A modulated light detecting and ranging (LIDAR) system has been developed to improve the detection of underwater targets. To study this detection scheme, this paper proposes a Monte Carlo simulation method for modulated pulse LIDAR systems. First, a Monte Carlo model is developed to simulate modulated pulse propagation in sea water. Second, a receiving system model is emulated with advanced signal processing tools like Fourier transform, cross-correlation and filtering. The simulation program based on the model is realized. This program is capable of predicting experimental results and helping in the design of more advanced transmitter and receiver configurations as various parameters of the environment, modulation and geometry are taken into account in our design. The calculations of backscattering frequency responses with different attenuation coefficients exhibit the low-pass filter-like response of backscattering. The modulated LIDAR results for a target depth of 5 m and attenuation coefficient of c = 0.67 and 0.85 m −1 are also computed. It is validated that the modulation approach can suppress volume backscattering clutter and can enhance the target contrast. Furthermore, comparisons with reported experimental results indicate the feasibility of the simulation model.