... like I'm 5 years old
Money laundering can be explained simply as the process of making illegally-gained proceeds appear legal. It's like a magic trick. Imagine you're a magician with a rabbit. You know that everyone will be watching you closely to see what you do with the rabbit. You don't want to get caught hiding it, so you use a little bit of trickery. You convince everyone that the rabbit has disappeared and then you make it reappear somewhere else, making it seem as if it was there all along. That's how money laundering works.
Imagine you're a magician and your illegal money is a rabbit. Through a series of tricks and illusions, you can make it seem like the rabbit has disappeared and then make it reappear somewhere else, all clean and legal.
... like I'm in College
Money laundering is a three-step process: placement, layering, and integration. Placement involves introducing the illicit money into the financial system. This could be done by splitting large amounts of cash into less conspicuous smaller sums that are then deposited directly into a bank account, or by purchasing a series of instruments such as checks, bank drafts, or money orders, that can then be exchanged in another country.
Layering is the act of masking the money trail to foil any attempt at tracing the funds. This might involve moving the funds around, often between different accounts and different financial institutions across the globe, changing the money's form, or using it to purchase high-value items to change the form of the money.
Finally, integration involves making the 'clean' money re-enter the legitimate economy, often by investing it in real estate, luxury assets, or business ventures. The laundered money is now intertwined with the legitimate economy and the ‘dirty money’ appears ‘clean’.
Let's imagine the process of money laundering with Lego bricks. Suppose you have a pile of red Lego bricks (representing the illegal money). You want to mix these red bricks with your pile of blue bricks (the legal money) without anyone noticing.
First, you would scatter the red bricks (placement) among other Lego sets, maybe even exchanging them for other colored bricks in the process. Then, you'd move the disguised bricks between different boxes (layering), maybe even selling some bricks to your friends or trading them for different pieces to further confuse the origin.
Finally, you would slowly start adding the disguised bricks back into your main pile of blue bricks (Integration). If anyone were to look at your pile of bricks now, they would just see a mix of colors and would not be able to tell which bricks were originally the red ones. This is how money laundering works, just on a much larger and complex scale.
... like I'm an expert
For a money laundering expert, the process goes beyond the simple three-step process. The sophistication with which money launderers operate is complex, involving a global network of legal and illegal entities.
Placement can involve 'smurfing', where the large transactions are broken down in smaller less suspect amounts. In some instances, the launderer might employ a technique called 'compounding', where transactions are performed at increasing amounts to avoid suspicion.
Layering may involve international transactions to complicate the paper trail, or even the digital equivalent - cryptocurrency transactions. Money launderers may use offshore accounts, shell companies, or trusts to hide the origin of the funds.
Integration often involves legitimate businesses which are co-owned by the launderer and an unsuspecting partner. The launderer can also use 'front companies' that appear to be legitimate but are actually controlled by the launderer.