Layering in Money Laundering: Unveiling the Complexity

When it comes to financial crimes, one practice stands head and shoulders above the rest in terms of its complexity, and that is money laundering. This isn't a run-of-the-mill crime. Money laundering is a sophisticated operation that requires careful planning, an in-depth understanding of financial systems, and a knack for exploiting loopholes in these systems.

At the heart of this elaborate scheme lies a process known as 'layering'. Layering in money laundering can be likened to the artistry of a master illusionist. It's about creating a facade, a smoke screen of convoluted transactions that serve one purpose - to obfuscate the illicit origin of funds.

Imagine trying to follow the path of a single leaf carried by a whirlwind. This is the complexity that layering introduces to money laundering. It involves creating a series of intricate financial transactions, each designed to distance the illicit funds from their source further, complicating the trail and making the process of tracing the money back to its origin increasingly difficult for authorities.

The layering process might involve transferring funds between multiple banks or across different countries. It could entail trading in high-value assets, like property and shares, or using the money to purchase and then quickly sell these assets. In some cases, the layering process even involves the use of cryptocurrencies, exploiting their decentralized nature to add another degree of complexity.

Definition and Purpose of Layering

Layering is a crucial stage in the money laundering process, where the aim is to confuse the paper trail and make it harder for authorities to trace the money back to its illicit source. This process involves creating a series of intricate financial transactions, each designed to distance the illicit funds from their source further, complicating the trail and making it increasingly difficult to follow.

The layering process might involve transferring funds between multiple banks or across different countries. It could entail trading in high-value assets, like property and shares, or using the money to purchase and then quickly sell these assets. In some cases, the layering process even involves the use of cryptocurrencies, exploiting their decentralized nature to add another degree of complexity.

Techniques Used in Layering

To achieve the desired complexity and confusion, criminals employ various techniques during the layering stage of money laundering. These techniques include:

• Breaking Up Large Amounts of Money: One common practice in the layering phase is breaking up large amounts of money into smaller, less noticeable transactions. This technique, often referred to as structuring or smurfing, takes advantage of regulatory thresholds that require financial institutions to report transactions above a certain amount. By staying below the reporting threshold, money launderers aim to evade detection and draw less attention to the transactions.
• Transferring Funds: Rapid transfer of funds between accounts and financial institutions is another core tactic used during the layering phase. These transactions might occur across different banks, between various countries, or even among separate financial institutions. Each transfer serves to cloud the financial trail further, making it increasingly challenging for investigators to follow the path of the money back to its original illicit source.
• Purchasing and Selling Assets: The buying and selling of high-value assets is another technique used in the layering phase. Criminals might purchase assets such as real estate, luxury cars, yachts, or precious metals and gemstones with illicit money. These assets are then quickly sold, and the funds generated from these sales appear to be legitimate income.
• Using Digital Currencies: The emergence of digital currencies like Bitcoin has introduced a new tool for money launderers. Transactions with cryptocurrencies can be difficult to trace, providing an attractive avenue for layering. Criminals can convert illicit money into Bitcoin, transfer the Bitcoin to a different wallet or exchange, and then convert it back into traditional currency or another cryptocurrency. The blockchain technology behind these digital currencies can provide a veneer of anonymity, making it harder for authorities to trace the transactions.

Layering and Anti-Money Laundering Measures

Detecting and preventing layering activities is a crucial aspect of anti-money laundering (AML) efforts. Financial institutions and law enforcement agencies worldwide employ various measures to combat money laundering, including layering. These measures include:

• AML Compliance Programs: Financial institutions are required to establish and maintain robust AML compliance programs that include policies, procedures, and controls to detect and prevent money laundering, including layering activities. These programs are designed to ensure that institutions comply with relevant AML regulations and report any suspicious activity to the appropriate authorities.
• Transaction Monitoring Systems: Financial institutions utilize advanced technology, such as transaction monitoring systems, to analyze customer transactions and identify suspicious activity. These systems use algorithms and machine learning to detect patterns and anomalies that may indicate layering or other forms of money laundering.
• Know Your Customer (KYC) Practices: KYC procedures are an essential component of AML measures. Financial institutions are required to verify the identity of their customers, understand the nature of their business, and assess the risks associated with their transactions. By obtaining comprehensive customer information, institutions can better detect and prevent layering activities.
• Suspicious Activity Reporting: Financial institutions have a legal obligation to report any suspicious activity, including layering, to the financial intelligence unit in their jurisdiction. Suspicious Activity Reports (SARs) are confidential reports that provide crucial information to authorities and aid in the detection and investigation of money laundering activities.

