The “Follow the Money” approach

First, the illegal money is introduced into the legal economic cycle. This is often the riskiest part of the money laundering cycle, as the money comes directly from criminal activities and is therefore easiest to identify.

ExampleA drug dealer has a large amount of cash earned from selling drugs. To invest this money, he could use it in a cash-intensive business, such as a laundromat, a bar, or a casino.

For example, he could pretend that this cash is actual income from operating these businesses and then deposit it into the business account.

The second phase is stratification, in which the money is further obscured through a complex series of financial transactions to conceal its illegal origin. Multiple transfers, the buying and selling of investment products, and the crossing of international borders make tracing the funds more difficult.

ExampleAfter the placement, the drug dealer could use the money to buy several high-end watches and cars, then quickly resell them and transfer the money via various international accounts.

He could also set up shell companies that conduct legal business on paper, and use these companies to create invoices and contracts that justify further movements of the money.

The final phase is integration, in which the money is finally reintegrated into the economy as legal assets. The money now appears as legal income and can be used for investments, purchasing real estate, or other legal financial activities without arousing suspicion.

ExampleAfter the money has flowed through various international accounts and transactions, it could be used to buy real estate or to invest in legitimate businesses.

The drug dealer could, for example, buy a property or invest in a legitimate retail business, with the money now appearing as legal investment capital. He could then declare the income from these investments as legitimate income.

These three steps suggest that the processes of a money laundering system are clearly structured, but should only be understood as a model.[5]

In fact, it is becoming increasingly complex to identify a money laundering network and to track down the masterminds, the "big fish".[6], to achieve this. The fact that German investigative authorities have not yet effectively succeeded in doing so was also noted critically in the FATF report 2022.[7]

Success stories demonstrate how this approach has led to significant progress in the fight against the financing of crime.

A prominent example is the uncovering of the Panama Papers scandal, in which the analysis of financial documents revealed a worldwide network of tax evasion and money laundering.

In summary, the "follow-the-money" approach is a powerful tool in the fight against financial crime.

Through the systematic analysis of money flows, this approach enables an in-depth investigation of illegal activities, supports the enforcement of laws, and promotes a more transparent and fairer financial world.