What is Money Laundering

Scenario 1:Mr. Big filthy rich. “Filthy” aptly describes his millions stashed away in bank accounts in Caribbean islands, funds derived from drug trafficking, prostitution and other illicit activities. He decided to bring his dirty money home. But how does he legalize it so he will not rouse the suspicions of the authorities? He sets up an offshore company that is engaged in a legitimate business such as venture capital. Through this venture capital company, he invests in a local business back home. His dirty money is thus “sanitized” (laundered), and he can officially enjoy it because it is now seen as profits from the local joint venture.

Scenario 2: Mr. Con obtains a policy for a “phantom” ocean-going vessel. He pays premiums on the policy, and bribes agents to facilitate and pay claims, always making sure his claims are lower than the premiums he pays. This way, the insurer still enjoys a “profit”, and through this process, Mr. Con receives laundered funds from a legitimate and reputable source.

Scenario 3: Mr. Chips takes gamblers on junkets to casinos in Europe, the Philippines and Australia where large sums of money are laundered. His clients don’t have to carry money with them. All they do is to provide him, in local currency, the amount they intend to bring with them to the casinos. He also accepts banker’s cheques. He then informs the casinos of the amount of money deposited with him. On arrival at the casinos, his clients are provided with the amount in gambling chips. Unused chips are exchanged for a cheque from the casinos. Because of Mr. Chip’s casino connection, syndicates make use of his services to launder money in and out of the country.

The money launderer comes in many other guises as well. According to international investigators, these are some of the businesses used to hide dirty cash. Property dealers, photocopying bureau, carpet traders, fairground operators, mobile telephone importers and computer memory chip suppliers.

What is money laundering?

It is a generic term describing the process by which illegally obtained money is transformed into ‘clean’ money that has the appearances of originating from a legitimate source.

The money laundering process is generally made up for three stages:

• The placement stage where illegitimate funds find their way into the financial system via payment into legitimate accounts. For example, depositing cash in banks which ask no questions, investing in deposit taking companies, buying precious metals/diamonds, or artwork/stamp collections.
• The layering stage, which is used to disguise the audit trail between the funds and the original point of entry into the system. Moving the funds around so that the origins of the money become obscured does this. For example, through wire transfer across borders, bonds, “wins” at the race track or regional casinos, and the use of offshore financial centers which either have strict banking secrecy laws or lax regulation.
  
• The integration stage where funds are reintroduced as legitimate wealth to fund further activities or to acquire assets. This includes loans to self/companies and false invoices, and other attempts to make the wealth look honest.

How this relevent with my tax planning blogs, Yes, it relevent with the next topic we discuss, is related to income from internet as well!