Stages of Money Laundering
In today’s interconnected world, financial crime threats economic integrity, and money laundering schemes stand out as a complex and elusive element.
Therefore it is vital to understand the stages of money laundering for individuals, companies and authorities alike.
In this blog post, we will delve into the subtleties of money laundering stages and uncover the mechanisms by which criminal money is transformed into seemingly legitimate assets.
So let’s embark on this journey and uncover the hidden world of legal and illegal wealth.
Table of Contents
Money laundering is a method of hiding the source of illegally obtained money, converting it into legal tender, and introducing it into the legal financial system. The main objective of money launderers and corrupt actors is to make the money obtained from illegal activities appear legitimate.
It means that illicit funds are concealed, mixed with legitimate proceeds, and channeled back to the criminals. In this way, they make it harder for law enforcement authorities to trace the money. Money laundering is associated with various crimes, e.g., drug trafficking, terrorism, tax evasion, fraud, theft, and embezzlement.
Determining the actual extent of money laundering can be difficult due to its shady nature. The dark web and its illicit transactions make it even more difficult.
However, according to the UK’s National Crime Agency (NCA), the national economy loses more than £100 billion a year.
Money laundering is a serious crime and a threat to the legitimate financial system. It is linked to the financing of terrorism and other organised criminal activities.
Anti-money laundering authorities such as the NCA apply strict rules and update them regularly to combat this illegal activity.
Targets of money launderers
Any business can be involved in money laundering. However, industries that facilitate high-value transactions are most at risk.
Financial institutions and service providers, casinos, real estate agents, dealers in luxury goods, artwork, legal firms, accountants, and payment agencies are common laundering destinations.
Due to their high vulnerability, these cash businesses are subject to strict AML regulations.
Money laundering process
There are three stages of the money laundering process:
These stages of money laundering come from methodologies revealed by law enforcement and authorities. They can be carried out simultaneously in a single transaction or separately. Each phase presents unique challenges and is complex due to the nature of the criminal activity involved.
Placement is the first of three stages of money laundering. The placement money laundering stage refers to an infusion of “dirty” money into the legitimate financial system.
It is achieved by breaking down large sums of cash into smaller, less suspicious amounts, transferring them to various bank accounts, and adding them to legitimate takings. Financial criminals use a few methods in the placement phase:
⭕ The blending of funds
Using this method, criminals mix illicit profits with legitimate business income. It often happens with businesses that have minimal variable costs. Historically, cash-based businesses such as tanning salons, car washes, casinos and strip clubs have been targets for this purpose.
⭕ Fraudulent bookkeeping
Invoice fraud is one of the easiest and most common methods. In this case, criminals often use invoice fraud to transfer dirty money.
It can include over- or under-invoicing, falsely describing goods or services and fictitious shipping. These forged documents serve as a basis for payments made abroad.
Ironically, this method resembles the cartoon with the little blue people. Smurfing is when criminals break down large sums of dirty money into smaller operations. It keeps them within the notification threshold and thus avoids detection.
These smaller amounts are usually transferred to one or multiple accounts by several individuals (known as “smurfs”) or by one person over time.
⭕ Offshore accounts
The laundered money is usually transferred to offshore accounts. These foreign bank accounts of offshore companies allow the actual beneficial owners to avoid tax obligations.
⭕ Carrying small sums of cash abroad
Money can enter the financial system by travelling abroad. It happens when people physically take small amounts of cash abroad and transport it below the specific customs declaration threshold. Owners transfer these illegally acquired funds to foreign bank accounts and then send them home.
⭕ Through aborted transactions
This method transfers money to a lawyer or accountant. The latter would hold it temporarily until the completion of a transaction. After the deal cancellation, the funds return to the offender from a seemingly legitimate source.
Overall, during the placement, criminals are more vulnerable as they move large sums of money directly into the financial system. Therefore, this requires careful masking and laundering of illegal funds.
The purpose of the layering stage of money laundering is to make it more difficult to trace the laundered funds and hide their illicit origin. To do this, the money launderer employs a variety of tactics:
- Transferring money electronically from one country to another using legal loopholes.
- Converting money into financial instruments, e.g., stocks.
- Investing in real estate or using “shell” companies with a functional front.
In the layering stage, dirty money is converted into large amounts of clean and untraceable funds. It involves a complex web of financial transactions that enables the concealment of the sources and ownership of illegal money.
The money launderer may have access to several banks and accounts. They may also hire professionals as intermediaries and carry out complex financial transactions.
It may include converting cash into travellers’ cheques, money orders or bank transfers. They can also purchase valuable assets such as artworks or jewellery.
Layering helps to create confusion and distance between the proceeds of crime and their current appearance. It masks audit trails and obscures the identity of the perpetrators. Therefore, it prevents any possible investigation. It is a strategic game.
By layering financial transactions, using fraudulent bookkeeping, and holding multiple bank accounts, money launderers evade paying tax and make it more difficult for authorities to detect money laundering activities.
Examples of layering in money laundering
Once the funds have successfully entered the financial system, money launderers continue to carry out a wide range of operations to disguise their illegal activities. At this stage of money laundering, they use techniques such as:
- Betting money on casinos
- Purchasing securities
- Purchasing financial products
- Funnelling funds through holding companies
- Purchasing of foreign currencies
- Operating cryptocurrencies through various exchanges and tokens.
In general, layering is a complex stage of the money laundering process. It involves a series of financial transactions that hide the source and ownership of illicit money. The actions that take place at this stage make it difficult for the authorities to trace the origin of the criminals.
Money integration into the legitimate financial system
Integration is the final stage of the three stages of money laundering. At this stage, criminals seek to integrate their illicit cash into the legitimate financial system so that they appear to come from legitimate sources.
Integration aims to reunite the money with the criminal without drawing attention to it and allow him to enjoy the illicit money.
For that, criminals often use laundered money to make purchases on the property market, buy shares and invest in luxury assets such as works of art, jewellery or expensive cars.
This further legitimizes their criminal proceeds. One method of integrating dirty money is to create fake employees and channel illegal funds into their accounts. They may also pay themselves loans they do not intend to repay or distribute dividends to the company’s shareholders.
These methods make it difficult to distinguish between legitimate and illegitimate assets and catch the criminal without sufficient documentation from the earlier stages.
In addition, it is crucial to note that the money laundering process is complex. Furthermore, the three stages of money laundering can overlap.
Anti-money laundering regulations
Anti-money laundering provisions help combat money laundering by governments and financial institutions.
These regulations help to detect and prevent illegal activities in financial systems, including the concealment of the origin of the proceeds of crime.
Financial institutions are required to implement controls such as:
- Customer identification
- Transaction monitoring
- Suspicious activity reporting
What is the common stage in money laundering?
A common stage of money laundering is integration. In this final stage, criminals reintroduce the laundered funds back into the legal economy. This method makes it appear as if it has come from legitimate sources.
What is the layering process in money laundering?
In this stage, financial criminals create multiple financial transactions to conceal the origin and ownership of illicit funds. It is done by creating multiple layers of transactions and financial movements to make it difficult to trace the source of the criminal money.
What is an example of placement in money laundering?
One of the simplest examples of money laundering is when illicit funds enter the financial system through cash deposits, bank transfers or investments.
For this to happen, criminals place the illicit money in a legitimate financial system or use it to buy assets. It makes the funds appear to come from legal sources.