Layering in Money Laundering

What is Layering in Money Laundering?

The technique of layering in money laundering involves a money laundering organisation passing their illegal funds through enough transactions to make it as difficult as possible to follow the paper trail back to the money’s source and its own identity.

The most successful layering occurs when the type of money being laundered varies during several transactional procedures. For instance, if transactions involving US dollars are subsequently converted to UK pounds and then Japanese Yen, it will be more difficult to identify the money laundering activity.

Additionally, financial criminals who engage in layering may employ a variety of institutions, intermediaries, and payment systems to further complicate the financial transaction and obfuscate the paper trail.

Thankfully, there are AML (anti-money laundering) safeguards that can assist individuals and organisations in preventing layering. So let’s get started with some information you should have regarding money laundering through layers.

Post-Layering and AML Processes

The process of getting “cleaned” money back into the economy and into criminals’ wallets after layering has actually taken place is known as the post-layering procedure. AML procedures exist to reduce the likelihood that post-layering transactions may be successful, including the following:

  • Transactions Monitoring
  • KYC verification procedure using customer due diligence (CDD) and enhanced due diligence (EDD)
  • The SAR procedure for reporting suspicious behaviour

In light of the aforementioned, AML procedures that keep an eye on transactions, confirm the legitimacy of customers, and make use of the SAR filing procedure work to prevent the exchange of post-layered money by tightening overall security by requiring parties to report potentially suspicious transactions and people.

How Does Layering in Money Laundering Work?

When money launderers conduct a variety of transactions, their nefarious activities become incredibly difficult to track. This is known as layering in money laundering. It is the second of the placement, layering, and integration steps, which make up the heart of money laundering.

Before we go any further, here is an explanation of the three-stage procedure that makes layering a regrettably effective money-laundering strategy. And while though some money laundering operations are far more complex than others (such those that include international trade), we’ll use a rather straightforward example here that concerns a money launderer who works in a casino.

  • Placement: It is the first transfer of illicit funds into the economy, which is loosely referred to as the legal economy because it is not immediately suspect. The placement stage can be carried out in a variety of ways, but for the sake of this illustration, imagine the money launderer first exchanging their filthy money for gaming chips from a cashier at a casino.
  • Layering: When a money launderer layers, they make an effort to complicate and so hide their involvement in the initial placement of the illicit money. In order to make their desire to risk losing their money look real, they would next try to deceive any prospective watching eyes by spending a tiny amount of money at gaming machines, poker tables, and other venues. But the following is possibly the most crucial detail: When the pantomime is done, the money launderer leaves but comes back with most of the chips they had initially, and gets those residual chips converted to actual cash. The money launderer has now dissimulated their unlawful activities with a number of layers of cover.
  • Integration: The illicit money has effectively been deposited, stacked, and finally washed when it can be utilised in the regular economy without raising any red flags. This is known as integration. In other words, the money has been “cleaned” and is now ready to be used for regular purchases, as any law-abiding individual likes doing.

Layering attempts are most successful when the type of money being laundered varies throughout the course of the multi-transactional process, which is necessary for stage 2 to work as a component of the operation. For instance, if money launderers start with illegally obtained US dollars, swap them for Great British Pounds and then BitCoin, then divide, rejoin, and mix them, it will be more difficult to find them.

Actually, various types of money muling and forex fraud are two strategies that money launderers may employ to further complication their layering tactics. Money launderers use offers of practically free money to get unknowing individuals into their activities.

To further complicate the process of identifying the money trail, financial criminals would undoubtedly use several payment methods, institutions, and middlemen.

Methods of Layering in Money Laundering

As every activity that complicates the paper trail is referred to as layering in the context of money laundering, there are several potential, and occasionally quite straightforward approaches. Here, we’ll concentrate on multilayer money laundering scenarios, including the following, which entail intricate transactions, fictitious businesses, asset investments, and accomplices:

  • Complex transactions: The employment of many strategies, such as foreign exchange trading, international money transfers, and of course, regularly occurring and variable payment amounts, to mask the origin of the funds’ criminal usage.
  • Shell companies: The use of “organisations” that essentially serve as a cover for illegal transactions involving money that has been laundered.
  • Asset investments: Using assets like high-value artwork or real estate to invest in can help conceal significant amounts of laundered money or distribute it over numerous ownerships.
  • Accomplices: The deliberate storage and exchange of laundered monies by corrupt bankers and other criminal helpers in order to further obscure the origin of the illicit funds. These conspirators may also be naïve or reluctant, unaware they are a part of a broader money laundering scheme.

These unintentional collaborators, many of whom may have been deliberately sought out via social media with the promise of free money, may end up serving as money mules. They will receive a premium in exchange for holding a specific quantity of money in their personal account before moving it to another account later.

The fact that these people are fully ignorant of their role as layers in a money laundering scheme hinders the government’s efforts to identify money launderers and gather evidence against them.

Variants of Money Laundering

Structuring, also known as smurfing, currency swaps, bank capture, shell company scams, and both trade-based and gambling-based money are some of the numerous variations of money laundering. Let’s examine each of them individually:

  • Smurfing, also known as structuring, is the practise of “structuring” transactions into little payments and other exchanges (like the Smurfs moving tiny items around) in order to lessen the likelihood that they would be discovered by law enforcement.
  • Transferring illegal cash through currency exchanges is a common practise, especially given the fact that exchange rates are continuously changing.
  • Gaining and using partial or complete control over a bank’s activities in order to launder money under the pretext of a legal payment processing system, generally offshore and in a country with weak AML regulations, is known as “bank capture.”
  • Shell company schemes: Using shell companies, or organisations with only a legal existence in name (although shell companies can be legitimate, especially those that are upfront about why they are shell companies in the first place), to carry out transactions in the name of one or more legally recognised businesses.
  • Trade-based money laundering: Disguising illegal activity through the conduct of apparent commercial transactions, particularly using pricing manipulation strategies such over- and/or under-invoicing.
  • Money laundering through gambling: Disguising illegal transactions by making ostensible bets and wagers and taking advantage of certain transactional practises that are unique to the targeted and/or complicit casinos. One such practise is chip walking, in which criminals ‘clean’ their funds by purchasing a large quantity of chips, playing them sparingly and conservatively, and then cashing out the vast majority of the remaining chips.

Of all, even this extensive list can only represent a small portion of the innumerable money laundering variations that financial criminals are capable of.

But even so, the approaches will probably continue to evolve over time.

These instances at least provide some notion of how prevalent money laundering may be and how hard it is to stop when there are so many chances. The choices show how many ways there are for crooks to conceal their proceeds of crime.

What are the red flags pointing to layering in money laundering?

Practitioners of AML consider specific behaviours and types of transactions to be signs of potential money laundering layering. Among them are:

  • High number of transactions involving ’rounded-off’ sums that are exact
  • High rates of money being placed into accounts and subsequently removed
  • Large numbers of transactions between several accounts in a same bank
  • Frequent wire transfers between and to accounts
  • Transferring money between high-risk accounts or to and from high-risk nations

How can AML technology detect layering in money laundering?

Although layering is the main focus here, it’s vital to recognise that AML regimes often consist of three components:

  • The first step in anti-money laundering, known as “know your customer,” involves confirming a prospective client’s identification and determining their risk profile. 
  • Monitoring a client’s financial actions is known as transaction monitoring. Layering, such as suspicious activity or transactional irregularities, will most likely be discovered during this AML stage. Read this to find out how Napier is a leader in transaction monitoring.
  • Globally, regulated institutions are required by law to submit Suspicious Activity Reports (SARs) or Suspicious Transaction Reports (STRs). 

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