We answered this on 6/5/09; since you ask so nicely, here it is again.
Money laundering, as it’s generally understood today, is the practice of engaging in financial transactions in order to conceal or disguise the origin or source, as well as the nature, location, ownership, or control, of money that has been obtained outside the parameters of legality. This includes transactions designed to avoid cash-reporting requirements (also known as structuring or smurfing) and income-tax reporting requirements (also known as false accounting and tax evasion). Money can also be laundered through complex business networks of shell companies and trusts based in tax havens. And in today’s paranoid financial environment where cash is often assumed to come from illegal sources and, thus, is routinely confiscated by authorities, transactions as simple as changing up small bills into hundreds, or changing down hundreds into small bills, can be considered money laundering.
In the United Kingdom, money laundering has even been taken out of the realm of currency (and its equivalents, such as checks and electronic transfers) and now involves property and goods.
The term "money laundering" is often cited as originating from Mafia ownership of laundromats. Gangsters, in this case Al Capone during Prohibition, earning huge sums of cash from bootleg liquor (as well as gambling, prostitution, extortion, and other crimes) needed to show a legitimate source for the money. One method they used to legitimize the money was to buy outwardly legitimate businesses and mix the legal and illegal earnings together. Laundromats were strictly cash businesses that filled the bill -- thus, the term money "laundering." However, this notion has been largely debunked as apocryphal.
Instead, according to Jeffrey Robinson in his book The Laundrymen, the first reference to the term appeared in conjunction with the Watergate scandal during the Nixon administration. Nixon's Committee to Re-elect the President moved dirty campaign contributions to Mexico, then brought the money back through a company in Miami. The British newspaper The Guardian apparently coined the term, referring to the process as "laundering." It’s certainly an apt description of making dirty money clean.
However, there is a Mafia connection. Al Capone’s conviction and imprisonment for something as obvious and avoidable as tax evasion is said to have inspired Meyer Lansky, the financial brains behind the big organized-crime families that arose out of Prohibition, to invent various ways to hide or launder money. One method Lansky devised, for example, was the loan-back, whereby money deposited in numbered Swiss bank accounts could be disguised as legitimate "loans" provided by cooperative foreign banks.
It wasn’t until the 1980s, however, that the crime of money laundering started to attract significant global interest. Government’s increasing familiarity with the huge amounts of revenues generated by drug traffickers launched concerted efforts to "follow the money" and pass legislation to deprive the drug cartels of their illicit profits.
Today, the same is true for terrorists and their money and the imperative to root out money laundering impacts a vast majority of global digital transactions. Certainly in the U.S., the Financial Crimes Enforcement Network (FINCEN) collects and analyzes such information; this vast network of databases and financial records is warehoused by the U.S. Treasury Department and is believed to handle more than 140 million computerized financial records, compiled from 21,000 depository institutions and 200,000 nonbank financial institutions, every day of the year.
In a gambling context, money laundering largely centers around surfing, i.e., structuring bets in order to avoid cash-reporting paperwork mandated by the Bank Secrecy Act.
