A comprehensive breakdown of money laundering crimes: from definitions and processes to practical methods

Money laundering is a global financial crime problem involving disguising illegal proceeds as legitimate income through various complex means. According to the Basel Committee on Banking Supervision’s definition, money laundering refers to the act of criminals and their accomplices using the financial system to transfer or move funds from one account to another in order to conceal the true source and beneficial ownership of the funds, ultimately legitimizing illegal gains in form. In short, this is the process of turning “black money” into “white money.”

Definition and Legal Framework of Money Laundering

The concept of money laundering originates from activities such as drug trafficking, organized crime, terrorism, smuggling, and other illegal activities. According to laws in various countries, entities involved in money laundering can be financial institutions or individuals, mainly including five types of criminal acts: providing accounts, assisting in converting assets into cash or financial instruments, facilitating fund transfers through remittance or settlement, helping transfer funds abroad, and other methods to hide or conceal the source and nature of criminal proceeds.

From a societal harm perspective, money laundering has dual negative effects. On one hand, organized crime successfully conceals its traces through laundering, allowing it to “legitimately enjoy” criminal gains; on the other hand, laundering provides financial support for criminal groups to infiltrate legitimate businesses, enabling them to “cover illegal activities with legality,” thereby expanding their criminal influence and reach.

The Three-Stage Operation Mechanism of Money Laundering

The complete money laundering process involves three critical stages, each with its specific operational logic and technical requirements. Understanding these three links is fundamental to recognizing modern money laundering methods.

Stage 1: Placement — Concealing Funds into the System

Placement, also known as the “deposit” process, is the initial stage of money laundering. Its core task is to convert scattered cash from criminal activities into assets that are easier to control and hide. For example, in drug smuggling, criminals obtain large amounts of small cash through street transactions. These cash amounts are inconvenient to carry and more vulnerable to detection when accumulated in large quantities. Therefore, they need to be transformed—by depositing into banks, purchasing securities, or smuggling large sums of cash into other countries for deposit.

Once large amounts of small cash are deposited into bank accounts or converted into portable securities, this stage is complete. The development of modern financial markets has diversified the methods—ranging from traditional counter transactions, remittances, credit cards, to emerging telephone banking and electronic banking—giving launderers more tools. This stage lays the foundation for subsequent complex operations.

Stage 2: Layering — Creating a Transaction Maze

Layering, also called “separating,” “stratification,” or “stirring,” is a key link in the entire laundering process. Criminals aim to disperse and concentrate assets, change their external form through complex transactions or transfers, and gradually disconnect illegal income from its original source, making the true nature and origin of the proceeds ambiguous to evade regulation.

Criminals often exploit modern complex and comprehensive market systems—using banks, insurance companies, securities firms, gold markets, car markets, and even street retail—to create extremely complicated transaction layers. They perform multiple transfers or transactions, sometimes using anonymous transactions, deliberately obscuring or circumventing audits, to artificially sever the link between illegal funds and their source.

Common practices include opening bank accounts under pseudonyms or trustee names, virtual trade receipts and payments, trading in bearer securities, and other complex financial operations. With the emergence and development of cross-border money laundering, the transaction layers constructed at this stage can be dizzying. If these operations occur in so-called “secrecy havens,” “tax havens,” or other regulatory blind spots, they further obscure the true source and destination of criminal proceeds, making it difficult for regulators to distinguish and trace.

Stage 3: Integration — Final Legitimization of Black Money

Integration, also called “assimilation,” “consolidation,” or “fusion,” is the final stage of money laundering. In this stage, criminals transfer assets that have undergone layering and are difficult for ordinary people to detect as illegal, under the guise of legitimate income, into legitimate institutions or individuals with no obvious connection to the criminal group, and inject them into normal social and economic activities.

If the first two stages are successfully executed, criminal proceeds are already mixed with normal income, making it nearly impossible for ordinary people to perceive their illegality. Criminals can freely manipulate and use these “legitimate” appearing funds, transferring them to accounts of legitimate organizations or individuals with no apparent link to the crime, just like regular business transactions, allowing the “laundered” funds to re-enter the financial system for normal circulation.

Common Methods of Money Laundering in Practice

Money laundering methods are diverse, generally falling into several categories based on operational logic: financial system-based, trade-based, physical asset investment, cross-border transfer, and new or innovative methods.

Financial and Banking System Methods

This category directly exploits legitimate financial institutions and is the most traditional approach. Cash smuggling is among the oldest methods—many countries without cash transaction reporting systems allow criminal proceeds to be smuggled in and deposited into banks, making it a major laundering method. This is also a key reason for strict restrictions on cash carry-in and carry-out.

“Breaking into smaller parts” is another common technique, involving splitting large sums into smaller deposits to avoid suspicion. Due to strict cash transaction reporting requirements in many countries, banks must report transactions exceeding certain thresholds, prompting launderers to split large cash amounts into smaller, below-reporting-limit deposits across multiple banks.

Using cash-intensive industries for laundering is also common. Casinos, entertainment venues, bars, jewelry stores, and similar establishments serve as cover. Criminals declare illegal proceeds as normal business income through fake transactions. Exchanging chips at casinos and transferring them to others is a common tactic—receivers then cash out the chips (often paying a 5% fee), claiming winnings, thus avoiding direct tracing of paper currency serial numbers.

Utilizing securities and insurance industries involves more complex financial means. Given the large transaction volumes and complex financial instruments in global capital markets, they provide excellent cover for laundering. Many crimes involve securities transactions—stocks, bonds, futures, etc. In the insurance sector, criminals buy high-value policies and then recover premiums through refunds or surrenders in legitimate forms.

