Money Laundering: 25 Common Methods and How Law Enforcement Tracks Them

11 min readSep 17, 2024

Introduction

Money laundering is the process of disguising illegally obtained funds to make them appear legitimate. It’s a global problem that fuels organized crime, terrorism, and corruption. By understanding how money laundering works, law enforcement agencies and financial institutions can better combat it. This blog explores 25 common methods of money laundering, their mechanics, risks, and the countermeasures law enforcement uses to track them.

What is Money Laundering?

Money laundering is the act of concealing the origins of money obtained from illegal activities. It often involves complex financial maneuvers that make the dirty money look clean.

Three Stages of Money Laundering:

Placement: Introducing illicit funds into the financial system.
Layering: Obscuring the source of the funds through complex transactions.
Integration: Reintroducing the laundered money back into the legitimate economy.

1. Cash-Based Businesses (Front Companies)

Money Flow (Step-by-Step)

Step 1: Placement: Criminal earns illegal cash (e.g., drug sales) and deposits it into the business’s daily cash income (like a restaurant).
Step 2: Layering: The company records higher-than-actual revenues by inflating receipts.
Step 3: Integration: Profits from the business are now mixed with illicit funds, appearing as legitimate income.

Real-Life Example:

Al Capone used laundromats and restaurants to launder illegal alcohol money during Prohibition.

Countermeasures:

Increased audit frequency for small businesses showing high cash flow.

How the Fed Tracks It:

Monitoring discrepancies between average income for similar businesses.
Random undercover operations to check real-time foot traffic versus reported income.

2. Shell Companies & Corporate Structures

Money Flow (Step-by-Step)

Step 1: Placement: A criminal establishes a shell company in a jurisdiction with loose regulatory oversight.
Step 2: Layering: Illicit funds are transferred through multiple corporate bank accounts under the guise of business operations (e.g., consulting or import-export).
Step 3: Integration: Funds are later withdrawn, appearing as legitimate business earnings.

Real-Life Example:

The Panama Papers revealed many wealthy individuals using shell companies to hide assets.

Countermeasures:

Enhanced due diligence on beneficial ownership by financial institutions.

How the Fed Tracks It:

Use of Suspicious Activity Reports (SARs) filed by banks.
Cross-border cooperation to track corporate ownership structures.

3. Trade-Based Money Laundering (TBML)

Money Flow (Step-by-Step)

Step 1: Placement: Over-invoicing or under-invoicing for goods traded internationally (e.g., importing electronics).
Step 2: Layering: The difference between the true value and the invoiced value conceals illegal profits.
Step 3: Integration: After selling or transferring the goods, the money enters the legitimate economy.

Real-Life Example:

The Black Market Peso Exchange involves laundering drug money through fake trade invoices between the U.S. and Latin America.

Countermeasures:

Automated systems to cross-check invoice values with international market rates.

How the Fed Tracks It:

Customs and Border Protection (CBP) compares declared values of imports with their market values.

4. Real Estate Investment

Money Flow (Step-by-Step)

Step 1: Placement: Purchase of real estate with illicit funds (often paid in cash).
Step 2: Layering: The property is resold several times, sometimes to family members or through shell companies.
Step 3: Integration: After several transactions, the final sale appears as legitimate earnings.

Real-Life Example:

Russian oligarchs have been known to launder money through luxury real estate in London and New York.

Countermeasures:

Beneficial ownership transparency for real estate transactions.

How the Fed Tracks It:

Monitoring cash purchases in high-value real estate markets.
Title deed tracking through multiple layers of ownership.

5. Offshore Accounts and Tax Havens

Money Flow (Step-by-Step)

Step 1: Placement: Criminals transfer funds to accounts in countries with bank secrecy laws (e.g., Cayman Islands).
Step 2: Layering: Money moves between various offshore accounts, making the original source difficult to trace.
Step 3: Integration: Funds are transferred back to the criminal’s home country under the guise of legitimate foreign investments or dividends.

Real-Life Example:

Swiss banking secrecy laws were used to hide billions of dollars from tax authorities.

Countermeasures:

Global reporting standards such as the Common Reporting Standard (CRS) and FATCA (Foreign Account Tax Compliance Act).

How the Fed Tracks It:

International treaties and data-sharing between financial authorities.

