Criminals profit immensely from illegal activities such as human trafficking, sales of arms and prohibited drugs, extortion, corruption and theft. They, somehow, need to conceal the criminal nature of the money they have in order to use them as they wish. Money laundering is the process of disguising the dirty money’s illegal origin to use it for legitimate purposes. There are three stages of money laundering: placement, layering and integration. It is important for financial institutions to understand each of these money laundering stages to develop effective anti-money laundering (AML) strategies. In this article, we will look in detail at different money laundering stages, what is layering with its definition and what does layering mean in money laundering with some examples.
Stages of money laundering
Money laundering can occur through a series of complex bank transfers or financial transactions, which prevents government officials from tracking the origins of the illegal income. Using different methods and multi-layered schemes, both small and large groups of terrorists can utilize their illicit funds without any detection from the law enforcement agencies and use them further to sustain criminal resources or carry out various unlawful acts/terrorist attacks.
Despite the level or nature of the crime, money launderers make use of 3 different stages of money laundering to convert their illicit proceeds from the illegal acts. The three different stages are:
It’s the first stage, where the illicit proceeds are introduced into the legal financial system. There are various techniques of placement – be it smurfing, electronic transfers, bulk movement, asset conversion, etc. In the case of smurfing, the criminal can do multiple transactions in different banks in a single day, less than the threshold amount ($10,000) so that the transfers go undetected by the bank or law enforcement agencies. The deposited amount may be transferred to a third party for safekeeping or to a security firm.
This is the second stage where the origins of the funds are concealed by moving them around in a series of complex bank transfers or financial transactions. Out of the various techniques of layering, the most common is to make electronic transfers between different jurisdictions and through offshore accounts. For instance, the criminal may wire the proceeds to a corporation in an overseas island where the money trail doesn’t end because the same corporation can be owned by a trust on another island.
The third and final stage is integration where the proceeds can no longer be detected by the officials and are infused back into the economy. The different methods of integration include the sale and purchase of real estate properties, expensive gifts, loans, false import/export invoices, which in turn helps to hide the source of the illegal income and reintroduces the funds into the financial system, for the use of criminals.
A pictorial representation of the three stages of money laundering is given below.
Details of the placement stage of money laundering
Placement is the first step or the initial stage which involves placing the illegal proceeds of the crime into a legal source through the use of financial instruments or financial institutions, to help conceal its origins. The process of placement can be tedious if the money is in bulk, so the large cash amounts are broken into various small amounts and deposited at different occasions over time. They may be deposited into a single financial institution with different offices or in multiple institutions. The amount is broken from one currency into another, converted from a smaller note to a larger denomination, whichever separates the funds further from the criminals as well as the scene of the crime. The monetary amount may also be converted into different financial instruments, money orders, assets to confuse the authorities, divert suspicion or prevent detection.
Details of the layering stage of money laundering
What is layering? Layering in money laundering is defined as the process of using layers of transactions or multiple financial instruments to reinforce the legitimate look of criminal money. Once the crime proceeds have entered the financial system, and their origins are separated from the criminal source, then the funds are moved, dispersed, and disguised to lessen the suspicion or prevent detection from the law enforcement. The funds are broken into smaller transactions and transferred overseas to keep the money moving internationally and prevent the authorities from tracking the finances easily. Since the money is transferred electronically, it becomes even easier to trade the money overseas. In recent times, money launderers can use the proceeds to trade various stocks overseas in various markets, hide the transfer as a payment for goods/services, or transfer the funds to a shell corporation.
Details of the integration stage of money laundering
Integration is the last step in money laundering where the funds are integrated back into the economy/financial system for the use of the criminal at his/her will. The process of integration can happen through different means such as the purchase/resale of real estate, expensive goods, luxurious assets such as jewellery, diamonds, or any item that amounts to huge sums of money. In the integration step of money laundering, criminals or terrorist groups can easily retrieve the laundered money and fully integrate it into a legal system and use it for their purpose.
What does layering mean in money laundering?
Amongst the three different stages of money laundering, as mentioned above, the second stage – layering is where most of the action happens to conceal the original source of the illegal proceeds. The name ‘layering’ is used for the stage as criminals use different layers of transactions through which the funds are legitimised. The different layers denote the sequence of complex financial transactions which mix up the funds through the international financial transfers and camouflage the illegal profits. The launderer will try to move the funds between various bank accounts and through different countries by using different financial institutions so that the money trail is far too complex to be traced back to the original criminal or the original source of income. The funds can be shifted/moved up to more than ten times before they are integrated back into the financial system.
The importance of modern technology to detect layering techniques
There are various methods to launder money such as multiple deposits of small amounts for sale/purchase of antiques or expensive art pieces and transfer of illicit proceeds through a series of complex bank transfers made from offshore accounts in different countries. Despite the method used, the above-mentioned stages of money laundering can occur in any country as they can be performed separately, without any trace of the original scene of the crime.
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 to be costly to manage and ineffective as criminals constantly improve on 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, request a demo with us.
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