Money laundering is one of the most common forms of organised financial crime in the world. To ensure you understand the stages of money laundering, let’s delve into the most frequently asked questions about money laundering, the three stages of money laundering and the typical approach that typically ensues the money laundering process, types of money laundering, and the prevention of money laundering in a variety of industries especially using AML Screening technologies in 2023
What is Money Laundering?
A major kind of criminal fraud called money laundering involves the acquisition of unlawful funds and their transformation into currency. The ‘dirty’ unlawful money is subsequently reintegrated into the legal, financial system for the advantage of the criminal by going through three separate steps of money laundering.
The exact scope of money laundering might be challenging to determine due to the nature of the crime. Since the process of money laundering can be connected to the funding of terrorism and other major organised crime, anti-money laundering authorities like the NCA are concerned with both the source and destination of the funds. Because of this, money laundering compliance standards are rigorous and frequently modified to reflect local laws and the effects of money laundering crime.
The methods employed by money launderers, the three phases of money laundering, and the complexity of financial transactions increase daily.
There is no one set way to go about laundering money. A schematic model was created to theoretically encompass as many money laundering techniques as feasible, much like in many other topic areas.
The Three Stages Of Money Laundering
When it comes to money laundering, this model was created using techniques that were discovered by law enforcement and government officials. Despite the range of techniques used, the laundry process in this model is really completed in three steps.
These actions can all be done at once within a single transaction. However, they can also show up in easily distinguishable shapes one at a time. Placement, integration, and stacking are the three phases.
Stage 1: Placement
“Placement” is the initial step in money laundering, during which “dirty” money is introduced into the judicial and financial systems. Financial thieves steal, bribe, and corrupt people to gain access to monies that have been obtained unlawfully, and then they relocate the money away from the source. It is the process by which illicit funds are “washed” and hidden by being deposited into a reputable financial system, such as offshore accounts.
But how is the money laundering step of placement accomplished? The “dirty” money can infiltrate the financial system in a number of ways.
The placement step of the money laundering process is linked to six typical forms of criminality.
- Blending of money: The so-called blending of funds is the first illustration. Businesses combine unlawful funds with legal takings in this situation. Since they have little or no variable expenses, it is often done through cash-only enterprises like tanning salons, car washes, casinos, and strip clubs. In the past, it was also done at launderettes and washing parlours.
- Invoice fraud: The second instance uses a method known as invoice fraud. The most popular method for moving illegal funds is invoice fraud. Primary methods include overcharging or undercharging, misrepresenting the nature of the products or services, and phantom shipment (in which no goods have been transported but fake documentation was presented to support the payment from overseas).
- Smurfing: The third illustrative technique, sometimes known as smurfing, involves splitting a significant quantity of money into smaller, less suspicious transactions that fall below the reporting threshold. Smurfs, or several individuals who deposit money illegally into one or more bank accounts, frequently do it over an extended period of time.
- Offshore Accounts: Additionally, laundered money is frequently transferred through offshore accounts, making it simple to conceal the true identities of the beneficial owners and a means of avoiding taxes.
- Carrying Small Amounts of Cash Overseas: As the fifth example, cash can be transported overseas in amounts lower than the minimum required for a customs declaration. This money is then transferred to foreign bank accounts before being sent back home.
- Through Aborted Transactions: Aborted transactions are used in the final illustration. In doing so, the funds are given to an attorney or accountant to retain until the planned transaction is finished. After upon, the transaction is reversed, and the money is returned to the offender from an untouchable source.
Stage 2: Layering
The layering stage is the next step. Through a variety of ways, the layering stage removes the proceeds of illicit activities from their source. Disguising the illicit source is one of money laundering’s two essential elements. Typically, it happens during the layering process.
Layering often entails a complicated web of exchanges intended to obscure the ownership and source of the cash. Using multiple banks and accounts, hiring professionals to act as intermediaries, using corporations and trusts, and engaging in multiple layers of complex financial transactions, such as exchanging cash for traveller’s checks, money orders, wire transfers, letters of credit, stocks, and bonds, or buying pricey items like fine art or jewellery, are all examples of layering activities.
These transactions are intended to conceal the alleged paper trail or audit trail and to protect the identities of the offenders.
