Financial Ethics 101: Money Laundering

By Josh Kindler

Section I: What is Money Laundering?

Money laundering is a process used by criminals to remove criminal ties from financial assets. Using un-laundered, “dirty” money would allow authorities to trace suspicious large purchases back to their source. This could reveal the crimes that originally earned the money and lead to prosecution. Money laundering, then, allows criminals to realize illegitimately-earned profit in the legitimate economy—without fear of compromising their criminal identity.

Money is traditionally laundered in three stages. The first stage, “placement,” consists of introducing money into the financial system.  Often, criminals place money by depositing large sums into bank accounts through multiple, smaller increments. Alternatively, placement can be conducted indirectly through cheques, wire transfers, or money orders, which are in turn deposited into bank accounts.

In the second stage, “layering,” money launderers distance the money from its initial source in an attempt to cleanse it of its illegal ties. Common forms of layering include the purchase or sale of investment instruments or payment for goods and services. This is often done through a shell company, an officially incorporated company that has no real assets and performs no real operations. The launderer deposits money into the shell company and it pretends to provide a cash-based service (e.g., a beauty salon). This gives the appearance the money was earned legitimately. The shell company will create fake invoices and receipts to further legitimize the operation. Once it has been “cleansed,” the shell company returns the money to the launderer or funnels it through further laundering methods on its way back to the launderer [2,3]. Using international or offshore accounts is another way launderers layer money. This capitalizes on certain foreign countries’ more lax anti-money laundering (AML) laws. Bank accounts in these countries offer greater privacy and less regulation.

In the third and final step, “integration,” the launderer uses the money in the legitimate economy. Often, this consists of spending, investing, or lending. Once this transaction has occurred without detection and the launderer can get rid of the previously dirty money, it has been successfully laundered.

A United Nations study estimated that in 2011, approximately $1.6 trillion was laundered. This equaled 2.7% of global GDP [4]. As a rough estimate, an equal proportion of global GDP in 2022 would represent $2.3 trillion laundered. A similar 2009 report estimates that 70% of all proceeds of organized crime are laundered. The drug trade is the most profitable sector, accounting for half of the proceeds of organized crime. Within this sector, the sale of cocaine is the most lucrative [4].

Section II: Consequences of Money Laundering

Money laundering is not a victimless crime; it causes myriad negative effects.

The most obvious consequence of money laundering is it promotes other crimes. The driving force behind much crime—especially the drug trade that accounts for half of money laundering—is profit. Thus, many criminals only commit crimes because they know they can launder the profits. In its groundbreaking report on the FinCEN Files, Buzzfeed News characterizes money laundering as “a crime that makes other crimes possible” [6].

Money laundering is also a major source of economic instability and can harm economic growth. Unpredictable transfers of large sums of money are common in the placement stage. Such big transfers can give banks issues maintaining adequate liquidity and lead to runs on banks. In addition, traditional investment is oriented toward profit and produces economic growth; conversely, the goal of money laundering is not to produce a profit but to clean the money. Thus, the money may be directed toward industries that are not necessarily economically beneficial. This can stunt economic growth, especially in smaller countries whose economies are smaller and more volatile. In the layering phase, money launderers may also move money quickly into and out of investments. This quick trading may damage industries that rely on the funds. For example, a construction project may be initially financed by money launderers. However, because they aim to cleanse the money, not to profit, they may re-route the money out of this project with no regard for its completion, leaving the project abandoned. This can have a large detrimental effect on industries and economies dependent on the investment [5].

Section III: Prevention Measures

The U.S. Bank Secrecy Act of 1970 (BSA) requires Money Services Businesses (MSBs) to report suspicious activity to regulators [7]. MSBs include banks, credit unions, other depository institutions, casinos, brokers and dealers in securities, and other money services businesses. These institutions must register with the Financial Crimes Enforcement Network (FinCEN) and are required to report details of its agents. Importantly, MSBs must file Suspicious Activity Reports (SARs) to FinCEN if they suspect money laundering or other suspicious activity including transactions derived from illegal activities, designed to evade reporting requirements, or appearing to serve no apparent or lawful purpose (which could be indicative of a shell company). 

