What are the Money Laundering Stages?

Money laundering is a relatively recognisable term around the world, with instances of this criminal activity a common theme in popular media. However, the actual act of money laundering is far more complex than it sounds. Ultimately, there are three stages of money laundering: each with its own intricacies.

Because money laundering is a complex crime, protecting your organisation against these threats can also be complex. That’s why education is paramount. To help you understand more about how the crime of money laundering works, this guide will cover the 3 stages of money laundering and provide detailed examples of anti money laundering practices.

What is Money Laundering?

As defined by HM Revenue and Customs, money laundering is the act of “exchanging money or assets that were obtained criminally for money or other assets that are ‘clean’”. Actually carrying out a money laundering scheme, however, is much more comprehensive.

As one of the most serious types of financial crime, money laundering is a risk that all organisations across every industry must protect against. In addition to recognising the 3 stages of money laundering, organisations must also be aware of the subsequent activity – reintegrating the ‘dirty’ illegal money or assets into a legitimate financial system.

The extent to which money laundering occurs around the world is opaque, due in most part to the nature of the crime itself. However, authorities report huge sums of money are laundered through financial institutions every year – in fact, the National Crime Agency says money laundering costs the UK economy more than £100 billion pounds annually.

Anti-money laundering authorities are designed to thwart money laundering activities, and they concern themselves with both the ‘source’ and ‘destination’ of funds throughout the stages of money laundering. This is because laundered money may be linked to terrorism financing and other serious crimes. That’s why anti money laundering (AML) regulations are so strict and why organisations must take serious steps to protect themselves against money laundering activities.

What are the Three Stages of Money Laundering?

Because of the extremely complex nature of money laundering, as well as the fact that multiple people and entities may be involved in the criminal activity, it’s important that organisations can recognise the stages of the money laundering process.

Below are some examples, though it is by no means an exhaustive list, so it is critical that your AML professionals conduct their own due diligence into the signs of money laundering.

Simplifying the complexities of money laundering is made easier by breaking the scheme down into its three core elements: placement, layering and integration.

1. Placement

The initial phase of a money laundering scheme – also known as ‘placement’ – involves placing the ‘dirty’ money into a legitimate financial system. Oftentimes this means sending the money to offshore foreign bank accounts. During this moving process, the money becomes ‘washed’ which disguises the funds to look like legitimate income.

This is arguably the most vulnerable phase for those laundering money, as criminals have to move large bulk amounts of money into a legitimate financial system.

Example

• Invoice fraud: A common tactic used by organised crime to ‘clean’ their dirty money. They will either over-invoice or under-invoice an entity, or falsely describe the goods or services covered in the invoice. There may also be instances of phantom shipping, whereby nothing is actually shipped to the receiver and the false documentation is created simply to act as a legitimate reason for transferring money between bank accounts.
• Smurfing: This tactic involves criminals breaking up a big sum of dirty money and dispersing it to one or multiple bank accounts via smaller, less-suspicious financial transactions. These financial transactions are under the reporting threshold so as to reduce the risk of detection, and there are commonly multiple ‘smurfs’ who make the transfers over an extended period of time.

2. Layering

The next phase – called ‘layering’ – involves a sophisticated series of financial transactions, usually involving offshore techniques, to shift the funds into the legal financial system. After ‘placement’, the money launderers conceal the audit trail for anti money laundering authorities: by strategically layering a number of financial transactions, in addition to employing fraudulent bookkeeping practices.

The ultimate goal of layering is to generate so many different financial transactions that the original source of the laundered money – i.e. whoever ‘owns’ the illegally gotten funds – is obscured. It’s at this stage of the process where anti money laundering strategies can help untangle the web of foreign bank accounts and complex transactions.

Example

• Legislation: Taking advantage of loopholes in certain jurisdictions’ legislation in order to transfer money electronically and ‘legally’.
• Stocks: Laundering money into the stock market or other, more obscure financial institutions.
• Real estate: Investing laundered money into real estate or what’s known as ‘shell companies’.

 

3. Integration

The final stage of money laundering is known as ‘integration’. At this point, the laundered money has been absorbed into the legal financial system due to the layering process. As it is now reintegrated into the financial system, it is essentially legal tender for the criminals to use as they like. Integration must be carried out within a legitimate financial system: such as real estate transactions, in order to provide a credible explanation for where the money came from.

Afterwards, the money is returned to the criminal through a seemingly legitimate source, and at this stage it is incredibly hard to distinguish between an individual’s legal and illegal funds. If successful, the money launderer can use the ‘clean’ money without fear of getting caught, and it is made even more difficult for anti money laundering authorities if there is no documentation or other physical evidence to tie the funds to the previous layering and placement phases.

Example

• Investments: Dirty money is ‘cleaned’ through investments into high-priced assets like artwork, jewellery, cars and real estate.
• Fake invoices: By overinflating the value of goods on an invoice (to be imported or exported) the criminal can gain ‘clean’ money off the top.

Tips to Prevent Money Laundering

Having effective AML agents in your organisation is a must in order to thwart the money laundering process, and to reduce the risk of transacting with a politically exposed person (PEP) or criminal organisation. Because the money laundering process typically targets certain businesses (e.g. financial institutions), it’s vital that you follow AML best practice guidelines and report anything you suspect as potential money laundering.

Having an effective anti money laundering compliance program in place can help your organisation detect and respond to potential fraudulent schemes. Below are some tips to make this an effective program.

Robust Reporting Structure

If and when money laundering is detected at your organisation, you must have a stringent policy in place that ensures staff know where to deliver the relevant information to the authorities.

Customer Risk Levels

Always evaluate the potential money laundering risk of a new client before transacting with them. Your AML protocol must ensure they are processed according to KYC checks, and monitored adequately.

Official Anti Money Laundering Compliance Officer

Having a compliance officer in your organisation makes it easier to manage AML processes. They will be able to review your existing AML strategy and make any necessary changes to ensure you are complying with the latest money laundering regulations and laws.

Nexis Diligence+ combines all the most valuable intelligence you need in a single solution, allowing you to conduct consistent due diligence, search sanctions lists, and comply with anti money laundering (AML) and anti-bribery regulatory requirements.