Money laundering is executed in three steps normally. The first one is the placement which involves disposal of the funds obtained illegally through some other means. This is primarily handling cash. The second stage of money laundering is normally called the layering when the cash gets involved in multiple modes of transactions. This would make tracking back money or source a problem and cause confusion in the audit trails. The third stage is the one when the money laundered merges with the normal economy and integrates with the financial system as if it is sourced from normal business. This is normally called the Integration stage. Invariably, at one of the stages, money enters the banks and money laundering could be caught at this point in time.
Money laundering is done using various mechanisms which have their own names. Some are called the 'star burst', when the money is deposited in one account and is immediately distributed to a number of other accounts losing slowly the trace of the money2. The second method employed is called the boomerang. In this method, the deposit is done in one account and then passes on to another account soon after. From there it goes on a third and so on until it comes back to the original account where it started. Countering all these and an innumerable number of other creative methods that are adopted by launderers is certainly a challenge. However, banks have been generically advised to 'know your customer and to know your employee' to counter such money laundering activities.
History of Money Laundering
Money laundering has its beginning in the US when Al Capino legalised money obtained through extortions, bootleg liquor business and other such illicit activities by using the Laundromats. May be that was the reason why it was called 'Money Laundering'3. Robinson says, as quoted by Billy Steel,
"Money laundering is called what it is because that perfectly describes what takes place - illegal, or dirty, money is put through a cycle of transactions, or washed, so that it comes out the other end as legal, or clean, money. In other words, the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income".
Money laundering improved from a small time business to a multi national one with Meyer Lansky. His large accounts with Swiss banks helped him convert large volume of money to legal tender.
Money laundering took a dirty turn with the rise in terrorism. Until then, it was more of the drug money and money through other illicit activities that ruled the roost. However, by 1990, the terrorism has started showing its ugly face on the surface of the earth. With that, came in another application for money laundering. Drug mafias, on one side, could collect large sums of money because of their unnatural population. The 1980s say a massive rise in drug abuse and hence a large mafia controlling the drug trade. Since they had large quantum of money under their control, the mafia could get things done at all levels in the Government. With the rise in terrorism taking a different hue, large quantum of cash needed to stashed away for varying uses; all the same, illegal. Many of the countries felt the negative impacts of money laundering and started coming down heavily on them. During the nineties most of the countries launched their own programs to counter money laundering