Indicators of suspicious activity include fake or altered customer information, transactions slightly below reporting thresholds, or the use of multiple locations to break down transactions into increments. 

The Anti-Drug Abuse Act of 1988 furthered AML regulations by requiring strict identification and recording of cash purchases of certain monetary instruments and requiring increased reporting by MSBs in specific geographic hotspots. 

The most recent significant AML legislation passed in the United States was the Anti-Money Laundering Act (AMLA) of 2020. This act was a part of the National Defense Authorization Act and became law on January 1, 2020. It was a landmark piece of AML legislation called “the most consequential anti-money laundering legislation passed by Congress in decades” [14].  The AMLA 2020 has four main pillars. Firstly, it expanded protections and incentives for whistleblowers. The Department of the Treasury is now obligated, instead of permitted, to pay whistleblowers whose information leads to the successful enforcement of certain AML laws; the amount of this payment was also increased. Secondly, it established a beneficial ownership registration database. This requires corporations to disclose their beneficial owners—any entity that owns 25% or more of the company. As noted in Section I, a shell company is used in the second, layering stage, and is only useful if the money can be rerouted back to the launderer to be used in the integration phase. Requiring companies to disclose this information makes it much more difficult for launderers to operate shell companies undetected. This was a critical step in closing a loophole and improving prosecution of shell companies and money laundering. Thirdly, the AMLA 2020 built on the Bank Secrecy Act to create new violations and greater penalties for deceiving banks and regulators.  Finally, it expanded the United States’ power to subpoena foreign banks in the effort to identify money laundering [14].

Section IV: Is Money Laundering an Ethical Issue?

Clearly, money laundering causes myriad negative consequences. For nations interested in growing and stabilizing their economy, this is likely enough reason to support stringent AML laws. However, there is another aspect to money laundering for further investigation. More than merely an economic issue, it also poses an ethical issue.

Money laundering is not a stand-alone crime. It is only done because the money it cleanses is earned illegally, through other crimes such as the trade of drugs or arms. Certainly, these crimes are immoral—that is not up for debate. Instead, the critical question is if the act of money laundering itself is immoral. On its own, money laundering is merely a way to hide one’s possession of certain money from the government—but can it be separated from the immoral acts that it relies on and propagates? 

Interpretation of John Stuart Mill’s ethical theory argues it is impossible to separate the morality of hiding funds through money laundering from the negative consequences it creates. In Mill’s theory, it is moral to act in such a way as to maximize total happiness or utility in the world. Mill’s ethical considerations are entirely rooted in consequences and outcomes. Thus, the economic consequences of money laundering are the direct bearer of its immorality. As shown in Section II, money laundering causes extensive negative real-world effects. Economic instability and collapse, for example, are major sources of stress, anxiety, and unhappiness for many people. This detracts from the world’s overall happiness, which should be maximized. So, insofar as money laundering causes or enables this unhappiness, it is immoral.  One cannot isolate the act of disguising money from the harm it creates in the real-world, because for Mill, it is nonsensical to isolate any act from its consequences—that is the exact source of moral worth. 

Aristotle’s philosophy also ties money laundering to its negative consequences, but in a different way than Mill. He defines a telos as an object or action’s fundamental aim or purpose. The telos of a knife, for example, is to cut. Certainly, a knife has other qualities, such as durability and ergonomics. However, the fundamental idea of a knife is not rooted in durability or ergonomics, but in cutting ability. To describe or conceive of a knife without considering its cutting ability would be to fundamentally misunderstand something about the knife. 