Using “straw” accounts and foreign currency accounts is also common. To avoid suspicion of “black money,” launderers often open foreign accounts unknowingly (straw accounts), depositing small amounts repeatedly, then withdrawing foreign currency abroad—commonly called “ant moving bricks”—often used with straw accounts.

Physical Assets and Investment Methods

Directly purchasing movable or immovable assets is a straightforward approach. Criminals buy real estate, high-value vehicles, antiques, artworks, and various securities, then resell to extract cash deposits into banks, gradually transforming illicit funds into legitimate currency.

“Straw house flipping” involves using others’ names to buy real estate, paying 50-70% of market value in cash to developers or contractors, then quickly flipping the property (e.g., pre-sale units before delivery), earning 50%-100% profit. Buying and selling high-value collectibles like jewelry and art follows similar logic—criminals use fake transactions to transfer money into designated accounts.

Investing in hotels, establishing companies, purchasing commercial real estate, or investing in property are also common laundering methods, sometimes even setting up offshore companies to cloak illicit gains. Gift cards from department stores, due to high liquidity, are exploited—distributing them as employee benefits or holiday bonuses, then converting them into near-equivalent cash, unknowingly transferring funds to third parties.

Trade and Import-Export Methods

Trade is a common cross-border laundering channel. Criminals inflate import/export prices or forge trade documents to transfer illicit funds across borders. Typical methods include over-invoicing imports and under-invoicing exports—corrupt officials collude with foreign companies, inflating import prices for equipment and raw materials, paying high commissions or discounts, and then taking kickbacks.

Shell companies and virtual trade are also common. Criminals establish shell companies engaged in disproportionate import/export activities or fake business performance, turning illegal income into legitimate revenue. In cross-border transactions, especially in industries without physical goods, falsifying transaction amounts is frequent—sending money abroad through legitimate channels, then splitting the amounts to distinguish between actual trade, broker commissions, and laundering.

Cross-Border and Offshore Transfer Methods

Currently, the most common laundering method is transferring illicit funds abroad or collecting proceeds offshore for money laundering. Non-trade methods include sending children abroad, using payments for education, insurance, or commissions to buy foreign exchange, then transferring it overseas.

Setting up shell companies for foreign investments is also common—establishing offshore shell companies and using authority to transfer illegal proceeds as foreign investments abroad. Underground banks are frequently used for offshore transfers—in the famous Yuanhua case, 12 billion RMB was transferred via underground banks linked to Jinjiang and Shishi, with funds transported by drivers to underground banks, then notified Hong Kong partners to pay foreign exchange to Yuanhua in Hong Kong.

Traveler’s checks, due to no amount limit at customs (only requiring documentation), are also used for laundering—after deposit and cashing, funds return to the original issuer. Corporate funds, especially in finance, banking, and insurance sectors, are also used for cross-border transfers, involving large cash movements.

Bribing financial regulators is another illicit method. In the 2001 Hong Kong ICAC bust of the largest cross-border laundering syndicate, laundering amounted to HKD 50 billion. Criminals opened accounts at BOC’s Bosheng Bank in Tsim Sha Tsui, bribed a senior manager to transfer illicit funds via regular transfers rather than currency exchange, moving money into various accounts, then transferring to Hong Kong and overseas banks.

Offshore financial centers and banking secrecy havens are also common routes—some countries allow anonymous companies or have excessive confidentiality measures, making it easy to hide the true source of illicit income. Underground exchange mechanisms (common in jewelry stores) not only provide illegal currency exchange but can also convert cash into foreign bearer checks for deposit into foreign accounts.

New and Flexible Methods

Internet-based money laundering is an emerging approach. Criminals transfer illicit funds via online banking, some laundering through online gambling. With the advent of cryptocurrencies, this field has become a new laundering channel.

Loan schemes are often used for bribery or corruption—receivers hold post-dated checks or promissory notes issued by others, claiming they are loans even if scrutinized. After the situation stabilizes or the holder is no longer in position, they transfer or cash the notes.

In certain sectors, criminals use foundations for laundering—setting up foundations, fake donations, tricking companies into donations, then embezzling. Politicians or companies may use fake donations to foundations they control, achieving “money shifting” to evade taxes. In cross-border laundering, funds are transferred among foundations under different charitable names.

Special Manifestations of Money Laundering in Corruption

Corruption and money laundering are often closely linked. In the “first grab, then wash” model, corrupt officials accumulate money while in office, then leave to start businesses or set up companies. Unlike private entrepreneurs who fear exposure, these officials often publicize their “big gains” to make sure others know they have earned money—because they need to find a “justification” for their illicit gains.

“Grab and wash simultaneously” involves officials’ relatives engaging in business—this is more common. Corrupt officials use their power to amass wealth, while relatives open entertainment venues, restaurants, or companies. If not closely related to the official, it’s harder to detect the connection, making laundering easier.

“Grab and wash together” refers to proxies acting on behalf of officials—government officials or state enterprise leaders establishing private companies but with others acting as representatives. The company appears to be owned by others, but real control remains with the official. This allows transferring black money through economic transactions into their own accounts, and also earning through legitimate taxation and operations.

Social Harm of Money Laundering Crimes

The object of money laundering crimes is black money, including proceeds from drug trafficking, smuggling, arms sales, fraud, theft, robbery, corruption, tax evasion, and other crimes. Its societal harm is profound—providing criminal groups with access to the legitimate economy, severely disrupting normal financial order and market competition.

Understanding and preventing money laundering requires joint efforts from financial institutions, law enforcement, and society. Effectively curbing laundering crimes has become a key part of anti-corruption, anti-terrorism, and anti-drug efforts worldwide, and is essential for maintaining financial security and healthy economic development.