Anti-money laundering – the three stages of money laundering explained

Money laundering is the unlawful practice of disguising wealth from illicit activities, so it appears to have come from legal sources.  In other words, the funds are “dirty” and should undergo a process of “cleaning.” Once the money is clean, it cannot be linked to its criminal origin. Therefore, the launderers can spend it without suspicion.

In recent years, money laundering has become an international concern.  According to the United Nations, an estimated $800 billion to $2 trillion undergo laundering annually. Criminal activities such as fraud, drug trafficking, embezzlement, and tax evasion are the usual sources of laundered assets.  Some terrorist groups resort to money laundering to fund their activities.

There are many variants of money laundering, which range from the very simple to the creatively complex.  The phases of the process often overlap with each other, happening simultaneously in one transaction.  But the act can also occur in three distinct steps: placement, layering, and integration.  Let’s look deeper into the stages of money laundering.

Placement

Many illegal transactions, particularly drug trafficking, almost always deal in cash because cash is nearly untraceable.   However, it could also easily catch the attention of law enforcers.  What criminals do is put the dirty money into a legitimate financial system, usually as cash bank deposits.  To avoid detection, they divide the funds into small amounts, frequently scattering them over several accounts.

Some launderers send the funds to “offshore accounts” in countries that allow anonymous banking under a bank secrecy law.  Major offshore centers include the British Virgin Islands, the Maldives, the Bahamas, the Cayman Islands, Hong Kong, Panama, Switzerland, and Singapore.

In other cases, “mules” or cash smugglers carry large amounts of illegal money to deposit in foreign banks where regulations are less stringent.  The smugglers then send the funds to an offshore account or back to the country of origin.

Layering

Layering makes the dirty money as hard to trace as possible by concealing its origin through a series of complicated processes. The step usually consists of numerous wire transfers to multiple accounts in various countries under different names. The launderer repeatedly deposits and withdraws money to vary the amount in the financial record. The purpose of this is to create layers that will confuse any investigator.

Another layering method is the use of shell companies or bogus businesses that create an appearance of legitimacy through fake invoices and balance sheets. Other launderers go for alternative banking that allows undocumented transactions and leaves no paper trail. These ancient trust-based schemes operate outside government control, so the transactions are not easy to track. Examples of these are the fie chen system in China and the hawala system in India and Pakistan.

The advancement in technology makes unlawful online money transfers even harder to detect. Launderers involved in cybercrimes use cryptocurrencies in their activities. Compared to conventional methods, these currencies are relatively untraceable. Other criminals clean their ill-gotten cash by converting it into gaming currency through virtual gaming and gambling websites, then turning it back into real and usable funds.

Integration

Also known as extraction, the final stage involves re-introducing the now “clean” cash to the economy.  The launderers make the last bank transfer into the account of a legitimate business, some of which they also own.  Other companies are co-conspirators who get a share of the profits.  Specific industries are ideal for laundering money because of the high level of cash they receive daily.  Such businesses include casinos, restaurants, dry cleaners, car wash services, and retail outlets. These businesses, especially casinos, need to train there staff to be aware of money laundering and create checks to monitor that it isn’t happening. It’s those in prominent political or public positions (PEPS), like, estate agents, that may be the most exposed and susceptible to bribery by people involved in money laundering. It’s even more important that PEPS take certified AML training to make sure they have done enhanced due diligence in their roles.

So, how do they get the assets out of the company?  The business gives the money to the launderer, then records it as salaries for fake employees, loans to directors, or dividends paid to stockholders.  At this point, it is almost impossible to distinguish honest with ill-gotten money, and the launderers can now use the funds without getting caught.