What is the Loan Back Method of Money Laundering?

Money laundering refers to the process by which individuals disguise the original ownership and control of proceeds through making such proceeds appear to be legitimately owned/acquired. 

Money laundering involves concealing the act of transforming profits earned from corruption and illegal activities into legitimate assets. The transfer of the concealed property, concealing the nature of the proceeds, the possession of property, or acquisition of the proceedings amidst knowing that the proceedings have been acquired through criminal activity is referred to as money laundering. 

The loan-back method of money laundering involves cleaning of money obtained from criminal activities such as insider trading, extortion, illegal gambling, and drug trafficking to appear to have been derived from legal activities in order for financial institutions to deal with it without any suspicion. Money can be laundered using various methods which vary in terms of sophistication and complexity. Loans and mortgages are usually taken as a cover to launder money proceedings, and lump sum cash repayments are used to repay the loans or mortgages.

How Does the Loan Back Method of Money Laundering Work?

The process of money laundering involves three stages: placement, layering, and integration.

Placement

• This is the first stage of money laundering where the source of cash is easily misrepresented or disguised. It involves the movement of cash from the source followed by placing it into circulation locally or abroad through casinos, financial institutions, shops, bureaus and other businesses. The process entails:
•  Currency smuggling
•  Bank complicity
•  Currency exchanges
•  Securities brokers
•  Blending of funds
•  Purchase of assets

Layering

On the second stage, money launderers make it more difficult to uncover or detect the laundering activity. This is meant to make it difficult for enforcement agencies to uncover or trail the illegal proceeds. The methods of layering include:

•  Cash is converted into monetary instruments
•  Material assets that have been bought with the laundered cash is the sold

Integration

The third stage of money laundering, integration, involves the movement of previously laundered money into the economy through the banking system. This makes the illegitimate money to appear in the normal business earnings. The methods involves in this stage include:

•  Property dealing
•  Front companies and false loans
•  Foreign bank complicity
•  False import or export invoices

Historically, money laundering methods have included smurfing, often spread out across different accounts to avoid detection, or the use of wire transfers, currency exchanges, cash smugglers, or mules, to move money across borders. Other methods of laundering including:

•  Investing in movable commodities like gold and gems
•  Investing in selling valuable assets such as real estate discretely
•  Counterfeiting
•  Gambling
•  Creating shell companies

Although these methods are still currently being used, any money laundering approach always includes modern methods like the internet which helps to create a new spin on the old crime. With internet, money launderers are able to avoid detection. 

With the rise of online bank institutions, online payment services from unknown sources, peer-to-peer transfers using mobile phones, and virtual currencies like Bitcoin, detecting money laundry or illegal cash transfer has become more challenging. Most often, the money launderer establishes an apparent legal origin of money through fabrication of transactions like agreements, bookkeeping, and invoices, deeds, reports, and spoken/written statements. 

The common methods used to justify money laundering is fabricating a loan, also referred to as back-to-back or loan-back.The most popular loan-back form of laundering money is when criminals borrow their own criminal money. This is usually done through the creation of a loan agreement between the criminal and a third party. Most used third parties are offshore corporations who are controlled by the criminals. 

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