Mechanisms and Effects of Money Laundering: A Detailed Analysis

This essay provides a detailed analysis of the mechanisms and effects of money laundering, both at the national and international levels. It begins by defining money laundering as the process of camouflaging the illegal origin of unlawful earnings, often involving trillions of dollars generated from activities like drug trafficking, arms smuggling, and embezzlement. The paper explores various national-level mechanisms, including the use of retail and wholesale businesses, manufacturing units, raffle tickets, charity cinemas, casinos, property trading, the insurance sector, and the role of financial facilitators. It also discusses the use of precious ornaments, inheritance laws, and multiple banking accounts. At the international level, the essay outlines the three main stages: placement, layering, and integration, with a focus on techniques like smuggling, money orders, and the use of brokerage houses. The essay highlights the challenges in disentangling international money laundering due to the complexity of transactions aimed at concealing the source of illicit funds.

Mechanisms and Effects of Money Laundering 1
MECHANISMS AND EFFECTS OF MONEY LAUNDERING
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Mechanisms and Effects of Money Laundering 2
Mechanisms and Effects of Money Laundering
Introduction
Most criminal actions are aimed at making a profit either for a group or an individual that
engages in the practice. The process of these unlawful earnings to camouflage the illegal origin is
known as money laundering. The proceeds of these significant crimes run into a few trillion
dollars. Primarily, the process benefits the criminals as they enjoy the profit without exposing
their source. A large number of proceeds are obtained from the sale of illegal weaponry,
smuggling, drug trafficking, organized crime activities as well as prostitution rings. Moreover,
embezzlement, bribery and computer swindle schemes equally contribute to the acquisition of
massive profits that create a reason for legitimizing the wrongly obtained benefits through
money laundering. In the event of generating considerable gains employing criminal activities,
the group or an individual involved has to establish means of controlling the funds without
drawing attention to the principal business and the people involved as well.
Occasionally, the criminals tend to move the funds obtained from one place to another
where little or no attention is drawn. Also, the disguise of the source is often taken to reduce the
likelihood of attracting attention. Being an illegal activity, money laundering takes place far
outside the financial and economic statistics. During the preliminary stages of money laundering,
the launderer breaks up the vast amounts of money into less conspicuous sums into the financial
system like in the bank account. Otherwise, purchasing the likes of money orders and cheques
which are later collected and deposited in accounts at different locations. Criminal utilize these
illegal proceeds in starting justifiable enterprises whereby the families of the criminals earn

Mechanisms and Effects of Money Laundering 3
respect since the past becomes imprecise. The paper herein explains mechanisms of money
laundering with a critical analysis of direct impacts it causes on the legal businesses.
Mechanisms of Money Laundering
Money laundering is a dynamic process that one needs to keep shoulder to shoulder to
understand the current developments in the field since it continuously evolves. Mechanisms of
money laundering are herein divided into techniques at the national and international level.
Mechanisms at the National Level
i) Retail and Wholesale Businesses
Most of the fabricated sales mostly happen in businesses. For example, even with a
limited stock a business person could have fictitious sales in the books of accounts clearly
illustrated. This means that the extent of the fictitious sales reflects the amount of money
laundered which is ultimately considered as rightful proceeds of the firm. Convenient avenues
for laundering money include such places as fast food restaurants (Chatain, 2009: 45). . Such
retail businesses register huge earnings in disguise of rightfully acquired profits. Also, other
retail companies that engage in money laundering include retail businesses that deal with highly
pricey materials like sales of fashion garments that have brands of exaggerated prices. In such
instances, illegal money is drawn into the business and thus legitimized.
Furthermore, simulation of trading businesses is yet another possible means of money
laundering. An example is where an individual or a group set up a shop with modest although
genuine stock of items such as jewelry. Records would, therefore, be generated showing
distressed sales in the business categorized as counterfeit, although the sales production would

