(FORTUNE Magazine) – Money laundering. It sure sounds malevolent, doesn't it? The people who do it seem like very bad people: Mob bosses, Colombian drug lords, and in the currently unfolding and instantly notorious case of the Bank of New York, Russian organized crime figures. Lurid images spring to mind. A Time magazine article last year began, "Like a vast, polluted river overflowing its banks, the illicit drug money spreading across Latin America has long been recognized as the region's most dangerous erosive force."

But what exactly is "money laundering," and why is it such a heinous crime? What kind of a crime is it, exactly? Let's begin with the paste-in definition that the New York Times--America's newspaper of record--has been using:

"Money laundering is a legal catch phrase that refers to the criminal practice of taking ill-gotten gains and moving them through a sequence of bank accounts so they ultimately look like legitimate profits from legal business. The money is then withdrawn and used for further criminal activity."

Take out the pejorative adjectives, and the first sentence would almost work as a definition of an ordinary banking relationship. You put money in your checking account, move some into savings, move some into a CD, and eventually you put it back in checking, withdraw it, and spend it. The second sentence, about "further criminal activity," has a nice ring to it, but it's incorrect. The money-laundering laws say nothing about how the money is used after it's laundered.

Money laundering, in fact, is one of the few crimes defined not by what you do but by whom you do it with. It's only been illegal since 1986. It is also, we will argue, the nose of a potentially dangerous governmental camel thrust firmly under the tent of American corporate privacy.

The war against money laundering is really a second front in the failed war against drugs. "We will not win the war on drugs by following the tons of cocaine and heroin and marijuana that move through our streets," admits Raymond W. Kelly, commissioner of the U.S. Customs Service. "We will win it by following the billions of drug dollars that move through our financial system."

America's bankers have been drafted into the drug-fighting army. The essence of the money-laundering law is that it puts the onus for detecting potentially illegal activity on bankers. This may seem reasonable: After all, it's illegal to sell liquor to minors, and rightly so. But it's relatively easy to determine who is and isn't 21. Determining whether a potential customer is a criminal is much harder. Sure, if someone comes into your bank with a suitcase full of cash and won't give a permanent address, you can make your own assumptions. But few cases are so cut-and-dried. Take the Bank of New York case. At least one of the businesses allegedly linked to the Russian mob was a publicly traded Canadian company that also ran a legitimate business manufacturing and selling industrial magnets in Hungary.

But say you do know your potential customer is a crook. Isn't opening a bank account for such a person just like knowingly buying stolen property? The answer is, not exactly. The money-laundering statute requires not that bankers refuse to do business with crooks, but that they report "suspicious activity" promptly to the federal authorities. You, as an ethical citizen, may be unwilling to buy something offered for sale if you suspect it's stolen. But would you feel comfortable if you could be prosecuted for failing to immediately inform the police of your suspicions?

Before you blow off the question because you think all bankers deserve whatever they get, consider this: The next draftee in the war against drugs may be all of corporate America. One of the new ways Columbian drug lords have found to launder money is by using "peso brokers" to buy U.S. manufactured goods that are then imported and sold for local currency. The feds are urging exporters of such things as appliances and consumer electronics to take steps to ensure that the buyers aren't crooks, with the implicit threat that they could face legal action if they're not careful. And why not? It's worked before. As one unnamed law enforcement official told the Journal of Commerce, "The threat of prosecution is an excellent way to solicit volunteers."

--Rob Norton