Mixes ones funds with others with the intention to confuse the trail back to the original source of the funds.
Compared to the traditional financial systems this service might be the equivalent of moving funds through banks located in countries that have strict bank-secrecy laws. Such countries include the Cayman Islands, the Bahamas, and Panama.
Mixing helps protect privacy however mixing can also be used for money laundering.
The term money laundering refers to the practice where this mixing is performed because the funds are illegally obtained. After laundering, the funds appear legitimate.
Mixing large amounts of money may itself be illegal, being in violation of anti-structuring laws.
There has been in Bitcoin's history the situation where an exchange has blacklisted bitcoin deposits due to them having taint and descending from bitcoins that were stolen. Unless the exchange follows the trail, manual or lightly automated mixing methods can make detection of taint more difficult even though this approach does protect privacy like a true mixing service would.