Whats is Money Laundering and How to Spot it | Skillcast

Money laundering is a serious financial crime. We examine its core components, the latest UK regulations, and recognising suspicious activities.

Money laundering is a serious financial crime – and one that’s committed worldwide. The United Nations Office on Drugs and Crime predicts up to £187 trillion is laundered each year, and in the UK alone, money laundered is up to £90bn.

Most of the time, these funds are obtained through criminal activity such as corruption, drugs, fraud, cybercrime and trafficking. The criminals then try to ‘clean’ this ‘dirty money’ by making it look like it came from a legitimate source.

While money laundering is commonly associated with organised crime, it can infiltrate almost any business in the UK, exposing you to damaging fines, reputational damage and legal trouble. That’s why it’s crucial for organisations to understand what money laundering means and how to identify it.

What is money laundering?

In simple words, money laundering is when illegally obtained funds are made legitimate through bank transfers or transactions, so that it can be used without raising suspicions. Criminals try to make it look like the cash is from a legal source, which can be done by splitting up large sums of cash into smaller transactions, creating false invoices, or using complex company structures to hide the money trail.

Money launderers are becoming more sophisticated and organised, especially with the rise of digital payments like cryptocurrency.

Emerging money laundering risks

Digitisation has made it easier for criminals to evade action, with some depositing their cash across multiple accounts around the world or using generative AI to create synthetic identities. Below are just some of the risks facing businesses today:

• Digital payment methods: As we develop and rely more on technology such as cryptocurrency, criminals are increasingly using it to layer and move funds on a global scale.
• Identity fraud: Remote working has made it easier for criminals to use fake identities and create complex digital trails that make detection more difficult.
• Reduced in-person interaction: A lack of face-to-face meetings can reduce the effectiveness of Know Your Customer (KYC) procedures, increasing the risk of onboarding fraudulent clients.

Three stages of money laundering

Because risks have increased, organisations are under increasing scrutiny to understand and stop it. The three stages include: 

1. Placement - The criminal introduces illegal money into the financial system through deposits, currency exchanges or purchasing high-value items such as jewellery or art.
2. Layering - Next, the money is moved through a series of transactions to hide its origins. It may be transferred between multiple accounts, invested into assets or sent through international wire transfers to make a complex paper trail.
3. Integration - The final stage is where the money is ‘cleaned’ and reintroduced into the economy. The illegally obtained funds appear legal and can be used freely.

By breaking down these steps, businesses can recognise where seemingly innocent transactions are part of a broader money laundering scheme.

Signs of money laundering

There are some telltale signs that money is being laundered through your business. To protect it and remain compliant, here are some red flags to look out for:

• Unusual large transactions: Large or inconsistent deposits that do not match the customer’s known profile.
• Complex company structures: Use of shell companies, offshore accounts, or complex ownership structures that make it difficult to identify the true owner.
• Frequent transfers between accounts: Rapid movement of funds between various accounts without clear business justification.
• Lack of transparency: Customers who are unwilling to provide required identification or business information.
• Suspicious third-party involvement: Third parties that make payments on behalf of others, especially if the relationship between parties is unclear.

If you or your team spot any of these indicators, it’s crucial to escalate the matter and report it in accordance with your company’s anti-money laundering (AML) policy.

What is anti-money laundering (AML)?

Anti-money laundering – commonly known as AML – is the laws, regulations and procedures designed to prevent criminals from concealing illegal money. These frameworks have been established globally, including in the UK, to protect businesses and prevent financial crime.

Money laundering: UK law

Businesses in the UK are governed by several key regulations but the main one is The Proceeds of Crime Act (2002), which makes it a criminal offence to obtain, handle or move criminal property.

There is also the Money Laundering Regulation (2019), which is an amendment to the former Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations.

It was updated to include the EU’s Fifth Money Laundering Directive (5MLD) to put stricter requirements on businesses to know their customers and report suspicious activity. However, the latest framework is the 6MLD (Sixth Money Laundering Directive), implemented in 2021 to harmonise 22 predicate offences, increase criminal liability and enforce stricter penalties.

AML best practices

Because of the severity and impact of money laundering, compliance is getting stricter. While that can mean more paperwork, it also protects your business from becoming involved in harmful money laundering activities.

As techniques become increasingly sophisticated, particularly in a digital-first environment, it’s crucial for businesses to stay ahead by implementing strong AML policies and training their teams effectively.

Enhance employee training: Regularly train staff on what money laundering looks like and how to respond if they identify suspicious activity.

Implement robust KYC procedures: Ensure that your business has strong Know Your Customer protocols, including verifying identities, conducting risk assessments and maintaining up-to-date records.

Utilise AML technology: Use software to monitor transactions, flag unusual patterns and automate reporting where possible.

Create a strong reporting culture: Encourage employees to speak up and report suspicious activities, providing them with anonymous channels if necessary.

Want to learn more about Financial Crime?

We've created a comprehensive AML roadmap to help you navigate the compliance landscape, supported by several financial crime prevention courses in our Essentials Library.

We also have additional free resources such as e-learning modules, microlearning modules, and more.