The 3 stages of money laundering- 2024 guide
The way in which money is exchanged between people can tell you a lot about them. The bank statements and receipts can reveal that a person enjoys their morning coffee at the cafe a block away from their office around the same time every morning and that they will often buy a lottery ticket on their way home at the corner deli. People, as well as businesses, leave a fiscal footprint whenever they make a purchase or sell a good or service. Cash can be utilized to mitigate this footprint, but there will usually be a receipt of the sale to show that a payment has been made.
Criminals make it their mission to ensure that they leave a carefully curated paper trail to hide their illegal business practices. Their goal is to sell their illegal goods and repurpose the money so that they hide how they make their money. This is known as money laundering – a method of taking “dirty” money and cleaning it. Money laundering is used in connection with crimes in all legal sectors including fraud, human trafficking, and narcotics. The money made from these illegal dealings are hidden behind legitimate business practices making it difficult to trace the money.
The three stages of money laundering
Once the money becomes dirty, criminals will go through the following three stages to launder their money. Laundering will take the illegally-gotten money and infuse it back into the market system.
First, is the placement stage
This stage creates an indirect association between the money and the crime it was obtained through.
As a kid, if you hated eating peas, you would try to hide the peas within another food on your plate so that you wouldn’t taste the peas. The same theory applies to the placement stage. Criminals will place the money with other transactions via various financial accounts to make the dirty money seem innocuous. One method is to divide the money into smaller amounts so that it will fly under the radar. For example, most banks only allow for a certain amount of money to pass through their system under each account per day. If a legitimate business puts in some of the clean money with some of the dirty money they received that day, the dirty money will go back into the system as though it were clean. The business’ books will be edited to reflect the introduction of the dirty money as though it were received legitimately.
Second, is the layering stage
This stage disguises the dirty money to make it untraceable.
Criminals like to play the game of Telephone with their dirty money. When playing Telephone, one person says a phrase and tells the person beside him. Then that person tells the person beside her what she thinks she heard. By the end of the round, the original phrase no longer sounds the same as it had when the first person said it. Similarly, the dirty money will be laundered to look as though it is clean money by layering it. Layering means that the criminal will make it so that law enforcement can’t trace the money back to the original source, the illegal exchange. One tactic criminals use to layer the money is to convert the dirty money into another currency in a different account and then back into the original currency before sending it to a third account. By the end of the layering stage, the money’s original source is untraceable.
Third, is the integration stage
This stage makes the dirty money appear as though it came from a legitimate source.
The first time you bought a new home gadget, you found ways to integrate the gadget into your life as though you had always owned it. Similarly, criminals try to find new homes for their illegitimate gains. They have methods of integrating the money into their legitimate businesses, such as by purchasing expensive goods or investing in a friend’s business venture. These purchases will be legitimate, but the money used to make the purchase will be dirty. The integration of the dirty money breaks the trail for law enforcement to follow. Another method is by paying fake employees of a company the dirty money. This allows for the criminals to keep the dirty money and pretend that they have a legitimate business.
The cost of money laundering
Money laundering has a cost because it affects everyone. Terrorist organizations as well as criminal enterprises, such as human traffickers, will launder money to fund their operations. In addition, according to the United Nations, Office on Drugs and Crime, “the estimated amount of money laundered globally in one year is 2 – 5% of global GDP, or $800 billion – $2 trillion in current US dollars.” (https://www.unodc.org/unodc/en/money-laundering/overview.html) This means that you may have encountered dirty money as part of your daily business interactions without realizing it. In addition to the direct cost to the economy, many families have been impacted by terrorist actions or other crimes. Therefore, everyone, in some way, has been confronted by the cost of money laundering.
Conclusion
The goal of the three stages of money laundering is to wash the money received from illegal practices so many times that, by the end of the wash cycle, the money appears to be clean. Criminals jump through multiple hoops to get their desired result. Unfortunately, there is a real cost to money laundering that goes beyond the world’s economy. Law enforcement works hard to track down the criminals by tracing the laundered money. It is a challenging endeavor, but one that makes everyone safer.
