How Do You Wash Money? Common Methods Explained

Money laundering is a significant issue affecting global economies and financial systems. It involves concealing the origins of illegally obtained money to make it appear legitimate, undermining economic stability and facilitating further criminal activities.

Understanding how money laundering occurs is critical in identifying and combating these illegal practices.

Structuring or Smurfing

Structuring, or smurfing, is a money laundering technique that avoids detection by financial institutions and regulatory bodies. It involves breaking large sums of illicit money into smaller transactions deposited into various bank accounts, often just below the reporting threshold set by financial institutions. In the United States, the Bank Secrecy Act requires transactions over $10,000 to be reported to the Financial Crimes Enforcement Network (FinCEN). By keeping deposits under this limit, launderers aim to bypass these reports.

This method extends beyond cash deposits and can include purchasing monetary instruments like money orders or cashier’s checks, which are then integrated into the financial system. Launderers exploit automated monitoring systems, which typically flag only transactions exceeding specific thresholds, by staying under those limits.

To counter structuring, financial institutions have adopted advanced monitoring systems to detect suspicious patterns, even when individual transactions remain below reporting thresholds. These systems analyze transaction behaviors over time, identifying frequent deposits just under the threshold or spread across multiple branches.

Shell Entities

Shell entities—corporations, trusts, or limited liability companies (LLCs)—exist solely on paper, with no physical operations, employees, or substantial assets. Their purpose is to obscure ownership and facilitate the movement of illicit funds. By creating a network of shell entities, launderers can hide the origin and destination of dirty money, complicating efforts to trace it back to its illegal source.

These entities are often established in jurisdictions with weak regulatory oversight, known as tax havens, which offer minimal reporting requirements and strong confidentiality protections. Locations like the British Virgin Islands and Panama have been implicated in scandals for enabling the creation of such companies. These jurisdictions provide a veil of secrecy, hindering international efforts to combat financial crimes.

Authorities worldwide are addressing this issue. The Financial Action Task Force (FATF) has issued guidelines urging countries to increase transparency around beneficial ownership, requiring entities to disclose the identities of individuals who ultimately control them. In the United States, the Corporate Transparency Act mandates that certain companies report their beneficial owners to FinCEN, aiming to limit the misuse of shell entities for money laundering.

Trade-Based Laundering

Trade-based money laundering (TBML) exploits international trade to disguise illicit financial flows. This method involves manipulating trade transactions, such as misrepresenting the price, quantity, or quality of goods and services on invoices. For example, over-invoicing enables excess funds to be transferred, while under-invoicing facilitates moving illicit money out of a country by undervaluing exports.

The complexity of global supply chains and the vast scale of international trade make TBML difficult to detect. Launderers exploit discrepancies in trade data between exporting and importing countries and take advantage of varying customs regulations. Free trade zones, which often have looser regulatory oversight, can further obscure illicit activities.

To combat TBML, governments and international organizations are enhancing trade transparency and improving coordination between customs and financial intelligence units. Advanced data analytics and machine learning are increasingly used to identify anomalies in trade patterns that may indicate laundering. For instance, the U.S. Customs and Border Protection agency employs algorithms to scrutinize trade data and flag discrepancies for further investigation.

Real Estate

Real estate is a favored avenue for money laundering due to its high-value transactions and potential for price fluctuations, which can obscure illicit funds. Criminals purchase properties at inflated prices to integrate illegal proceeds into the legitimate economy. Real estate also offers the added benefit of potential capital appreciation.

A major challenge in addressing real estate-based money laundering is the sector’s fragmented regulatory framework. Unlike financial institutions, real estate brokers, agents, and developers often face less stringent anti-money laundering (AML) requirements. This gap is especially evident in luxury real estate markets, where high-value properties can be purchased with limited oversight. The Financial Action Task Force (FATF) has called for extending AML obligations to real estate professionals, requiring due diligence and the reporting of suspicious transactions.

Casino and Gambling

Casinos and gambling establishments are vulnerable to money laundering due to their cash-heavy operations and, in some jurisdictions, limited oversight. Launderers buy chips with illicit money, conduct minimal gambling, and cash out the chips as if the funds were legitimate winnings, creating a paper trail that appears lawful.

In jurisdictions with weaker regulatory frameworks, casinos may lack robust anti-money laundering measures such as customer due diligence and transaction monitoring. Even in countries with stricter regulations, enforcement can be inconsistent. The Financial Crimes Enforcement Network (FinCEN) has flagged the gambling sector as high-risk, urging casinos to implement compliance programs that include suspicious activity reporting (SAR) and enhanced due diligence for high-value transactions.

Online gambling platforms add complexity, often operating across multiple jurisdictions and enabling anonymous transactions through prepaid cards, cryptocurrencies, or other untraceable methods. This anonymity complicates regulatory oversight. To address such risks, international bodies like the Financial Action Task Force (FATF) recommend stricter oversight of both physical and digital gambling operations, including mandatory reporting requirements for online platforms.

Cryptocurrencies

Cryptocurrencies present new challenges in combating money laundering. Digital currencies like Bitcoin, Ethereum, and Monero offer decentralized and often pseudonymous means of transferring value, making them attractive for obscuring illicit funds. Cryptocurrency transactions occur on blockchain networks, which provide transparency but allow users to operate without revealing their identities.

Launderers use techniques like “mixers” or “tumblers,” which blend cryptocurrencies from multiple users to obscure transaction histories. Privacy-focused cryptocurrencies like Monero and Zcash further complicate tracking by concealing transaction details, such as sender and recipient information. These tools make it difficult for law enforcement to trace funds, even with advanced blockchain analytics.

Regulatory responses are evolving. The European Union’s Fifth Anti-Money Laundering Directive (5AMLD) extends AML obligations to cryptocurrency exchanges and wallet providers, requiring customer due diligence and the reporting of suspicious transactions. In the United States, FinCEN holds cryptocurrency exchanges to the same AML standards as traditional financial institutions. Despite these measures, the decentralized and borderless nature of cryptocurrencies continues to challenge enforcement, especially in jurisdictions with limited regulation.