Money laundering involves three stages to turn dirty money into clean money:
1. Electronic money
Electronic money (or e-money) is money that is represented digitally and can be exchanged by means of smart card from one party to another without the need for an intermediary. It is anticipated that e-money will work just like paper money. One of its potential key features is anonymity.

The proceeds of crime that are in the form of e-money could therefore be used, for example, to buy foreign currency and high value goods to be resold. E-money may therefore be used to place dirty money without having to smuggle cash or conduct face to face transactions.
2. Layering
Once the dirty money has been placed, the money launderer works it through a complex series of transactions to separate it from its illegal origins. This process is known as layering. It may involve the transfer of money through a series of offshore companies or the purchase of goods for re-sale. The launderer may try to legitimise the money by laundering it through a solicitor’s client account or by paying tax on it as purported income from a business!

It is the layering stage where the use of the Internet is most likely to facilitate money laundering. If the procedures for opening an Internet bank account are permitted to take place without face to face contact or without a link to a pre-existing traditional bank account, where the customer has to produce documentary evidence of identity, a money launderer may find it easier to set up accounts in false names that cannot be traced back to him.

The money launderer can control transactions from his PC. He can transfer money virtually instantaneously and thereby build up an extensive audit trail in a short space of time. The transfers can be made through many jurisdictions making it harder for prosecutors from one jurisdiction to follow the audit trail.

With the Internet there is the added jurisdictional issue of where the transaction takes place. Does it take place where the launderer is located, where the server is located or where the accounts are held? A joint report last year by the Bank of France and the French Banking Commission suggested that the last of these three locations is where the transaction takes place.

Layering may also become easier if the money can be transferred between banks that deal with e-money. Then the anonymity features of some types of e-money may make the source virtually untraceable.
3. Integration
Finally the money needs to be used by the owner, ensuring that the owner’s consequent wealth appears legitimate. This process is known as integration. A common traditional technique is to raise false invoices for goods and services.

The owner could use a company that provides Internet services to make it appear that services are being provided in return for the payment of monies that have passed through the layering process. For example, the laundered money may be in a bank account held in the name of a fictitious person or shell company. Payment would be made from that account to the Internet service company, as purported payment for a service. The service may be an Internet casino or betting facility. However the service would never be delivered – there would be no (net) winnings paid back to the account. The payment would appear as profit in the books of the Internet service company. Thus the wealth of the owner would appear to be legitimate – the profit of his Internet company.

This has greater scope than the traditional provision of goods and services where to legitimise the false invoicing may involve extensive paperwork such as documents evidencing delivery of goods and purchase of raw materials. Services may also be restricted to a particular geographical area. It may therefore be harder to justify a substantial turnover. It may also raise suspicions if money is being transferred from overseas banks or substantial amounts are being transferred through a few banks in the vicinity of the company’s operation.

On the other hand, Internet services tend to have lower overheads that needed to be accounted for and need not be limited geographically.


Reference:
http://www.antimoneylaundering.ukf.net/papers/solicitor.htm