Mechanisms and Effects of Money Laundering 4
record sale of genuine items of jewelry (Cassella, 2004: 89). Thus, the profit obtained less the
price of the fake items would now be the laundered money.
ii) Manufacturing Units
Forged manufacturing entity could adequately be used in money laundering. These
entities would have billboards even buildings showing factories. Therefore, false manufacturing
centers project forged sales that allow laundering of money as exaggerated invoices are produced
for the items and products being made. Substantially, the extent to which invoices are inflated
corresponds to the extent of the money laundered into the business.
iii) Raffle Tickets
Lottery businesses have thus far become quite prominent in many countries, like in India.
Often the people involved in money laundering buy the raffle tickets from the authentic winners
sing the illegitimately acquired profits. The cash obtained by these criminals become legitimized
through encashment of the gambling tickets.
iv) Charity Cinemas
Organizing entertainment cinemas has been a successful technique often used in
laundering money. In the process of assembling the event, the sale of fraudulent vouchers is
carried out. It’s a sure method of money laundering since the individual buying the ticket is
under no compulsion to attend the cinema. Here, the extent to which money is laundered is
dependent on the fraudulent vouchers sold. Nonetheless, the type of funds acquired through this
technique of laundering money is taxed in some countries as entertainment levy.
v) Casinos

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Casinos are popular in many countries and have equally been successful and convenient
means of money laundering. The criminal takes their illegally acquired cash to the casinos
whereby a large number of chips and minimal gambling is practiced. Therefore, the launderer
encloses the chip and passes it off as a real winning. To achieve an effective laundering of
money especially in casinos, the money is cashed out in form cheques and withdrawn through
banks to legitimize the proceeds acquired. Usually, casino games have no close monitoring
procedures that would make money laundering impossible within the businesses
vi) Property
In trading of property, the sale of insignificant houses at exaggerated prices is common to
allow laundering of money. In spite of payment of registration fees on the property, criminal
make significant proceeds out of the successful laundering of cash. Cash is also disguised
through buying of the property using elevated money element. It, therefore, means that the
extent, to which the buying price is significant, is consequently the extent to which the
illegitimate cash is used in buying the property on sale. While here, commissions allowed when
dealing with relatives could fundamentally be of importance when legalizing wrongly acquired
cash.
vii) Insurance Sector
Often, the insurance firms are used by criminals to legitimize the illegally obtained
money. The sole function of the insurance company is to offer property as well as health cover.
However, criminals who acquire wealth by illegal means opt for expensive policies of insurance
after which premature encashment is done at a discount rate. Such money is allowed as

Mechanisms and Effects of Money Laundering 6
legitimate cash. Moreover, in so doing, the fake identities end up being handy, and at the end of
it, all these individuals have large amounts of money.
viii) Role of Facilitators
In the national level of money laundering, the financial experts play a significant role in
advising their clients. Indeed, laundering of cash takes place in banks among other sites such as
commodities markets. Other role players in advising the clients who happen to be money
launderers are lured into legitimizing illegal money at a certain bribery amount. Money acquired
through certain illicit means such as drugs trafficking and arms trafficking among others are
made legitimate whereby the involved parties in the process share some amount of money.
ix) Use of precious ornaments
Sale of certain expensive ornaments such as gold and diamond can be used to disguise
money illegally obtained by a group or an individual. For instance, the demand for gold is
relatively higher as compared to other items of sale. Also, India is prominent in cutting as well as
polishing the diamond. Just before measures were put across to control gold sales, a lot of it had
already been smuggled into the country which was approximately 600 tons which are an
equivalence of 7 billion US dollars. Currently, the sale of diamond attracts quite a substantial
amount of money and smuggling of gold even in India today. Many of these diamonds and gold
are redirected from sales overseas which end up being sold in black markets by criminals. The
earnings obtained from the illegal sales are used to purchasing diamond and gold from
recognized stores where the laundering of money happens in the process.

