ight thanks everyone i understand now
In: Economics
Money laundering is meant to conceal the origin of money or funds.
Basically, suspicious large amounts of money are pretty bad flags for illegal activities (imagine someone just somehow “getting” $200,000, not through inheritance or family, or spending 5x+ the amount their income sources should earn on a regular basis), but if that same money can be traced back instead to a legitimate business income, it becomes a lot “safer” to handle. It’s essentially shuffling money through legitimate channels to remove the direct connection to illegitimate origins.
It’s shuffling money around to look legitimate.
You have a lucrative business doing something illegal, say supplying some city with high grade heroin. Now this is very profitable, but also rather illegal.
So when you have your fat rolls of cash from your illicit trade, and you start spending them this is going to raise eyebrows since according to your official income you can hardly afford a Dacia, yet you have a Jaguar.
This is problematic, you want to be able to USE your ill-gotten gains without attracting the attention of law enforcement.
Enter money laundering. You buy some company that makes the majority of its money through small cash payments, like say a strip club, and a car wash, and a kebab restaurant. You take your bad money and throw it into your legit company, artificially inflating the income there.
You wash 50 cars a day, but in your accounting you do 75 cars a day. And there you go, 25 car washes worth of money is no no longer dirty, but clean and you can use it without the Fuzz coming to your door wondering how you afforded that Jaguar.
Say you stole a bunch of money.
Just having the money is useless, you want to be able to spend the money.
Now if you buy a lot of things, many people might ask, where did the money come from?
Now you can’t just say “I stole the money!” they’d put you in jail.
So you go to do things that can explain where you got the money you stole from.
That way if someone asks you can say stuff like “That business I just started did really well!” or “Someone really liked my art so he bought it from me!” or more likely it’s something a lot more complicated because police are getting better at figuring this out.
Often it will require someone to help you out, or just keep quiet about lying to the government for you. So these people are often given some of the money you stole.
It’s called money laundering because money you stole is called Dirty Money.
Money you are free to spend is called Clean Money.
So the process of turning Dirty Money into Clean Money is Money Laundering.
Let’s say (hypothetically) I own a laundromat, but also illegally sell drugs. I make 100k per year at the laundromat, and 100k selling drugs. I want to be able to spend the 200k without raising questions, so I lie about how much my laundromat makes so on paper it totals 200k.
I laundered the money (cleaned it) by giving the appearance that I earned it from my laundromat.
Many major purchase cannot be made by cash. And banks will flag and suspend accounts if they notice suspiciously large transactions/deposits in cash without some kind of explanation (eg someone owns a cash business). This will go to the relevant authorities and will usually result in some kind of investigation.
Some illegal businesses are cash businesses (like drug distribution). This poses a problem because they can’t actually spend their illegally obtained cash money and cannot simply deposit it all in a bank either to avoid investigation.
This is what money laundering is about. One method is to funnel illegal cash through a “legal” business which then could be passed off as simply business income and deposited into banks and used normally.
You steal 100 000 dollars. You can’t really pay taxes on it, because IRS wants to know where you got them. You can’t NOT pay taxes on it, because IRS will put you to jail. Cops will raid you and find the money and ask a question you don’t have answer to. And you can’t use it, because it’ll be visible (a house or car or whatever) and questioned, because you’re a criminal and probably investigated and suspected.
So, you open some sort of hard-to-audit cash business, like a burger joint, and slowly drip that money into burger joint. You make $1 profit from burger, but in your accounting, you write $2. And really have that amount in your till, because you added your dirty money. And then you pay taxes. Because IRS won’t ask your customers how much they paid or tipped or whatever nor post an agent in the joint, counting the burgers sold.
And the stolen money becomes clean for you to use, legal and taxed. You can put it in the bank and nobody bats an eye.
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