6. Cryptocurrency Laundering (Bitcoin & Altcoins)

Money Flow (Step-by-Step)

Step 1: Placement: Criminal converts cash into cryptocurrency through exchanges or direct peer-to-peer transactions.
Step 2: Layering: Coins are transferred across multiple wallets, using mixing services to obfuscate the trail.
Step 3: Integration: Crypto is converted back into fiat currency or used to purchase goods and services.

Real-Life Example:

The FBI traced Silk Road transactions, leading to the arrest of its founder through tracking Bitcoin transactions.

Countermeasures:

KYC (Know Your Customer) regulations for cryptocurrency exchanges.

How the Fed Tracks It:

Blockchain analysis tools that trace the movement of cryptocurrency across wallets.

7. Smurfing (Structuring Deposits)

Money Flow (Step-by-Step)

Step 1: Placement: Criminal breaks large sums of money into smaller deposits under the reporting threshold (typically $10,000 in the U.S.).
Step 2: Layering: These small deposits are spread across different banks or accounts.
Step 3: Integration: Money is withdrawn or transferred once it appears as legitimate bank balances.

Real-Life Example:

Drug cartels in Mexico and the U.S. used smurfing to place drug money into legitimate banks.

Countermeasures:

Automated transaction monitoring that flags structured deposits.

How the Fed Tracks It:

Suspicious Activity Reports (SARs) flagging multiple small transactions below reporting thresholds.

8. False Invoicing & Fake Loans

Money Flow (Step-by-Step)

Step 1: Placement: Criminal generates fake invoices for nonexistent goods or services.
Step 2: Layering: Money is transferred as “payment” for the fake invoice or loan.
Step 3: Integration: After multiple rounds of transactions, the money is integrated into legitimate business accounts.

Real-Life Example:

In Operation Phantom, U.S. authorities uncovered a network of businesses creating fake invoices to launder drug money.

Countermeasures:

Random audits of companies with unusually large loans or invoices.

How the Fed Tracks It:

Red flagging companies with high invoice volume but little business activity.

9. Gambling and Casino Laundering

Money Flow (Step-by-Step)

Step 1: Placement: Criminal buys large amounts of chips using illicit funds.
Step 2: Layering: They gamble a small amount and then cash out, receiving a receipt for “legitimate” winnings.
Step 3: Integration: The money is now “clean” through casino receipts and can be deposited into a bank.

Real-Life Example:

The Crown Casino scandal in Australia where organized crime figures laundered money through high-stakes gambling.

Countermeasures:

Monitoring large cash buy-ins at casinos and reporting to FinCEN.

How the Fed Tracks It:

Tracking gambling patterns of high-stakes players and cash outs without significant play.

10. High-Value Assets (Art, Jewelry, and Cars)

Money Flow (Step-by-Step)

Step 1: Placement: Criminal purchases expensive art, cars, or jewelry using illicit funds.
Step 2: Layering: Items are moved or sold through intermediaries, increasing the value or changing ownership multiple times.
Step 3: Integration: After several transactions, the sale proceeds are now considered legitimate.

Real-Life Example:

The $70 million art fraud case involving forged art sold to collectors, laundering the proceeds.

Countermeasures:

KYC measures for high-value goods dealers and auction houses.

How the Fed Tracks It:

Cross-referencing databases of luxury asset transactions for anomalies.

11. Hawala Networks

Money Flow (Step-by-Step)

Step 1: Placement: Criminal gives cash to a hawala broker.
Step 2: Layering: The hawala network transfers the money across borders through informal methods.
Step 3: Integration: The recipient collects the money from another hawala broker, bypassing formal banking systems.

Real-Life Example:

Terrorist financing often uses hawala systems to move money globally without formal banking involvement.

Countermeasures:

Outreach and education in communities that rely on hawala for legitimate transfers.

How the Fed Tracks It:

Monitoring large informal cash transfers and linking them to criminal enterprises.

12. Money Mules

Money Flow (Step-by-Step)

Step 1: Placement: Criminal transfers funds into a money mule’s personal account.
Step 2: Layering: The mule withdraws or wires the money to another account under the criminal’s control.
Step 3: Integration: The funds appear clean when withdrawn by the mule or after layering through multiple accounts.

Real-Life Example:

Phishing and cybercrime scams often use money mules to transfer stolen funds.

