Money laundering , frankly speaking, is an age-old process to disguise the illegal origin or criminal nature of money. Such as money gotten from smuggling, arms sales, organized crime, trafficking in humans, prostitution rings, drug trafficking, embezzlement, bribery, insider trading and all technical fraud. These ill-gotten gains are moved, hopefully, untraceable by investing them in legitimate businesses, bank deposits or securities. But, mostly, the reason for laundering is tax evasion, like the VAT carousel scheme in the EU, which moved goods among businesses in other jurisdictions and capitalized on the various VAT rates. Tax fraud laundering schemes has cost the US over 10 to 20 billion dollars every single year. Both criminal and tax aversions in money laundering work well in obscuring the source.
Banking systems are an important part for money laundering to take place. Huge amounts of cash are spread out in numerous accounts, like financial off-shore centers , tax havens and free economic zones, then converted to money orders or bonds. Sometimes they are even placed in charities and trusts, then transferred to other locations, like a fake payment for ‘goods and services’ against bogus or inflated invoices issued by holding companies owned by accountants, lawyers on behalf of the unnamed beneficiaries. These transferred funds are then re-assembled and shipped back to the point of origin with a clean identity. Hence, laundered money. The laundered funds will be invested in legitimate businesses. Very simple really and very effective. There is no paper trail or way too much paper trail and the accounts are liquid making it virtually impossible to trace.
The problem laundered money is due to the very nature of being non-productive and idle . But, the injection of laundered money into any economy transforms them into a productive source of working capital, but this is bad, because it corrupts banks, government officials, it contaminated legal sectors of the economy, pushes out legitimate and foreign capital, deflates and un-stabilizes the control of money and enhances a cross-the-border capital movement, which increases the volatility of the exchange rate. There is a multilateral, coordinated effort to require and to exchange information, uniform laws and enhance extra-territorial legal powers to counter the international dimensions of money laundering. Due to the domestic political and economical concerns, may countries have signed up in an effort to combat this insidious practice.