Everyone has heard of money laundering. It features prominently in TV shows like “Breaking Bad” and “Narcos” and just about every Mafia movie since the 1980’s. Despite this, few people know how money laundering works. A perfect example comes from the cinematic classic “Office Space”, where after executing a skimming scheme that is years ahead of its time, the cast looks up the definition in the dictionary and come away even more confused than before.

While understanding how money laundering works may be a mystery, what it does is well-known. Criminals, drug dealers, and terrorists want to spend their hard-earned money like everyone else. Therefore, they launder the money to make it appear legitimate. The process is complicated, but when drilled down to the basics, it consists of three steps that anyone can follow.


Step 1: Placement

Placement is what it sounds like, literally moving the funds into the financial system. This step is the hardest, where law enforcement catches most criminals in the act. Depositing the cash into a bank is the most obvious choice for putting the funds in the system. Banks are safe and offer a wide variety of ways to transfer and convert funds, which helps in masking the origin down the line.

Despite the financial security, banks come with a definite downside. The IRS requires all banks to monitor cash transactions over $10,000.00 with currency transaction reports. Trying to get around this requirement by making multiple small deposits or going to different branches will trigger internal alerts, and the bank will file a Suspicious Activity Report, where analysts document the activity, sending the information straight to the federal government. After the attacks on September 11, 2001, the federal government forcibly deputized the U.S. banks to identify criminal activity in the financial system as part of the Patriot Act. Failure to comply resulted in massive fines exceeding $600 million, so the banks are hyper-vigilant to look for possible crime.

Investment brokers and life insurance agents follow the same reporting requirements, so a great place to deposit illegal cash is real estate. However, criminals first need to find a builder who is willing to accept a sizeable down payment in cash, who will not ask too many questions about where it came from. On the downside, the U.S. Treasury Department issued Geographic Targeting Orders requiring realtors and builders to provide information on cash payments in high financial crime areas like New York City, Los Angeles, and even San Antonio.

For computer savvy criminals, cryptocurrency offers a new avenue for placement. They are semi-anonymous and unregulated. Identifying ownership is a strenuous process and sold at specific ATM’s in some large cities. On the other hand, the price of crypto-currencies fluctuates wildly, so $100,000.00 on plummet to $60,000.00 shortly. The security provided for cryptocurrencies is also lacking. Hackers wiped out major cryptocurrency exchanges such as Mt Gox, in 2014, leaving a $460 million hole that no law enforcement agency wanted to investigate.