Countermeasures:

Public awareness campaigns to prevent recruitment of money mules.

How the Fed Tracks It:

Tracking patterns of small international transfers linked to larger networks.

13. Charities and Non-Profit Organizations

Money Flow (Step-by-Step)

Step 1: Placement: Criminals donate illicit funds to a charitable organization.
Step 2: Layering: The charity funnels the money through various projects and accounts, concealing the origins.
Step 3: Integration: The money is later withdrawn or redirected as legitimate charitable expenses.

Real-Life Example:

Charities have been used to funnel money for terrorism financing, such as Al Qaeda.

Countermeasures:

Stricter audits and reporting for large donations to charities.

How the Fed Tracks It:

Monitoring cross-border charity transactions linked to known extremist organizations.

14. Tax Evasion Schemes

Money Flow (Step-by-Step)

Step 1: Placement: Criminal underreports income or inflates expenses, reducing taxable income.
Step 2: Layering: Illicit money is hidden through false deductions or shell company transactions.
Step 3: Integration: The laundered money appears as legitimate income, taxed at a lower rate.

Real-Life Example:

Paul Manafort was convicted of tax evasion through offshore accounts.

Countermeasures:

Random audits by tax authorities targeting high-risk taxpayers.

How the Fed Tracks It:

Cross-referencing tax returns with known lifestyle indicators (e.g., luxury purchases).

15. Microtransactions and E-Commerce

Money Flow (Step-by-Step)

Step 1: Placement: Criminals set up online storefronts to process thousands of small, fake transactions.
Step 2: Layering: Money is laundered through automated microtransactions, making it harder to detect large sums.
Step 3: Integration: Funds are collected through a payment processor and appear as legitimate e-commerce earnings.

Real-Life Example:

Click fraud schemes often involve laundering ad revenue through fake clicks and microtransactions.

Countermeasures:

Enhanced monitoring of unusual microtransaction patterns.

How the Fed Tracks It:

Automated analysis tools that flag unusual volumes of microtransactions.

16. Layering Through Foreign Exchange (Forex Laundering)

Money Flow (Step-by-Step)

Step 1: Placement: Criminals use illicit funds to purchase foreign currency.
Step 2: Layering: Money is exchanged through multiple Forex accounts, obscuring the trail.
Step 3: Integration: Clean funds are withdrawn after profitable currency exchanges.

Real-Life Example:

Drug cartels launder money through money exchange houses in Latin America.

Countermeasures:

Increased scrutiny on Forex transactions from high-risk countries.

How the Fed Tracks It:

Monitoring Forex accounts and linking them to suspicious cash movements.

17. Crowdfunding & Fake Startups

Money Flow (Step-by-Step)

Step 1: Placement: Criminals create a fake startup or crowdfunding campaign.
Step 2: Layering: Illicit funds are mixed with legitimate donations or investments.
Step 3: Integration: Funds are withdrawn as “business capital” or “donor contributions.”

Real-Life Example:

GoFundMe scams have been used to funnel illicit money under the guise of charitable causes.

Countermeasures:

Verification of legitimacy for high-value crowdfunding campaigns.

How the Fed Tracks It:

Monitoring financial activity of startups and campaigns, especially if they suddenly attract large sums.

18. Prepaid Cards and Gift Cards

Money Flow (Step-by-Step)

Step 1: Placement: Criminals buy large amounts of prepaid debit cards or gift cards using illicit funds.
Step 2: Layering: Cards are used or resold, and the money is withdrawn through various small transactions.
Step 3: Integration: Funds reappear in legitimate accounts after being spent or exchanged.

Real-Life Example:

Drug traffickers use prepaid cards to move money across borders without triggering suspicion.

Countermeasures:

Limits on prepaid card purchases and increased reporting for large sums.

How the Fed Tracks It:

Tracking bulk purchases of prepaid cards and unusual spending patterns.

19. Personal Loans to Friends and Family

Money Flow (Step-by-Step)

Step 1: Placement: Criminal provides illicit funds as a “loan” to a friend or relative.
Step 2: Layering: The recipient returns the money later, possibly in a different currency or through a third-party bank.
Step 3: Integration: The money now appears as a returned loan, with no link to illegal activity.

Real-Life Example:

Drug dealers use this method to distance themselves from illegal profits.

