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Category Archives: Economic terms and Buzz Words

Buzz word: Money Laundering

What is ‘Money Laundering’

Money laundering is the process of creating the appearance that large amounts of money obtained from serious crimes, such as drug trafficking or terrorist activity, originated from a legitimate source.

Money Laundering Scheme

Money Laundering Cycle Source: http://www.unodc.org

There are three steps involved in the process of laundering money: placement, layering, and integration. Placement refers to the act of introducing “dirty money” (money obtained through illegitimate, criminal means) into the financial system in some way; “layering” is the act of concealing the source of that money by way of a series of complex transactions and bookkeeping gymnastics; and integration refers to the act of acquiring that money in purportedly legitimate means.

One of the more common ways that laundering takes place is when a criminal organization funnels their illegally obtained cash through a cash-based business, slightly inflating the daily take. These organizations are often referred to as “fronts.” In the popular television series “Breaking Bad,” the methamphetamine dealer funnels his earnings from selling illicit drugs through a series of car-wash businesses.

Other common forms of money laundering include smurfing (A smurf is a colloquial term for a money launderer. Also refers to one who seeks to evade scrutiny from government agencies by breaking up a transaction involving a large amount of money into smaller transactions that are below the reporting threshold. The term is derived from the cartoon characters known as The Smurfs) , where a person breaks up large chunks of cash and deposits them over an extended period of time in a financial institution, or simply smuggles large amounts of cash across boarders to deposit them in offshore accounts where money laundering enforcement is less strict.

 

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BUSINESS TERM OF THE DAY: Cockroach Theory

Cockroach Theory is a A market theory that suggests that when a company reveals bad news to the public, there may be many more related negative events that have yet to be revealed. The term comes from the common belief that seeing one cockroach is usually evidence that there are many more that remain hidden.

A cockroach theory suggests that one piece of bad news indicates more bad news will follow.

The name comes from the common belief that the discovery of one cockroach means more are hiding nearby.

A cockroach theory can have crushing effects on an entire industry or a single business.

Investors who buy into a cockroach theory upon hearing bad news, such as a bad earnings report, will pull their support because they expect the worst. The company’s stock value will plummet as investors sell their shares.

Companies can limit the impact of negative earnings by releasing only parts of the story at a time, or by delaying their announcement as long as possible.  Bad news from one company will often be followed by bad news from another in the same industry.

 
 
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