CRIMINALS and terrorists need to move assets around without attracting attention. To achieve this, billions of pounds is "laundered"each year.

Dr Jackie Harvey is principal lecturer in finance at Northumbria University's Newcastle Business School.

She said: "By its very nature, money laundering occurs outside the normal range of economic statistics and remains unobservable, and therefore difficult to quantify.

"In the UK, it is part of the shadow economy, which encompasses a wide range of activities, both legal and illegal. That shadow economy currently represents around 13 per cent of gross domestic product, which puts its value at around £132bn.

"Of that, around £25bn is believed to be laundered money.

"However, there is real difficulty involved in calculating the actual size of the money laundering problem. Estimates regarding its global scale are, for the large part, little more than informed guesses."

Money laundering takes place in stages. The money arrives in the financial system and is channelled through shell companies, in which the directors are little more than front men for those who benefit from the money. The money then returns to the person who started the process, only now, its true origins are hidden.

Soon, financial organisations not doing enough to tackle these activities may find themselves in the dock. And it is not just the possible legal sanctions that should concern such institutions.

Dr Harvey said: "One of the biggest threats to an organisation caused by money laundering is to its reputation.

"While the £25bn of funds laundered annually is a drop in the ocean compared to the £5,500bn of transactions carried out by British banks, the damage it can do to their reputation can be massive."

Governments around the world are taking steps to make it harder for international terrorists to operate. The new rules are designed to strengthen the financial system, and involve a substantial increase in the number and type of businesses subject to anti-money laundering regulations.

For the first time, dealers in high-value goods, such as cars, jewellery, fine art and even yachts will have to comply with the regulations introduced earlier this month, whenever the transaction involves a total cash payment of more than £10,000.

Estate agents and casino operators are also caught by the new regulatory regime.

The law also affects professional service firms, including accountants, lawyers, and insolvency and tax advisors.

Business advisor PricewaterhouseCoopers (PwC) predicts that many businesses may find it difficult to comply, particularly those lacking a professional or supervisory body and therefore denied easy access to information and guidance on the regulations.

The result may be little understanding and a failure to implement the necessary compliance procedures. This could be far more than just a clerical problem. Failure to report laundering activities carries a penalty of up to five years' imprisonment and an unlimited fine.

Andrew Clark, partner in the investigations and forensic services practice at PricewaterhouseCoopers, said: "The extension of anti-money laundering laws leaves fewer loopholes for criminals to exploit. It will provide valuable additional information to the police, and prosecutions should rise. However, many businesses affected by the regulations for the first time will face an uphill task to comply."

Last year, PwC estimated that complying with the new regulations could cost the big five banks up to £60.2m a year, and the rest of the banking sector £42m a year.

The cost to the capital markets and insurance investment market could be another £69m.

Dr Harvey said: "The sectors most at risk from the money launderers, and therefore these new regulations, are the banks and building societies where the cash enters the financial system.

"It is an offence under the new regulations for a firm to fail to apply proper anti-money laundering procedures and failure to comply can result in imprisonment and unlimited fines.