Countermeasures:

Scrutinizing personal loans that don’t follow normal banking procedures.

How the Fed Tracks It:

Monitoring loan agreements and repayments involving large sums from known suspects.

20. Buying & Selling Fake Goods

Money Flow (Step-by-Step)

Step 1: Placement: Criminals set up online shops to sell counterfeit goods (e.g., fake luxury items).
Step 2: Layering: Illicit funds are used to “purchase” the fake goods, and the money is circulated through various e-commerce platforms.
Step 3: Integration: Profits from these fake sales are now laundered into legitimate business accounts.

Real-Life Example:

Counterfeit clothing and accessories are frequently sold to launder money.

Countermeasures:

E-commerce platforms are increasingly using AI to detect and remove counterfeit listings.

How the Fed Tracks It:

Monitoring payment flows to sites known for counterfeit goods.

21. Student Loans & Scholarships

Money Flow (Step-by-Step)

Step 1: Placement: Criminals use illicit funds to provide scholarships or loans to students.
Step 2: Layering: Money is cycled through educational institutions, appearing as legitimate tuition payments or grants.
Step 3: Integration: Once funds are withdrawn or reimbursed, they appear clean.

Real-Life Example:

Fraudulent scholarship programs have been used to launder money through educational institutions.

Countermeasures:

Auditing student financial aid programs for unusual patterns.

How the Fed Tracks It:

Cross-referencing scholarship programs with known financial criminal networks.

22. False Insurance Claims

Money Flow (Step-by-Step)

Step 1: Placement: Criminals file false insurance claims using illicit funds.
Step 2: Layering: The insurance payout is moved through various accounts.
Step 3: Integration: The money is now clean as an insurance settlement.

Real-Life Example:

Arson-for-insurance-fraud schemes involve criminals setting fires to claim insurance payouts.

Countermeasures:

Random inspections and verifications of large insurance claims.

How the Fed Tracks It:

Cross-referencing claim histories with suspected criminal activity.

23. Peer-to-Peer Lending Platforms

Money Flow (Step-by-Step)

Step 1: Placement: Criminal invests illicit funds in peer-to-peer (P2P) lending platforms.
Step 2: Layering: Loans are given to multiple borrowers, making the origin of the money hard to trace.
Step 3: Integration: When the loans are repaid, the money appears as legitimate returns on investment.

Real-Life Example:

P2P platforms like LendingClub have been scrutinized for enabling money laundering.

Countermeasures:

Increased KYC measures on P2P lending platforms.

How the Fed Tracks It:

Monitoring loan flows on P2P platforms for suspicious patterns.

24. Precious Metals and Rare Minerals

Money Flow (Step-by-Step)

Step 1: Placement: Criminals purchase gold, diamonds, or other precious metals with illicit funds.
Step 2: Layering: The metals are sold or transported internationally, making it harder to track ownership.
Step 3: Integration: Proceeds from the sale are laundered through banks or legitimate businesses.

Real-Life Example:

Conflict diamonds and gold smuggling are common in Africa to finance criminal enterprises.

Countermeasures:

Enhanced tracking of gold and diamonds through international certification programs (e.g., Kimberly Process for diamonds).

How the Fed Tracks It:

Monitoring shipments of precious metals and matching them to declared trade values.

25. Social Media Fundraising

Money Flow (Step-by-Step)

Step 1: Placement: Criminals use fake social media campaigns to raise money for charitable causes.
Step 2: Layering: Donations are funneled through multiple accounts, obscuring the original source of the funds.
Step 3: Integration: The final amount is withdrawn and laundered as “legitimate” charity funds.

Real-Life Example:

Scams on platforms like Facebook have used fake humanitarian crises to launder money.

Countermeasures:

Verifying charitable causes on social media before they’re allowed to fundraise.

How the Fed Tracks It:

Monitoring donations linked to high-risk charities or organizations flagged for financial crimes.

Conclusion

The Ongoing Fight Against Money Laundering: This blog outlined 25 common methods of laundering money and discussed how each is tracked by federal authorities like the FBI, IRS, FinCEN, and other international agencies.
The Future of Laundering: As technologies evolve (e.g., AI, blockchain), so will laundering methods. Increased transparency, global cooperation, and cutting-edge forensic accounting techniques will remain essential to combat this ever-evolving crime.