Demystifying Tranche 2: A beginner’s guide to money laundering

Tranche 2 is coming, meaning that lawyers, accountants, real estate agents and other ‘gatekeeper’ professions in Australia will need to introduce Anti Money Laundering (AML) procedures in the next 12-24 months. In this piece we go back to basics, explaining what money laundering is and how it’s done.

In the shadows of our society, a hidden practice exists that transforms illicit funds into seemingly legitimate wealth. It's called money laundering, and understanding this process is crucial to unveil the deceptive tricks employed by criminals. Let's explore the world of money laundering, demystifying its complexities and translating them into simple terms.

But first, some key concepts.

Placement

The introduction of cash or other assets derived from criminal activity into the financial system. Instead of directly depositing or using the money, the launderer seeks to place it in legitimate financial institutions or businesses. The purpose is to avoid suspicion and make it challenging to trace the funds back to their illegal source.

Layering

A process of creating complex transactions to obscure the origin and trail of illicit funds with the intention of creating a maze of transactions, and make it extremely challenging to identify the initial source of funds.

Integration / Extraction

Here, the ‘clean’ or disguised criminal proceeds are reintroduced to the legitimate economy by the money launderer with a legitimate appearance given to the criminal proceeds. This can involve purchasing real estate, luxury goods, businesses, or investing in legal ventures.

Note that in real-life situations, these stages may differ; it may not involve all three stages, or some stages could be combined or repeated several times.

A simple example: hiding the origins of wealth

Imagine a scenario from our childhood days. Picture yourself as the school bully, collecting money off of your schoolmates through intimidation and fear. Business is good, but there's a problem: how can you spend this money without arousing suspicion?

If your parents notice your newfound wealth without a reasonable explanation, questions are sure to follow. Enter the need for a clever disguise to hide the true source of income.

Concealing the trail

To conceal the true source of your income, you devise a cunning plan; the “lemonade stand” plan:

• By selling lemonade after school, you create a legitimate cover for your dubious “earnings”.
• Meanwhile, during school hours, you continue to coerce and intimidate classmates into surrendering their lunch money. 
• You stash all the collected funds (both lemonade and bully money) in a piggy bank, making it appear as if your lemonade stand is incredibly successful. 
• The more lunch money you extort, the more imaginary cups of lemonade you add to your books, ensuring your profit margin appears balanced.

However, if your parents investigate further and examine the actual quantities of lemons, water, sugar, and cups you're utilising, they would notice an obvious discrepancy. To eradicate any traces of deceit, you start consuming the additional 20 cups of lemonade you falsely added to your records.

With this system in place, you begin turning a healthy profit, all while keeping your illegitimate source of income hidden from prying eyes. To boost your profit margins further, you enlist a friend as a lemonade stand consultant, paying them large sums of money for their "services".

Layering the deception

Building upon your successful lemonade stand, you decide to expand your business operations. You create new ventures that supply your lemonade stand, such as cup manufacturers and lemon growers. Every invoice you pay to these companies ultimately finds its way back into your own pocket. This additional layer conceals the true origin of your income, making it harder to trace.

But why stop there? You establish a delivery service to transport your goods and even a security firm to protect your stall at night. You even open them via offshore entities to really put the authorities off the trail. To the casual observer, these seemingly unrelated companies, with offshore holding entities and overseas branches, appear completely legitimate and unrelated.

Shielding the paper trail

Despite how legitimate all these businesses look, beneath the surface, you've cleverly constructed an intricate web of interwoven businesses, shielded by attorney-client privilege and different jurisdictions. You’ve set up businesses in Luxembourg, Switzerland, and the Cayman Islands. These measures ensure that no one can uncover the beneficial ownership of your companies. With all these layers of protection, no one would ever suspect that most of your profits stem from exploiting vulnerable individuals.

Real world application

Now, let's apply this fictional narrative to the real world. Replace the bullying with an elaborate drug trafficking network, substitute your parents with government agencies like AUSTRAC, Australian Criminal Intelligence Commission, Australian Border Force or the AFP’s money laundering task force and exchange the lemonade stand for businesses like real estate, luxury goods or even baby formula syndicates.

The core principles remain the same: concealing the true nature of illegal gains, creating a maze of transactions and building a facade of legitimacy.

By shedding light on the intricate world of money laundering, we equip ourselves with the knowledge to recognise the warning signs and actively combat financial crime. Understanding the deceptive tactics employed by criminals helps foster a more transparent and fairer financial system, safeguarding our communities against illicit activities.