Money Laundering: What It Is, How It Works, and Which Signs Should Raise a Red Flag in Business

A new customer who pays in advance, and in cash. An investor from abroad who wants to put money into your company, through a company you do not know. A buyer for an apartment who asks to record the deal at a different price. Most of these transactions are completely innocent. But some of them are exactly how money from crime turns into money that looks clean, and you may find yourself in the middle.

What money laundering is

Anyone who makes money from an offense, for example from fraud, drug trafficking, bribery or tax evasion, needs to explain where the money came from before they can use it openly. They cannot buy an apartment in cash without questions being asked, and cannot deposit large sums in a bank without the bank checking.

Money laundering is the process designed to solve this problem: to turn "dirty" money into money that looks as if it came from a legitimate source, such as business income, a loan, an inheritance or an investment.

The three stages

1. Placement

The stage at which the money, usually cash, enters the financial system: bank deposits, buying assets, or putting it into a business that works with cash anyway. This is the most vulnerable stage, because here the money is still close to its source.

2. Layering

A series of transfers, sometimes between several companies and several countries, designed to break the link between the money and its source. The more layers there are, the harder it is to follow.

3. Integration

The money returns to the legitimate economy in a form that looks legitimate: a real estate purchase, an investment in a company, a loan from a foreign company, or "income" from a business.

Common methods

• Cash businesses: fictitious income added to the business's real income, so that the money looks like turnover.
• Structuring: splitting a large sum into many small deposits or transfers, so as not to attract attention.
• Shell companies: companies with no real activity, used only to pass money through.
• Inflated invoices: trade between related companies, at prices that do not match the value of the goods or services.
• Real estate: quick buying and selling, recording a price different from the real price, or purchase through a third party.
• Fictitious loans: money that returns to its owner as a "loan" from a foreign company he controls himself.
• Straw men: family members, employees or acquaintances in whose names assets and accounts are registered.
• Digital currencies: transfers that are hard to trace, especially through platforms that do not identify their users.

What Israeli law says

The Prohibition on Money Laundering Law prohibits carrying out a transaction in property that originates in an offense, where the purpose is to conceal its source. The law also prohibits certain transactions in such property where it is known to be prohibited property.

Identification and reporting obligations apply to bodies defined by the law: banks, insurance companies, financial service providers and, in certain cases, also lawyers and accountants who carry out certain transactions for clients, and other professionals. These bodies must identify their clients, and report unusual transactions to the Israel Money Laundering and Terror Financing Prohibition Authority.

In addition, Israel has restrictions on the use of cash, which apply to all businesses, not only to reporting bodies.

If you are not sure which obligations apply to you, that is a question for a lawyer. The obligations vary according to the type of business and the type of transaction.

Signs that should stop you

On the other side

• They will not disclose who the ultimate controlling party of their company is.
• Their company structure is complex for no clear business reason, with companies in countries known as tax havens.
• There is a mismatch between their size or track record and the amount they are willing to pay.
• They are new to the market, or have no history that can be verified.

In the payment

• A large cash payment, or a request to pay in cash when there is no reason for it.
• Payment from a third party with no clear connection to the transaction.
• An overpayment, followed by a request to return the difference to a different account.
• Splitting the payment into many small transfers.
• Payment from an account in a country with no connection to the transaction.

In the transaction itself

• The price does not match the value, too high or too low.
• They do not negotiate, and the price does not seem to really matter to them.
• A request to record the transaction differently from what it really is.
• Pressure to close quickly, combined with resistance to questions.

No single sign proves anything on its own. But several signs together are a good reason to stop, ask and check.

What to do when something does not add up

1. Ask questions and document the answers. Where the money comes from, who the controlling party is, why this structure.
2. Ask for documents, and check that they match the story.
3. Check the other side in independent sources, not only according to what they have provided.
4. Consult a lawyer, especially if you are not sure which obligations apply to you.
5. If you are a reporting body, act according to your procedures. Such bodies are usually also prohibited from informing the client about a report.
6. Walk away from the deal, if necessary. No deal is worth the risk of becoming part of money laundering.

When you need a private investigator

When the other side will not disclose who stands behind them, or their answers do not add up. When there is a structure of several companies in several countries, and you need to know who the ultimate controlling party is. When an investor or buyer arrives with a lot of money and little history. Or when you are lawyers or a compliance department, and need a deeper check than the standard databases provide.

A licensed private investigator maps the structure of the companies and their ownership, identifies the ultimate controlling party, checks the business and legal history of the people involved, and searches for information in several languages and several countries. The result is a factual report that helps you decide whether to proceed with the deal, and documents that you checked. Read more about due diligence, and about white collar crime in Israel.

The information in this section is general and is not legal advice. Every case is assessed on its own facts.

In case of any discrepancy, the Hebrew version prevails.