Challenges Faced in Detecting Layering

Detecting layering activities poses significant challenges for financial institutions and law enforcement agencies. The complexity and intricacy of layering transactions make them difficult to identify and trace. Some of the challenges faced in detecting layering include:

• Vast Amounts of Data: Layering involves numerous transactions across different accounts, banks, and countries. Analyzing and connecting these transactions can be overwhelming, especially considering the vast amounts of data involved.
• Sophisticated Techniques: Criminals continually adapt their layering techniques to evade detection. They employ sophisticated methods such as structuring transactions to stay below reporting thresholds and using digital currencies to obscure the money trail.
• Evolving Technologies: The use of emerging technologies, such as cryptocurrencies and anonymous online platforms, adds another layer of complexity to layering activities. These technologies can make it harder to trace transactions and identify the individuals behind them.
• Global Nature of Money Laundering: Money laundering is a global issue that often involves transactions across multiple jurisdictions. Coordinating international efforts and ensuring effective cooperation between different countries' law enforcement agencies is a significant challenge.

Despite these challenges, financial institutions and law enforcement agencies are continuously improving their capabilities to detect and prevent layering activities. The advancement of technology, such as artificial intelligence and machine learning, has proven valuable in identifying patterns and anomalies that may indicate layering.

Examples of Notorious Layering Schemes

Numerous notorious layering schemes have been uncovered over the years, highlighting the complexity and impact of layering in money laundering. Some examples include:

• The Panama Papers: The Panama Papers leak in 2016 exposed an extensive network of over 200,000 shell companies, set up by the Panamanian law firm Mossack Fonseca. These companies were used by influential individuals worldwide to facilitate money laundering, tax evasion, and other illicit financial activities. The intricate web of these companies created layers of transactions that obscured the origins and true ownership of the funds.
• Trade-Based Money Laundering: Trade-based money laundering involves manipulating trade transactions to disguise the movement of illicit funds. Criminals may over-invoice or under-invoice goods and services, over-ship or under-ship goods, or falsely describe goods or services to create layers of complexity and obfuscate the money trail.
• Use of Offshore Accounts and Shell Companies: Criminals often use offshore accounts and shell companies to layer and conceal illicit funds. These accounts and companies provide a higher level of financial secrecy, making it more challenging for authorities to trace the money back to its origin.

These examples highlight the need for continuous advancements in technology, regulation, and international cooperation to detect and disrupt layering activities effectively.

Conclusion

Layering in money laundering is a complex process designed to confuse and conceal. However, with a thorough understanding of what layering is and how it works, along with robust AML policies, ongoing monitoring, and international cooperation, it is possible to detect and disrupt this process. As we continue to advance in technology and global collaboration, we stand a better chance in the fight against money laundering.

The countries that are suffering the most due to money laundering have complex financial systems, ineffective AML/CFT compliance programs or operations, which leads them to become vulnerable to various criminal activities. Current AML programs powered by legacy rule-based systems are proving costly to manage and ineffective as criminals constantly improve their laundering strategies.

Modern RegTech solutions powered by artificial intelligence, machine learning and big data analytics can effectively detect layering techniques such as the use of money mules and offshore shell companies.

To know how Tookitaki helps financial institutions of all types and sizes strengthen their AML compliance programmes, book a demo with us.

Frequently Asked Questions (FAQs)

What are examples of layering in money laundering?

Examples include the use of offshore accounts, shell companies, and rapid buying and selling of assets.

What are the 3 layers of money laundering?

The three stages of money laundering are placement, layering, and integration.

How can businesses protect themselves from being used for layering in money laundering?

Businesses can protect themselves by implementing a comprehensive Anti-Money Laundering (AML) program. 

What are the consequences of failing to detect and report layering activities in money laundering?

The consequences can be severe for businesses that fail to detect and report layering activities in money laundering. These might include substantial financial penalties, regulatory sanctions, and reputational damage.