All about Money Laundering

We always hear of people who were sent to jail because they laundered money. Most of the times it is to do with drug possession too. So what is money laundering?  This is the process of disguising money form illegal activities as proceeds from legal activities.

Money laundering is the generic term used to describe the process by which criminals disguise the original ownership and control of the proceeds of criminal conduct by making such proceeds appear to have derived from a legitimate source.

The processes by which criminally derived property may be laundered are extensive. Though criminal money may be successfully laundered without the assistance of the financial sector, the reality is that hundreds of billions of dollars of criminally derived money is laundered through financial institutions, annually. The nature of the services and products offered by the financial services industry (namely managing, controlling and possessing money and property belonging to others) means that it is vulnerable to abuse by money launderers.

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So how did it all start or who were the first people to launder money/ well history states that American gangsters had been looking for a convenient way to hide their stash and the best idea they came up with is gambling.

American gangsters in the country’s prohibition era were looking for ways to stash the massive profits they earned from bootlegging. Hoarding cash had its risks, so the gangsters decided to start businesses. One of them was gambling, which lead to the growth of Las Vegas as a gambling hub. The other business which found favour with the gangsters was laundries. The books of these laundries were used to conceal the origin of where the money was really flowing in from.

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In 1996 a study was conducted and it showed that two to five percent of the world’s domestic product had the ingredient of money laundering. People were really ‘washing’ their dirty money. There were several notorious cases infact they are the biggest money laundering cases of the twentieth century.

  • Bernie Madoff Investment Scandal: This scandal was perpetrated by Bernie Madoff and is considered by many to be the biggest hedge fund scandal of the century. He defrauded investors out of nearly $50 billion. The modus operandi that he used was getting in new investors and using the money from them to payoff the old investors rather than generating profits from trading. Unlike other Ponzi schemes, Madoff didn’t promise astronomical returns but regularly paid off returns between 10-15% which raised red flags because maintaining such consistent returns weren’t possible.
  • LIBOR Scandal: This is called by many to be the biggest scandal in history of Financial Services Industry. I will not go into the details of how LIBOR [London Interbank Offered Rate] is fixed but it is fixed by banks operating in the London InterBank Market twice a day. Now LIBOR is a very important rate as the entire U.S Derivatives market is based on these rates since these rates are the basis of a range of financial products. Many floating rate bonds are indexed to this rate. Now many banks with proprietary trading operations in these derivatives manipulated LIBOR to their advantage. Infact phone and mail records have been found of traders which said that LIBOR rate fixing was now a cartel and they could get LIBOR to whatever value they wished. The main perpetrators of this were Barclays, Deutsche Bank, JP Morgan, Citigroup, Bank of America, RBS etc.
  • In 2012, new rules were passed which subjected LIBOR to increased UK regulatory oversight. A few banks did pay monumental fines in this regard and Bob Diamond, then CEO of Barclays plc even had to resign.

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