Layering in Money Laundering

Layering in Money Laundering - Quick Definition

Layering (also known as "structuring") is the second stage of the money laundering process. It involves passing illicit funds through a series of complex financial transactions to obscure their origin, making them exceptionally hard to trace.

Key Characteristics of Layering

• Purpose: To distance funds from their criminal source by creating multiple transaction layers that obscure audit trails.

Techniques Used Include:

• Transferring money across multiple accounts, banks, or countries
• Converting cash into assets (e.g., real estate, artwork, precious metals)
• Using shell companies and professional intermediaries to conceal ownership

Why it’s critical: Layering is considered one of the most complex and central phases of money laundering due to its ability to disguise illicit flows as legitimate financial activity.

Digitisation has transformed the business landscape, bringing opportunities and benefits for many. It has, however, precipitated a rise in money laundering and financial crime. Companies were quick to implement digital payment systems during COVID-19; but criminals adapted also, using cutting-edge technology to exploit this new “normal.”

Incidence of money laundering is continuing to rise, with sophisticated layering strategies. Fines imposed on the financial system have shared this upward trend: with more enforcement to fight money laundering.

In fact, combating money laundering has become a governmental priority. Dirty money funds terrorism, arms trading, wildlife and human trafficking. It also destabilises institutions and impacts inflation. Here’s how to prevent layering with an anti-money laundering program.

What is Money Laundering?

Money laundering is the process of concealing or disguising the origins of money obtained through criminal activity. Dirty money is put through the money laundering process in order to make it appear as though it came from a legitimate source.

To increase your chances of detecting and preventing money laundering, it is helpful to understand its inner workings in more detail. While there are various money laundering methods, processes usually follow the three-stage model below.

What are the Three Stages of Money Laundering?

Stage 1: Placement

The first stage of money laundering is the pre-layering stage. The illegal funds are introduced into a legitimate financial system via the following methods:

• Cash-driven businesses like car washes, tanning salons, restaurants and laundromats
• Fake invoices paid to criminal associates for goods or services that weren’t provided
• Smuggling funds into offshore bank accounts in small amounts, before transferring back to the country of origin
• Smurfing, which involves multiple small deposits over a prolonged period to avoid triggering reporting thresholds
• Casino schemes where cash is exchanged for chips, used in games, and then converted back into cash

The placement stage is the easiest to detect, as large cash movements are more likely to raise suspicion and trigger due diligence action.

Stage 2: Layering

What is layering in money laundering?
Layering is the second stage of money laundering, where illicit funds are obscured through a series of complex transactions to conceal their origin.

Why do money launderers use layering?
To obscure the source of their funds and create a legitimate-looking transaction trail, making it difficult for authorities to trace.

What are common layering methods?
Examples include transferring funds internationally, converting cash into assets, using shell companies, and employing intermediaries.

Examples of layering include:

• Shell companies used to divert profits from laundered money and conceal ownership
• International banking systems that exploit regulatory loopholes to evade detection
• Electronic bank transfers between accounts held by false identities
• Property transactions used to legitimise illicit money by purchasing real estate above market value
• Changing assets by purchasing prepaid cards, wire transfers, bonds, gold, stocks, or cryptocurrency
• Artworks and luxury goods purchased anonymously and resold without leaving a paper trail

Stage 3: Integration

Once money has been distanced from its criminal source, the final stage, known as integration, occurs. This is when illicit funds are reintroduced into the economy as legitimate wealth.

Integration typically involves large legal transactions, often using banks, investments, or property purchases. Anti-money laundering programs and KYC checks play a crucial role here in detecting and preventing this process.

How Have Money Laundering Trends Changed in the Digital Era?

Developments in fintech and open banking have introduced new challenges for detecting money laundering. Below are emerging strategies used by criminals.

E-Commerce

Online businesses can be used as fronts for illegal activities, a practice known as transaction laundering. Criminals connect illicit sites to legitimate payment systems to move funds undetected.

Online Banking

Weaker identity verification and instant payments make it easier for criminals to move money globally and harder for institutions to trace transactions.

Work From Home Schemes

Money launderers recruit unsuspecting individuals through fake online job offers to move illicit funds, often targeting young people as “money mules.”

Online Gambling and Gaming

Unregulated online gambling sites and in-game economies provide opportunities for laundering via chip transfers or digital asset sales.

Peer-to-Peer Transactions

Peer-to-peer marketplaces such as AirBnB can be exploited for money layering due to minimal user screening.

Making Anti-Money Laundering Simple for Organisations

Businesses must keep pace with technological change by implementing strong compliance and due diligence measures to counter modern laundering threats.

Recent Trends in AML Solutions

Artificial Intelligence (AI)

AI-powered AML systems help institutions detect anomalies and streamline the screening process, making them essential in financial compliance.

Global Screening Systems

Solutions like Nexis Diligence+™ automatically screen clients against international watchlists and databases for faster, more accurate compliance checks.

Cryptocurrency Regulation

The rise of digital currencies has led to new AML and KYC requirements globally, as crypto’s decentralisation attracts financial criminals.

Tips to Prevent Money Laundering

To reduce exposure to laundering risks, businesses should strengthen compliance programs and continuously monitor for suspicious activity.

Risk Assessment

Identify and prioritise high-risk areas. Apply rigorous KYC checks with new clients.

Appoint an AML Compliance Specialist or Money Laundering Reporting Officer (MLRO)

Designating a dedicated compliance officer or team ensures up-to-date oversight of AML regulations and reporting processes.

Train Staff Regularly

Keep employees informed about AML protocols, red flags, and reporting responsibilities.

Clear Reporting Protocol

Establish a transparent reporting procedure for suspected financial crimes. Retain records for at least five years and ensure they are easily accessible to regulators.

Nexis Diligence+™ provides a comprehensive solution for AML compliance, enhancing KYC and due diligence processes while safeguarding your business from risk.