After successfully introducing cash into the financial system, money launderers are free to carry out an endless number of transactions. Criminals frequently create a convoluted web of transactions to transfer money into the financial system, typically using offshore methods. The perpetrators make it difficult for the authorities to locate proof of money laundering after the money is in the banking system. They accomplish this by strategically stacking financial transactions and engaging in dishonest bookkeeping to hide the audit trail.
A highly complex step in the money laundering process is layering. Its goal is to set up several financial transactions to hide the ownership and source of the unlawful cash.
These transactions are intended to create anonymity and conceal the audit trail, and the source of the property. The layering stage’s main goal is to complicate any criminal inquiry. The goal is to put some space between where the illegally obtained wealth came from and how it currently appears.
Stage 3: Integration
The integration stage is the third and last step in the money laundering process. The money is given back to the offender during the integration stage from sources that appear to be trustworthy. After being first put as cash and stacked via multiple financial transactions, the illegal proceeds are now completely integrated into the financial system and may be utilised for any purpose.
For instance, real estate is one way that the “dirty” money is now incorporated into the economy. The “dirty” money will be piled and placed before being incorporated as “legal” cash into the established financial system. Integrating information from reliable sources is done very carefully to come up with a convincing story about where the money came from.
The perpetrator then receives this money from what seems to be a trustworthy source. At this point, it is quite challenging to discern between legitimate and illicit money. Without being discovered, the money launderer can use it. If there is no paperwork to utilise as proof from the earlier phases, it is very difficult to apprehend the offender.
There are several strategies for reintegrating the stolen funds into the criminal. The main goal is to return the money to the criminal in an undetectable manner that seems like it came from a reputable source.
For instance, acquiring luxury items like affluent real estate, fine art, jewellery, or expensive cars is a typical way for the launderer to indulge in their illicit gains without necessarily calling attention to themselves.
The process of money laundering is incredibly complicated and may include several members of organised crime. It is significant to notice that these three steps of money laundering sometimes overlap in practice. There is no necessity for the illicit monies to be “placed,” unlike in certain financial crimes.
IDcentral’s Anti-Money Laundering Solution
Reduce the Risks of Money Laundering with Effective AML Solutions
Effective AML systems may assist financial organisations in identifying and stopping suspicious money laundering activities through procedural filtering, predictive analysis, and machine learning capabilities.
Businesses may immediately identify prohibited or sanctioned individuals using a real-time risk name screening technology and stop them from transferring potentially illegal cash into the legal banking system. Businesses should check for politically exposed individuals (PEPs) and adverse media, which are stories that are unfavorable and appear in a variety of sources and indicate a higher risk of doing business with the individual or company in question.
Businesses should use transaction monitoring software that can adapt to detect changes in consumer and criminal behaviours in order to spot suspect trends in client transactions. When adopting risk-based rule sets that match a firm’s risk appetite, risk indicators relating to layering and integration approaches should also be taken into account.
Although not all money laundering instances will follow the three-stage process—steps may be mixed or repeated more than once—the concept of the money laundering process‘s three stages still guides the thinking of many compliance teams.
What Is Money Laundering?
Money laundering is the illicit practice of disguising huge sums of cash obtained via criminal activity, such as the financing of terrorism or drug trafficking, as coming from a legitimate source. The technique “launders” the money obtained from illicit conduct, which is thought to be unclean, to make it appear clean.
Both white-collar and low-level criminals use money laundering, a severe financial crime. Anti-money laundering (AML) rules are in place at the majority of financial institutions today to identify and stop this behaviour.
How Money Laundering Works
For criminal organisations to efficiently employ money earned unlawfully, money laundering is necessary. Large sums of illicit currency need inefficient and risky handling. Criminals require a means of depositing money into reputable financial institutions, but they can only do so if it looks to originate from reputable sources.
Placement, layering, and integration are the traditional three phases in the money laundering process.
- The “dirty money” is covertly introduced into the established financial system via placement.
- By using a succession of transactions and accounting ploys, layering hides the money’s origin.
- The money has now been cleaned up, and in the final phase, integration, it is taken out of the genuine account and used for whatever uses the thieves have in mind.
Be aware that this template might not apply in real-world circumstances. The three steps of money laundering may not all be present, or certain stages may be merged or repeated numerous times.
From the very simple to the most complicated, there are several ways to launder money. Using a genuine, cash-based business run by a criminal organisation is one of the most popular tricks. For instance, if the company operates a restaurant, it can overstate daily cash collections in order to transfer unlawful funds via the eatery and into the firm’s bank account. The money can then be withdrawn as required after that. These companies are frequently referred to as “fronts.”
