

The invention of money laundering goes back to the famous American mafioso Al Capone. He wanted to reintroduce the money he earned from smuggling alcohol, drug trafficking and illegal prostitution back into the regular economic cycle.
To do this, he bought a large number of laundromats. This is where the expression “laundering money” comes from.

Tax evasion vs. money laundering

Money laundering is the opposite of tax evasion. When it comes to money laundering, one wants to bring illegally earned money back into the legal cycle. With tax evasion, on the other hand, you want to smuggle legally earned money past the tax office in order to save taxes.

The 3 phases of money laundering

How can a criminal now bring his money back into the legal economic cycle? There are hardly any limits to the creativity of criminals. Basically, however, these activities can be divided into three phases.

Phase 1 - placement

The first phase is the so-called placement. The aim of this phase is to convert illegally acquired cash back into book money. This can be done in casinos, exchange offices or restaurants, for example.

Example of a simple placement

In practice it could look like this. A criminal wants to launder his money with the help of a restaurant. For this purpose he runs a badly going restaurant, which has 5 to 10 visitors per evening.

Of course, this customer frequency is far from sufficient to generate a profit. Nevertheless, at the end of the month he stated that he had made several 10,000 euros in sales. So he mixes legal money with illegal money and thus turns cash back into book money.
It is obvious that this type of business is relatively easily exposed. It is not for nothing that the Ministry of Finance checks the cost of goods in restaurants. Nevertheless, this method can be used in less regulated countries to convert at least small amounts of illegal cash back into book money.

That is exactly what money launderers intend to do. They focus on dividing their illegal money into as many different activities as possible in order to keep it opaque.

Example of a complex placement

Of course, there are far more complex methods of laundering money. Criminals could run company A in Germany, which bills a foreign front company for certain services.

A popular service is, for example, a consulting service that never took place. Company A thus makes legal sales with the fictitious foreign company. It is difficult to prove that this is money laundering.

Smurfing

Another possibility of placement is so-called smurfing. The strategy behind this is to split illegally acquired money into the smallest possible amounts of money and deposit these small amounts into different accounts.

Due to the large number of accounts, this method naturally requires sufficient accomplices.
The method is clever because banks are only obliged to report the transaction once a certain amount has been deposited. The reportable deposit amount is currently 15,000 euros in Germany and Austria and 2,500 euros for varieties.

Structuring

Placement can also take place via what is known as structuring. Luxury goods such as valuable cars or paintings are bought with illegal money. These are then taken out of the country and sold again.

Phase 2 - layering

The second phase in money laundering is layering. The aim of this phase is to break through the paper trail, i.e. the receipt path, and to anonymize the money. It should be made as good as impossible for outsiders to trace the origin of the money.
To achieve this, as many complicated transactions as possible are carried out from one bank account to other bank accounts. Often these transactions take place across national borders and involve bogus companies and third parties such as lawyers or notaries who have a professional secret by default.

Phase 3 - integration / recycling

The last phase is called the integration phase or the recycling phase. In this phase you let the money flow back into the regular economic cycle.
To accomplish this, the money is in turn invested in activities that have a certain synergy effect with the criminal activity and require a large amount of cash.

In turn, casinos, restaurants or exchange offices can be used for this purpose. Recently, it has also been observed that more money has been invested in pharmaceutical and chemical laboratories. This is where criminals can secretly manufacture drugs.

Example integration - overvaluation and undervaluation

Another way of integrating illegal money into the legal economic cycle is to buy and sell real estate. For example, a criminal can buy a property that is worth 2 million euros. However, he officially pays only one million euros for this property and sends the other million to the seller in a small case, unregistered under the hand.
After that, the money launderer holds the property for a few years and carries out renovation work on the property during this time. The sales value of the property increases, so that after a while he can legally sell it on the market for 2.5 million euros. He has thus made an official profit of 1.5 million euros, which he now legally owns and pays tax on his bank account.

Example integration - loan-back method

In addition to the overvaluation or undervaluation of real estate, the so-called loan-back method can also be used for integration.
Here, assets are entrusted to a bank abroad. This bank then in turn issues a loan to a money launderer based in Germany. Thus, the launderer gets his own money in the form of a legal loan.
As you can see, there are no limits to creativity at this point. Money launderers are in a constant race against laws and against the supervisory authorities.

It goes without saying that states will not tolerate these illegal activities. For this reason, there are various cooperations at national and international level that have the common goal of uncovering money laundering and terrorist financing.

The Money Laundering Act

The German Money Laundering Act was passed in 1993 and revised in 2008 and supplemented to include terrorist financing. This law has a major impact on how banks treat their private customers.
Banks are obliged to identify individuals and companies when opening a new account.

Influence of the Money Laundering Act on Private Investors

When you open a new account, you will need to identify yourself at the bank with your passport or ID card. You also have to sign the money laundering regulations, as the bank is obliged to report suspicious transactions on your account.
For example, if you sell your car privately and receive 15,000 euros from the buyer, it can happen that you are only allowed to deposit the money into your account when you present the purchase contract to the bank.

Money laundering indicators

In addition to large cash deposits, accepting bad conditions or holding many accounts are indicators of money laundering activities.

The fact that poor investment conditions are accepted may be due to the fact that money launderers want to cheer their bankers. A banker who collects high margins thanks to his customers will not be particularly motivated to report this money laundering case.
In the case of higher cash deposits, banks and thus also the benefiting bankers are obliged to report these deposits to the tax office. These principles are also known as “Know Your Customer”.
They apply not only to banks, but also to trustworthy persons such as notaries or lawyers who have a certain degree of professional secrecy. Auditors and tax consultants are also required to follow these principles.

Conclusion

As you can see, the subject of money laundering is not only exciting, but also highly complex. There are almost endless ways to launder money, which makes it difficult for the police to detect these activities.