What Is Money Laundering?

By Jeremy Bowman – Updated Nov 12, 2025 at 11:47 AM EST

Key Points

Money laundering moves illicit funds into legal channels, often through complex financial maneuvers.
Banks combat money laundering with systems like KYC practices and transaction monitoring.
Enhanced tech and AI could improve detection and prevention of money laundering activities.

Much like it sounds, money laundering is the act of cleaning dirty money. In this case, dirty money refers to money gotten through illegal means, and cleaning it means making it look like it was obtained legally.

Money laundering is illegal, and it’s a serious problem in the financial systems. Global banks often devote significant resources to fighting it to ensure that they’re not enabling criminals.

In this look at money laundering, you’ll learn what it is, how it works, and why it matters.

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Person holding dollar bills up under their eyes. — Image Source: Getty Images

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Understanding money laundering

Money laundering is the process of making illegally gotten financial assets appear as though they were obtained legally. All kinds of criminals use money laundering, including drug dealers, terrorists, arms dealers, white-collar criminals, and thieves. Laundering makes the money they use untraceable to criminal activity.

Money laundering generally involves a three-step process. Ill-gotten money is placed with a financial institution, often offshore. This is known as placement. From there, the money goes through “layering,” which refers to a complex series of transactions to obscure the source of the money and make auditing difficult. Finally, the money is integrated in the financial system to make it appear like it was obtained legally; one common way to do this is through purchasing real estate.

Why it matters

According to the United Nations Office on Drugs and Crime, money laundering schemes account for a whopping 2%-5% of global GDP, or roughly $2 trillion. The U.S. Treasury estimates that $300 billion in illegal funds enters the U.S. every year.

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Gross Domestic Product (GDP)

Gross Domestic Product, or GDP, is a crucial measure of economic activity that helps policymakers and investors with decision-making.

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Banks and law enforcement agencies work together to fight money laundering through coordinated anti-money laundering systems and policies, know-your-customer practices so banks understand who they’re doing business with, and monitoring for suspicious transactions. Banks also rely on cybersecurity systems to deter fraud and reduce vulnerability to illegal activities.

Money laundering is a difficult problem to stop because there are so many different ways to do it, and there is so much banking activity to search through. Criminals are always looking for creative ways to launder their money and stay ahead of law enforcement.

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What you should know about money laundering

Money laundering imposes a larger cost on society by giving criminals funds to run illegal activities, but these criminals can also prey on everyday citizens through phishing scams and other techniques that allow them to use your bank account to clean their money. Examples might include an email telling you you’ve won a prize, or informing you that you have inherited money from a long-lost relative as a pretext for collecting your banking information. Sometimes, they even start on online dating websites.

If you suspect you’ve been the target of a money laundering scheme, the best thing to do is to cut off all communication with the criminal in question and report it to your financial institution and local law enforcement, especially if you’ve given the criminal your personal information.

Like most things in life, if an unsolicited email or offer sounds too good to be true, it probably is.

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About the Author

Jeremy Bowman has been a contributing Motley Fool stock market analyst, covering technology, consumer goods, and macroeconomic trends since 2011. Before The Motley Fool, Jeremy was a newspaper reporter, restaurant manager, and English teacher abroad. He holds a bachelor’s degree in English from Colorado College and a master’s degree in business administration from American University. One of his Motley Fool headlines was briefly featured on Late Night with Stephen Colbert.

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Wells Fargo is an advertising partner of Motley Fool Money. HSBC Holdings is an advertising partner of Motley Fool Money. Jeremy Bowman has positions in Wells Fargo. The Motley Fool recommends HSBC Holdings. The Motley Fool has a disclosure policy.