Large cash transfers and other unusual activity that can be indications of money laundering must be reported by banks.
Variants of Money Laundering
Smurfing (sometimes referred to as “structuring”) is a typical type of money laundering. To avoid being caught, the thief divides huge sums of money into several little deposits and frequently disperses them among numerous accounts. The use of currency exchanges, wire transfers, and “mules”—cash smugglers who carry huge sums of cash over borders and deposit it in foreign accounts where money-laundering regulation is less strict—can also be used to commit money laundering.
- Other money-laundering techniques include gambling and money laundering in casinos, counterfeiting, and investing in commodities like jewels and gold that may be discreetly shifted to other countries.
- Other ways also include investing in and discreetly selling expensive assets like real estate, vehicles, and boats.
- Using “shell companies” (inactive companies or corporations that essentially exist on paper only).
What Is Electronic Money Laundering?
The old crime has taken on a new look because of the Internet. The emergence of peer-to-peer (P2P) mobile phone transfers and anonymous internet payment systems has made it more challenging to identify money transactions that are not authorised. Furthermore, the third element of money laundering, integration, may be carried out with little to no trace of an Internet protocol (IP) address thanks to the usage of proxy servers and anonymizing software.
Online auctions and sales, gambling websites, and virtual gaming platforms are more places where money can be laundered. Illegally obtained funds are turned into virtual currency and subsequently back into real, useable, and untraceable “clean” funds.
Money laundering’s newest frontier is a digital currency like Bitcoin.
They are not completely anonymous, but because of their greater secrecy when compared to more traditional forms of cash, they are increasingly being utilised in extortion schemes, the drug trade, and other illegal activities. Due to the fact that the majority of AML rules still rely on the idea of seeing dirty money as it moves through conventional financial institutions and channels, they have been reluctant to catch up to emerging forms of cybercrime.
How to Prevent Money Laundering
In recent decades, governments all around the world have intensified their efforts to prevent money laundering, enacting laws requiring financial institutions to set up systems to identify and report suspicious activities. The money involved is a considerable sum. Global money-laundering transactions are estimated by the United Nations Office on Drugs and Crime to be worth between $800 billion and $2 trillion annually, or between 2% and 5% of the world’s gross domestic product (GDP), though it is challenging to calculate the exact amount due to the clandestine nature of money laundering.
To combat money laundering on a global scale, the Group of Seven (G-7) established the Financial Action Task Force (FATF) as an international organisation in 1989. Its scope was extended to include preventing the funding of terrorists in the early 2000s.
In 1970, the Bank Secrecy Act was enacted in the United States, obliging financial institutions to disclose certain transactions to the Department of the Treasury on a suspicious activity report (SAR), such as cash transactions over $10,000 or any other that they find suspicious.14 The Financial Crimes Enforcement Network (FinCEN), which uses the data that banks give to the Treasury Department, may share it with domestic criminal investigators, international organisations, or foreign financial intelligence units.
Although these regulations were useful in identifying criminal conduct, the Money Laundering Control Act of 1986 was the first to make money laundering itself unlawful in the United States. The USA Patriot Act, which was passed shortly after the terrorist events of September 11, 2001, increased money-laundering operations by permitting the use of investigative techniques intended to combat organised crime and drug trafficking in terrorism cases.
A professional title known as a Certified Anti-Money Laundering Specialist (CAMS) is offered by the Association of Certified Anti-Money Laundering Specialists (ACAMS). A CAMS-certified individual may work as a brokerage compliance manager, a Bank Secrecy Act officer, a financial intelligence unit manager, a surveillance analyst, or an investigative analyst for financial crimes.
Why Is It Important to Combat Money Laundering?
The goal of anti-money laundering (AML) is to strip criminals of the proceeds from their illicit businesses, removing their primary incentive to carry out such evil operations. Millions of individuals throughout the world are put in danger by illegal and risky operations including drug trafficking, people smuggling, sponsorship of terrorism, smuggling, extortion, and fraud. These activities also have a significant negative social and economic impact on society. In light of the fact that money laundering serves to legitimise the proceeds of such crimes, the fight against money laundering may significantly benefit society by reducing criminal activity.
What Is an Example of Money Laundering?