Instead of arguing that no action can be separated from its consequences, like Mill, Aristotle argues that no action or object can be separated from its telos. The telos of money laundering is to enable profit from crime by removing the money’s ties to criminality. It would be a fundamental misunderstanding of the concept of money laundering to conceive of it without this end goal. It is not possible to say that money laundering can be separated into its mere privacy-maintaining actions without the immoral ends, because there is no such thing as merely the action without the telos. Consider the action of playing in a basketball game. A basketball player jumps, dribbles, and runs with the aim of winning the game. But were one to jump high, bounce a ball, and run fast without the telos or aim of scoring points to win the game, a player cannot be said to be playing basketball. Scoring points to win the game is the telos of playing basketball. The player acts in a way that resembles playing basketball but is not actually playing. Similarly, imagine an agent engaging in the actions of depositing money in increments and opening a foreign bank account. Without the end goal of protecting criminals and enabling crime—without pursuing the telos of money laundering—it is fundamentally a different act. The agent would not actually be said to be laundering money. This concept demonstrates how money laundering itself cannot be separated and is not merely an impartial means to its immoral ends. 

To clarify this point, contrast money laundering with a pen that is used to write hate speech. This does not condemn the pen as immoral for its instrumental role in immoral hate speech.  Though the pen has been used for hate speech in this specific instance, the pen’s telos is not to write hate speech, but merely to write. The pen cannot be blamed for the immoral actions of the author.  Conversely, the telos of money laundering is already steeped in its non-virtuous ends. To use it according to its nature, according to its telos, is already immoral. 

Immanuel Kant’s moral system does not directly tie money laundering’s real-world consequences and its morality like Mill and Aristotle. In his Groundwork of the Metaphysics of Morals, he deduces his theory of morality with no consideration of consequences, effects, or anything specific to the human condition (instead, he considers only the very idea of a rational will). Kant infamously claimed that even if your friend is in your house taking refuge from a murderer, if the murderer knocks on your door asking if she is inside, the demand of morality prohibits you from lying to him. Clearly, he does not consider even direct, horrible consequences of an action as affecting its morality. So, if the real-world effects of money laundering are not considered, on what grounds could it be considered a moral wrong? 

Kant’s philosophy is not consequentialist, but deontological. An action’s moral worth is evaluated not based on its consequences, but according to a set of rules. Thus, for it to be considered immoral, the action of money laundering must violate the moral rules Kant sets out. He establishes his overarching categorical imperative in the Groundwork of the Metaphysics of Morals: an action is only moral if a rational will could wish the maxim to be universal law, to be followed by all other rational wills. An action is immoral if it either cannot be willed to be universal because such a world would be logically impossible, or because such a world would be necessarily undesirable to a rational will.

As noted above in the example of the murderer, Kant argues that lying is unacceptable no matter the circumstances; this is derived from the categorical imperative. A rational will cannot wish the maxim “I will deceive others to get what I want” to be universal because such a world cannot exist: in a world in which everyone lies, no one would trust anyone else’s word because everyone is lying. However, it is impossible to engage in deceit at all if the other person does not take your word in the first place. Thus, it is impossible to “universalize” the maxim of lying, and the action must be immoral.

On a macro scale, money laundering is deceiving the government about the true source of the money in question. A basic Kantian argument against money laundering, then, would deem it immoral because it violates this prohibition against lying. However, this argument is not as comprehensive as Mill’s or Aristotle’s. While some steps of money laundering are overt lies, such as a shell company’s falsification of receipts, others are less so. It is not obvious that making deposits in small increments, for example, is a lie. Such a debate relies on the uncertain distinction between lying and withholding the truth. This in itself is an entire branch of philosophy without a clear answer.

This issue identifies the challenge of applying Kant’s categorical imperative: a maxim can be formulated in many different ways, to the point where it is not clear whether it conforms to the categorical imperative or not. In the evaluation of deposits in small increments, one could reasonably use the maxim “I will deposit money in small increments” or “I will deceive others.” The first maxim would conform to the universalization test, though the second would violate it. 

In conclusion, application of Kant’s categorical imperative does not condemn money laundering based on its negative consequences. Instead, Kant’s deontological ethical system deems it immoral for violating a prohibition against lying. On a grand scale, money laundering is the act of deceiving others, and that is unethical. However, the argument against it is not as strong and clear as Mill’s and Aristotle’s. Though some steps or methods of money laundering also violate this principle (shell companies), others (deposits in small increments) do not, for they are not explicit lies. This draws an unclear line between moral and immoral and exposes one major difficulty with Kant’s system.

