What are money laundering and its role in the illegal-drug economy?

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Money laundering is an idiom for the process of turning “dirty” money obtained by illegal means into “clean” money that can be spent in the legitimate financial system. One important goal, achieved through a variety of methods, is to make it impossible—or nearly so—to trace the clean money back to its original source. Having a number of ways to convert illegally obtained income is essential to any successful illegal business operation. Using foreign banks is one method that is generally employed; money deposited therein may be transferred to another country and withdrawn in that country’s currency. Depending on the country, banking laws shield clients' privacy to different degrees so some countries become havens for such accounts.

Businesses that operated outside the law often have a large number of associates who operated businesses, which in turn were owned by other associates, through a process called layering. At each step, the distance from the original source grows and became more difficult to track. International business may successfully disguise the illegal profits, such as from drug sales, with legal profits, such as from items that typical are shipped across borders, such as automobiles.

Certain aspects of money laundering may also work against the illegal businesses. If the owners are unable to verify the source of income they declare, they may be arrested for failure to pay income tax even if the source of the funds cannot be established.

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