Let’s say a drug dealer wants to purchase a new automobile using money acquired illegally from selling narcotics. The dealer must launder the money to make it seem legal because it is challenging and suspicious to try to buy a car in full cash. The drug dealer also operates a small laundrette, a venture that requires a lot of cash. The money from the heroin transaction is mixed with the money from the laundry before being transported to a bank for deposit. The dealer may then purchase the automobile without raising any suspicions by drawing a cheque from the laundromat’s account.
Purchasing chips from the casino with cash and receiving checks in return for the chips from the casino, sometimes without engaging in any gambling or putting even small bets, is another frequent method of money laundering in casinos.
How Do You Know If Someone Is Money Laundering?
There are a number of warning signs to watch out for that might indicate money laundering. Some of these include engaging in questionable or covert financial behaviour, making substantial cash transactions, having a business that appears to have no actual purpose, engaging in excessively complicated transactions, or making many transactions that are just below the reporting level.
What are a few methods for using real estate for money laundering?
The undervaluation or overvaluation of properties, the buying and selling of properties quickly after one another, the use of third parties or businesses to keep the transaction separate from the illegal source of funds, and private sales are some methods that are frequently used by criminals to launder money through real estate transactions.10
What Roles Do Cryptocurrencies Play in Money Laundering?
Convertible virtual currencies, or CVCs, are another name for cryptocurrencies, and the U.S. Financial Crimes Enforcement Network (FinCEN) indicated in a study from June 2021 that they have increasingly replaced traditional currencies in a variety of illegal online activities.11 CVCs are being used more often to layer transactions and conceal the source of money obtained from criminal activities, in addition to becoming the main method of payment for online purchases of ransomware tools and services, online exploitative content, narcotics, and other illicit commodities. Criminals utilise a variety of cryptocurrency based money laundering methods, such as “mixers” and “tumblers” that disrupt the link between the address (or “wallet”) sending bitcoin and the address receiving it.
What are the common money laundering schemes?
To make their unlawful funds appear legitimate, criminals employ every financial tool at their disposal, including real estate and NFTs.
Gaming, betting, and gambling
Online and offline gambling and betting are frequently used to launder illegal funds.
Here, money laundering can be done in the following ways:
- Criminals use low-probability wagers to deposit ill-gotten gains and extract them as “winnings.”
- The funding for the sponsorship of recreational betting comes from illicit sources.
- Bet shops are directly purchased or invested in by criminals.
A person who is “hired” by criminals to launder unlawful gains is known as a money mule. Mules frequently have a solid banking background and reputation, which enables them to conceal the movement of illicit funds.
Online dating services or job postings are used to find money mules. Criminals might entice victims by making false job postings that seem authentic or by offering quick cash.
There are several methods to generate money in sports, including betting, sponsorships, and action figures. The possibility of money laundering increases as these operations’ profits rise.
Football, cricket, rugby, horse racing, auto racing, ice hockey, volleyball, and basketball are among the most at-risk sports.
Criminals use football to clean up dirty money in the following ways:
- the buying and selling of football clubs
- Player exchanges
- football agents being used in ML schemes
- Rights to player images are sold
- fraudulent ticket sales
How is Money Laundering Detected and Prevented?
A comprehensive AML compliance programme is necessary to keep organisations secure. It should outline the company’s procedures for identifying, evaluating, and disclosing financial crime, including the actions listed below:
- CDD stands for customer due diligence. A consumer must undergo a consumer Due Diligence check before being permitted to utilise the service. Getting the customer’s information is necessary for identity verification and to determine whether they have any criminal history.
- EDD stands for enhanced due diligence. Companies use what is known as “Enhanced Due Diligence” in situations where there is a higher danger of money laundering. Checking the clients’ source of money to make sure they don’t come from criminal activities is one of the most important aspects of EDD.
- Ongoing Customer Transaction Monitoring. This is an additional layer of risk management that entails monitoring clients’ transactions and doing continuing due diligence checks on them.
- Unbiased AML audits. These enable companies to identify gaps and weaknesses in their AML processes and fix any issues before regulatory inspections to avoid penalties.
- Transaction monitoring, or KYT. Transaction monitoring is a continuous security procedure that aids in the identification of erroneous transactions. Reliable KYT software examines suspicious transfers and transactions involving digital or fiat currency and looks for odd trends.
Sumanth Kumar is a Marketing Associate at IDcentral (A Subex Company). With hands-on experience with all of IDcentral’s KYC and Onboarding Technology, he loves to create indispensable digital content about the trends in User Onboarding across multiple industries.