Section V: Right to Privacy in Money Laundering Regulation

Section IV examined ethical theories. Applying these theories to money laundering reveals how it should be understood as a moral wrong, at least on a grand scale. Thus, governments have both an economic interest and moral interest in preventing and regulating money laundering. Yet, to what extent are they morally permitted to do so?

The debate around AML laws is a debate about the right to privacy. It is widely held and recognized that citizens do have a right to privacy from the government and society. This notion has existed for centuries and has been construed in countless ways. An evaluation of AML laws, though, considers a more specific question about informational privacy, the right to privacy of personal data and information. Regulators use financial data as a critical tool to identify money launderers, so prevention often necessitates giving more data to the government and forgoing some data privacy. Unlike the broader question of the right to privacy, which has been discussed for centuries, informational privacy has quickly risen to importance in the digital age. In addition, the conflict between privacy and security was highlighted in the wake of the September 11, 2001, terrorist attacks and Edward Snowden leaks.

It is beyond the scope of this paper to evaluate every instance of AML law. Instead we focus on one key element of key AML legislation recently in headlines related to the FinCEN Files case: the Bank Secrecy Act’s required Suspicious Activity Reporting. On paper, this is a valid measure to regulate money laundering without excessively violating privacy. This is because of the type of privacy SARs compromise. Some philosophers consider privacy as critical to intimacy or human dignity. That is not the type of privacy sacrificed here. Instead, it is William Parent’s conception of privacy as control over one’s personal information. This type of privacy regarding money laundering—control over financial data—is not as fundamental or critical as other conceptions of privacy. Privacy of intimacy is a form of self-expression and liberty, both of which are values many philosophers consider the most important to achieve for a fulfilling life. The entire school of liberalism prizes liberty most highly of all values. Human dignity, of course, is also fundamental to a fulfilling human life. Kant, for example, reformulates his categorical imperative to prohibit any treatment of someone that violates their human dignity. These are critical core values that define what it means to be human. Simply put, control over financial data is not such a critical value, and to sacrifice it is not a flagrant violation of humanness that constitutes other forms of privacy.

In addition, SARs do not constitute an “unchecked security state,” a claim Adam D. Moore makes to justify prioritizing privacy over security. Certainly, some losses of privacy do constitute this: for example, the content of Edward Snowden’s leaks demonstrated a level of surveillance that was alarmingly secretive and widespread. SARs, however, have neither of these qualities. These are public laws and all agents doing business with MSBs are aware they could be subject to a SAR. Further, they are limited to transactions above a certain threshold, limiting the extent to which everyday people’s everyday transactions are monitored. Finally, the BSA is checked by the judiciary and the possibility of future legislation to overturn it, unlike secretive NSA surveillance.

However, a BuzzFeed News report on the FinCEN Files leak claims that in practice, most SARs were not acted upon: “The lack of money laundering enforcement had nothing to do with a lack of evidence of suspicious transactions, but a lack of interest by political and law enforcement leadership.” FinCEN, the relevant regulatory agency, failed to use these SARs to pursue money launderers. This, then, tips the delicate balance between security and privacy. The sacrifice of privacy for the well-being of society is not morally acceptable if the sacrifice does not truly lead to increased well-being and security. For this reason, the Bank Secrecy Act’s Suspicious Activity Reporting requirement is immoral in practice.

Works Cited

1. “What Is Money Laundering?” What Is Money Laundering? | FinCEN.gov, https://www.fincen.gov/what-money-laundering. 
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5. Author(s) John McDowell; Gary Novis. “Consequences of Money Laundering and Financial Crime.” Consequences of Money Laundering and Financial Crime | Office of Justice Programs, https://www.ojp.gov/ncjrs/virtual-library/abstracts/consequences-money-laundering-and-financial-crime.
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