Most cash-intensive business meaning that businesses process their business through cash transactions. The industries include restaurants, construction, retail, and entertainment. These are businesses that add to the economy but have the nature of cash, making them a lucrative target for money laundering activities. Money laundering often occurs through schemes that are cash-intensive and difficult to trace and verify, as a result of which illicit funds can be concealed.
In this article, we will investigate how money-intensive business schemes facilitate the laundering of ill-gotten money, how it is executed, and what is being done to minimize the risk associated.
What Is Money Laundering?
The term money laundering is used to describe a process in which illegally gained money is made to look legal. In laundering money, criminals hide the origins of illicit funds that look like legitimate earnings from lawful commercial activities. Typically, this often includes three stages.
- Placement: Money laundering into the financial system.
- Layering: These are terms for hiding the source of the funds by moving them from one source to the next.
- Integration: The funds are integrated with the legitimate economy, and they seem clean.
In particular, cash-intensive businesses are susceptible to fraud at the placement and layering stages because of the large volume of cash transactions and the inability to follow such transactions down.
Bonus: Learn about the best ways of going after money laundering in industries that rely heavily on cash.
Cash Intensive Business Schemes and Money Laundering
There are business schemes that are cash-intensive, and such businesses are a perfect environment for money laundering activities. However, by using cash to make purchases, businesses hide large amounts of illicit money because of the heavy reliance on cash transactions. Typically, these schemes work as follows:
Smurfing
In this method, criminals break down large amounts of illegal money into smaller, less suspicious amounts. They deposit these smaller amounts into bank accounts that they hide under the pretense of small business earnings. This practice can be easily implemented by cash-intensive business and money laundering since the volume of cash transactions renders the criminal activities invisible.
Illicit funds commingling with legitimate funds
Some criminals may simply thrust illicit funds into a business’s cash flow, and they will be mixing with the business’s legitimate income. The cash flow then acts as if it originates from ordinary business activity as a way to launder the money.
Shell companies
Businesses that require large amounts of cash as an asset are sometimes used as a front for such crimes because they are cash-intensive business in money laundering. Illicit money could be washed through a dubious-looking but, in fact, a criminal organization that may set up a fake business to create the impression of a legitimate operation. The money is cycled through the system without any real origins, thus making it hard to trace.
Risks and Consequences of Cash-Intensive Business Schemes
There are several negative effects that the use of cash-intensive business schemes can have on the business of money laundering:
Economic Disruption
It’s hard to judge the performance of businesses in cash-intensive industries as economic motion cannot always be tracked appropriately. Thus, it shrinks the view of the economy to include those businesses that are not playing by the tax and regulatory rules but are thriving far at the expense of those that play by the rules.
Tax Evasion
This is one of the main risks of businesses that inherently use cash for money laundering. Their low reporting of earnings limits the amount of public revenue they are able to pay. This is especially alarming to governments that are challenged to balance budgets and budget spenders.
Financial system
Money laundering damages the integrity of financial systems. If the financial institutions do not know where the funds come from, and if there are funds that flow through legitimate channels but are illegitimate money, then it may embarrass and demoralize these institutions. This is destabilizing to financial markets, and the impact can spread across the entire economy.
According to European statistics, the amount of tax evasion in European cash-based industries is $160 billion annually, which is the economic factor behind such cash-based schemes. It is a large part of the overall tax gap in the EU.
Regulatory Measures to Combat Money Laundering
One way to combat the risks involved in cash-based business schemes is to implement a few regulatory measures issued by governments and financial institutions.
Anti-Money Laundering (AML) Laws
Many countries follow strict anti-money laundering laws to monitor and report suspicious financial happenings. For instance, if a business is cash-intensive, it will need to report any large cash transactions to the regulatory body. It enables the creation of a paper trail of suspicious electronic activity that is much harder to disguise as illegal activities.
Know Your Customer (KYC) regulations
In Know Your Customer (KYC) regulations, businesses and financial institutions are obliged to identify their customers with biometric aml. This prevents criminals the ability to launder money through fake identities or shell companies. This means that authorities will be able to better track the flow of funds by being sure that customers are handling them.
Click here to read how governments and financial institutions continue to work together so the role played by cash-intensive businesses in money laundering can be reduced.