Money laundering is any attempt to legitimize money that comes from illegal activities. For example, drug dealers typically receive large quantities of cash. But banks become suspicious when people deposit large cash deposits into their bank accounts. Therefore, criminals must find a way to make the money legitimate.
How does a criminal launder money?
Historically, money laundering involved using shell companies or cash-based businesses such as a bar or a car wash. The owner would inflate the business sales to account for the extra money being deposited and keep two sets of books. But modern criminals continue to evolve, and they now transfer ill-gotten gains through reputable businesses that process payments between two parties.
For example, a drug dealer could put a fake vacation property or rare collectible item on an online marketplace at a very high price, and a drug buyer could pretend to rent or buy that item in order to pay for the drugs. This way, the transaction appears to be legitimate, and the money the drug dealer receives is now “clean”.
How can companies help prevent money laundering?
Any company that processes financial transactions between two parties is a potential target for money laundering. That’s why governments have created anti-money laundering (AML) laws. AML regulations require companies to have an effective, auditable process in place to detect and prevent suspicious activity.
To meet regulatory requirements, firms should implement a powerful AML compliance solution. The AML software should include transaction monitoring, Know Your Customer, identity verification, and sanctions screening. For more information, see What is anti-money laundering software.