Money laundering is the process of concealing the source of money obtained by illicit means. The methods by which money may be laundered are varied and can range in sophistication. Many regulatory and governmental authorities quote estimates each year for the amount of money laundered, either worldwide or within their national economy. In 1996 the International Monetary Fund estimated that two to five percent of the worldwide global economy involved laundered money. However, the Financial Action Task Force on Money Laundering (FATF), an intergovernmental body set up to combat money laundering, stated that "overall it is absolutely impossible to produce a reliable estimate of the amount of money laundered and therefore the FATF does not publish any figures in this regard". Academic commentators have likewise been unable to estimate the volume of money with any degree of assurance.
Regardless of the difficulty in measurement, the amount
of money laundered each year is in the billions (US dollars) and poses a
significant policy concern for governments.[2]
As a result, governments and international bodies have undertaken efforts
to deter, prevent and apprehend money launderers. Financial institutions have
likewise undertaken efforts
to prevent and detect
transactions involving dirty
money, both as a result of government requirements and to avoid the
reputational risk involved.
Today, most financial institutions globally, and many
non-financial institutions, are required to identify and report transactions of
a suspicious nature to the financial intelligence unit in the respective
country. For example, a bank
must verify a customer's
identity and, if
necessary, monitor transactions
for suspicious activity. This is often termed as KYC – "know your
customer". This means, to begin
with, knowing the identity of the customers, and further, understanding the
kinds of transactions in which the customer is likely to engage. By
knowing one's customers,
financial institutions will
often be able
to identify unusual
or suspicious behavior, termed anomalies, which may be an indication of
money laundering.