What Exactly Is Money Laundering?

You would think that with all the legal and regulatory focus on money laundering, it would be comparatively simple to define. Not so. Even within the AML sector, many people struggle to articulate a clear definition of money laundering, and those who can offer a succinct definition are rarely completely in agreement with one another. The Oxford English Dictionary definition of money laundering, “the concealment of the origins of illegally obtained money”, is somewhat undermined by the history of carousel fraud. Throughout the 1990s and early 2000s, multi-billion-pound profits from organised VAT fraud were transferred to jurisdictions such as Dubai where there was no VAT and therefore no element of “dual criminality”, meaning that offenders could not be extradited, stolen tax funds could not be recovered and criminal property and assets could be kept in plain sight, rendering any concealment unnecessary.

It is not even that easy to find a definition of money laundering in UK legislation. Even the brazenly titled Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, which might be expected to be fairly clear on the matter, is somewhat coy, simply stating in its introduction that “’money laundering’ has the meaning given by section 340(11) of the Proceeds of Crime Act 2002”. Reference to section POCA 340(11) clarifies that money laundering “is an act which constitutes an offence under section 327, 328 or 329 [of the same legislation]…”; and those sections define the criminal offences by reference to those who conceal, disguise, convert, transfer, remove, acquire, use, possess or enter into an arrangement which facilitates the acquisition, use or possession of “criminal property”, which is itself defined elsewhere in the same act.

Leaving theoretical definitions aside, the process of money laundering has long been described using a simple three-stage model, likely to be familiar to anyone who has undertaken any basic AML training – Placement, Layering and Integration. Placement describes the first stage of the money laundering process, where the criminal pays the cash into the formal banking system. Layering is the process of transferring the cash through various accounts and (genuine or contrived) financial transactions, obscuring the original source of the funds. Finally, the Integration stage is reached when the money, or property purchased with the money, is indistinguishable from legitimate assets – it has been “integrated” into the economy. The three-stage Placement, Layering, Integration model is rooted in the investigation of the laundering of cash from drug sales and continues to serve as a sound introduction to money laundering in police colleges and regulatory agencies all over the world.

The only real problem with this model is that it’s wrong.

Perhaps “wrong” is the… well, the wrong word. Like most academic models, Placement, Layering, Integration is a useful illustration of a complex real-world process, in this case the process that criminal street cash goes through to turn it into a house or a BMW. It is not so much that the model is flawed, but rather that the world has moved on.  I can’t remember the last time I actually had cash in my wallet, and whilst I accept that the anonymity of cash transactions might still serve an important purpose for those who supply illegal narcotics, it would pose a serious inconvenience to me if I were to decide to buy some drugs myself and my local dealer didn’t take contactless payment. Moreover, the fastest-growing area of criminal activity in the UK and much of the rest of the developed world is now fraud, in particular online fraud, vanishingly little of which generates street cash.

The deficiencies in the model become stark when you consider high-end money laundering. There has long been a regulatory focus on PEPs, or Politically Exposed Persons – ex-presidents, foreign government ministers, judges, senior public servants and the heads of national banks. The reason for a particular international interest in PEPs is not partisan politics; it is the fact that PEPs are perfectly placed to benefit from grand corruption and the extraction of funds from the institutions they control. To be clear, these are not likely to be payments in cash. Throw into the mix the current crop of sanctioned Russian oligarchs and supporters of President Putin, whose wealth is mostly derived from ex-Soviet owned energy and mining concerns or straightforward ministerial kleptocracy, and you begin to see how modern criminality strains the boundaries of the trusted old “Placement, Layering, Integration” model. Money embezzled from a government, a company or a national bank requires no initial Placement, and Integration is notably less challenging when offshore financial centres, tax havens and struggling economies worldwide are falling over themselves to encourage foreign investment and prepared to ignore the significant red flags which should be raised by eye-watering levels of inexplicable and obscure wealth.

There is arguably one very clear advantage to the Placement, Layering, Integration model of money laundering, beyond its nostalgic “Janet and John” simplicity as a means of introducing novices to the basic concepts of money laundering; the model places law enforcement emphasis squarely on hard cash and therefore on street crime, rather than on international organised crime and corruption and the role played by governments, banks, international corporate structures and sport in – to borrow a phrase from the Proceeds of Crime Act – “facilitating the acquisition, use and possession of criminal property”. For anyone tempted to write this observation off as conspiracy theory, it is interesting to observe that as of March 2023, the UK had frozen (not seized) £18 billion in assets linked to Russian individuals and entities as a result of sanctions imposed following the invasion of Ukraine. The Russian Central Bank’s own 2021 report disclosed that it held £26 billion of assets in the UK. None of these funds had been targeted by the UK government prior to February 2022, when intense international pressure and a threat to world stability unprecedented since 1939 rather forced their hand. The much-vaunted Unexplained Wealth Order, introduced in 2017 specifically to target large-scale wealth derived from crime and corruption, has generated a total of nine orders in four cases, one of which failed embarrassingly in court and none of which have yet led to the actual confiscation of any assets. The fact is that prosecutions for “money laundering” are comparatively common in the UK; prosecutions of politically exposed persons, ex-presidents, foreign governments officials or oligarchs availing themselves of the benefits of offshore banking and Londonistan property investments are vanishingly rare.

So what then is money laundering, if it is not Placement, Layering and Integration, if it is not “the concealment of the origins of illegally obtained money”? I rather think that the answer to that question, like money laundering itself, is hidden in plain view. Money laundering is the compromising of moral and legal principles in the face of substantial wealth; it is the perennial reluctance to challenge criminality, even in the face of clear evidence of its existence; it is the inertia created by long-established international institutions whose interests are better served by “facilitating” the movement of criminal property than by obstructing it.

It is the financial status quo.

Welcome to the new Dubai.