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HOW
MONEY IS LAUNDERED
In money laundering, the proceeds of crime are run through the financial system
to disguise their illegal origins and make them appear to be legitimate funds.
Most often associated with organized crime, money laundering can be linked to
any crime that generates significant proceeds, such as extortion, drug
trafficking, arms smuggling, and white-collar crime. Although money laundering
often involves a complex series of transactions, it generally includes three
basic steps.
The first step is the physical disposal of cash. This placement might
be accomplished by depositing the cash in domestic banks or, increasingly, in
other types of formal or informal financial institutions. Or the cash might be
shipped across borders for deposit in foreign financial institutions, or used to
buy high-value goods, such as artwork, airplanes, and precious metals and
stones, that can then be resold for payment by check or bank
transfer.
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to top The second step in money laundering is known as layering, carrying out
complex layers of financial transactions to separate the illicit proceeds from
their source and disguise the audit trail. This phase can involve such
transactions as the wire transfer of deposited cash, the conversion of deposited
cash into monetary instruments (bonds, stocks, traveler's checks), the resale of
high-value goods and monetary instruments, and investment in real estate and
legitimate businesses, particularly in the leisure and tourism industries. Shell
companies, typically registered in offshore havens, are a common tool in the
layering phase. These companies, whose directors often are local attorneys
acting as nominees, obscure the beneficial owners through restrictive bank
secrecy laws and attorney-client privilege.
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The last step is to make the wealth derived from the illicit proceeds appear
legitimate. This integration might involve any number of techniques,
such as using front companies to "lend" the proceeds back to the owner
or using funds on deposit in foreign financial institutions as security for
domestic loans. Another common technique is over-invoicing or producing false
invoices for goods sold--or supposedly sold--across borders.
(Excerpt
from the World Bank Public Policy for the Private Sector, May 1995, David
Scott, Senior Financial Sector Specialist, Financial Sector Development
Department, World Bank.)
"The Public Policy for the Private Sector series is an open forum intended
to encourage dissemination and debate on ideas, innovations, and best practices
relating to public policy issues in private and financial sector development. The
views published are those of the authors and should not be attributed to the
World Bank or any of its affiliated organizations. Nor do any of the
conclusions represent official policy of the World Bank or of its Executive
directors or the countries they represent."
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