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x) Inheritance laws
Inheritance laws are allowed in some countries as pertains jewelry which has been
realized as a successful means of doing money laundering. Following the ruling, all females as
long as they are married could have. For example, in India jewelry is worth Rs. 500,000 which
allows an opportunity for money laundering by criminals (McCarthy, 2014: 324). A systematic
structure of families and groups that could even be a team of criminals the right amount of cash
could be laundered with no doubt.
xi) Several Banking Accounts
Several banking accounts with little money under the same owner or even under fictitious
names at different branches could sufficiently be used to reduce incidences of suspicion of
money laundered. The technique is quite useful as it is an unimaginative mechanism to reduce
attention and suspicion. Thus, cash is considered legitimate. Typically, the enormous amount of
money laundered could be split into smaller amounts that could be banked with a different
account with no cause of alarm to the public.
Mechanisms at the International Level
At the international level, it becomes hard to disentangle due to a complicated web of the
transaction in an attempt to expose the source of proceeds obtained from criminal activities.
Money laundering at the international level goes through three main stages of importance. They
are; Placement, Layering, and Integration. Once the laundered money has gone through the three
steps, then it transforms into justifiable money.

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i) Placement of Money
The introduction of the illegitimate money in the laundering circuit is an essential
practice although the operation is weak. Movement of cash is one fundamental method of
placing money in the financial sanctuary. Usually, money obtained in crime encompasses small
bills all the way to high denomination currency (McCarthy, 2014: 78). Still, in the form of cash,
money could be transported through airplanes or even employing speed boats. However, due to
vast amounts of money, problems emerge associated with bulkiness. Essentially, this is a
physical placement stage which is very vital in the entire process of money laundering at the
international level. From the physical placement as mentioned, the criminal tends to become
smarter, and they become quite sure that the illegally acquired cash could readily be exchanged
for valuable currencies and safely such as in the form of cheques, company pounds as well as
inequity shares. It, therefore, becomes easy to smuggle the money out of the country has bulk has
been reduced. Today, the countries that have legislation about money laundering initiated the
start of cash reporting requirements by the monetary instruments as well as cash.
Smurfing enables the availability of drafts, cheques as well as the bounds making the
illegally acquired amount in the country in some ways. Smuggling is one and the most
significant means of placing the money for laundering at the international level. Money orders
are also usable by the criminals to transport the money from one country to another. For instance,
the United States is able to move a maximum of $ 3,000 (Mugarura, 2013: 345). In addition to
the above-mentioned techniques of laundering money at the international level, the brokerage
house that deals with securities and foreign exchange offer a convenient channel for moving
money obtained through illegal means out of the country circle. The brokerage houses manage to

Mechanisms and Effects of Money Laundering 9
initiate the entry of the laundered money into the financial havens such as Singapore and Hong
Kong.
Expensive art objects are also bought by launderers using the illicit money to introduce
their cash in the international circuit of money laundering. These precious items purchased by
the criminal are easily smuggled away from the country and traded outside the home country.
Usually, the earnings acquired in the business are availed from a convenient financial haven to
successfully go through the cycle of money laundering and appearing once more now as rightful
money. The correspondent Banking Channels have helped to move money from one country to
another. For a successful operation with correspondent banking channels, one has to have a clear
understanding of the system operations. Since opening branches in every country are expensive
and hard to manage, most banks in the world opt to enter into a correspondent relation with
different banks that have offices in other countries (De Sanctis, 2013: 45). This makes the
laundered money to quickly be moved from a nation to another. To successfully eliminate the
physical movement of the funds, underground as well as parallel systems of banking are used.
ii) Layering of Money
Layering is otherwise referred to as disguising of cash. In order to disguise the laundered
cash, shell companies, shell banks as well as offshore trust just to mention a few entities working
jointly with the foreign jurisdictions that offer the brand services allow money to be passed
through them despite the legislative laws govern the offshore influence. In the process of
layering money, cash could effectively be moved through businesses that are genuine as well as
banks in global finance. Electronic movement of money is universal in the process of layering
money which takes place within a short time.

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iii) Integration of money
This is the legitimization stage of the money which is the ultimate objective in the entire
laundering process. The process of integrating wealth makes use of similar modus operandi just
like the one for laying cash in the previous stage.
Once the money has been incorporated, it becomes legitimate. Money could, therefore, be sent
back home as legal earnings (Harvey, 2005: 129). In the process of integration from coming
from these justifiable banks accounts or even enterprises need not come to the mother country as
stated earlier thus the money could be used in other countries in doing either illegal or lawful
activities. Whereas going through the integration stage of laundering money at the international
level, the unlawful money could end up in the dollar markets that allow decent amounts of
interest rates since tracking down has now become difficult (Turner, 2011: 377). For instance,
Euro-dollar markets are quite huge and often allow the flow of several trillions of money in
terms of dollars.
Harmful Effects of Money Laundering
A research by Unger et al. concerning money laundering in the literature indicated that
several adverse effects of money laundering dividing them into long and short-term effects.
Essentially, laundering of money intimidates the national governments and worse of all, the
international relationships due to the corruption that exists between the officials and the legal
systems. Also, the process threatens the free enterprise as well as the financial stability since it
crowds the private sector (Azevedo et al. 2006: 68).. Among the challenges brought by the
criminal activity of money laundering in the entire globe include; terrorism, possible threats to
the banking systems, threats to political and economic stability because it significantly interferes

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with the macro-economic performance as well as the financial behavior. Observable fact of
money laundering amongst several other crimes associated with finance significantly infiltrates
the political as well as economic structures especially in the third world countries thus it results
to the digression of economy and instability in the political sector (Durrieu, 2013: 67).
A Case Study of a Company Affected by Effects of Money Laundering
The practice of money laundering is widespread. However, some money laundering cases
have been realized because of the severity of the activity or even the amount of cash involved in
the criminal exercise. Indeed, most of the prominent examples of the crime have involved
comprehensive worldwide transactions. A case study of a London –based firm, Hong Kong
Shanghai Banking Corporation (HSBC) Holding is herein detailed in a discussion. The company
ended up paying $2 billion as penalty having participated laundering money for drugs
trafficking, terror campaigns, and several other criminal activities by certain groups in Iran. The
operation of laundering took sometime before it was detected in 2012.
Being one among the largest financial institutions in the globe, HSBC has over $2.6
trillion assets, 90 million customers and more than 300,000 employees (Cox, 2010: 234). In
2011 the company managed to make $22 billion in profits. Currently, the company has
operations in more than eighty countries. Also, the company has hundreds of affiliates in the
world. The company’s principal subsidiary is based in US known as HSBC Bank in the USA that
operates more than 470 branches in the United States. The company owns a national Bank
charter regulated by the US office. In 2012, the company agreed to pay close to $ 2 billion

Mechanisms and Effects of Money Laundering 12
penalties to regulators that required them to enter into an overdue trial agreement since the
company had failed to control money laundering processes meeting the requirements (Alldridge,
2003: 98). Being a large financial institution, its failure would jeopardize the entire global
financial system, and it is the primary reason the regulators took action on the discovery of
criminal acts behind the company. These indiscretions came about as a result of Mexico’s
involvement that offered laundering services that were associated with drugs trafficking cartels
(Boon, 2010: 456). Such included movement of a lot of money from the bank’s Mexican entity
to the United States. The company also made transactions with other countries such as Iran
whereby, the company got rid of references in aid to cover them up.
The company was accused of offering banking services that entailed fund transfers as
well as the exchange of currencies. These operations were the primary sources of prohibited
flows. The practices violated the Bank Secrecy Act as well as Trading with the Enemy statute
among others (Webb, 2013: 367). Besides the penalty payment, the firm hired a chief legal
officer to enhance the internal controls that involve detailed procedures that need to be followed
to the latter along with transparency.
Conclusion
Money laundering is an illegal practice that adversely affects businesses not just at the
national but also international level. Therefore, mechanisms of money laundering apply both at
national as well as international level causing significant impacts of economic and political
aspects of life. When detected, the process significantly interferes with the relationship between
the financial officials involved and the legal system. The criminal act of laundering money
encourages vices like terrorism, drug trafficking and significantly threatens the banking and