Money laundering is the act that enables criminals to camouflage money that originates from a dirty, illegal 'Source A' so that it looks like it came from a clean, legal 'Source Z'. There are three stages of money laundering. In the first stage, placement, unlawfully acquired funds are incorporated into the legal economy. The second stage, layering, entails criminals obscuring the origins of illicit funds by redistributing them through various means. The third stage, integration, occurs when the illicit funds, now disguised as legal currency, are extracted and put to use.
Both local and international organizations make an effort in by using economic and legislative means to prevent suspicious activities for money laundering and supervise related institutions. Almost every country has a national anti-money laundering (AML) compliance system according to its risks and local dynamics. In the international area, there are regional and global authorities. The Financial Action Task Force (FATF) is one of the most efficient actors in this field.
What Are the Three Stages of Money Laundering?
The money laundering process generally unfolds in three distinct stages aimed at legitimizing illicitly obtained funds within the legal financial system. These three phases are as follows:
- Introduction
- Layering
- Integration
Money Laundering Stage 1: Placement
Placement in money laundering is the initial stage of the money laundering process, where illegal funds are introduced into the legitimate financial system. This is achieved through a variety of methods, including deposits, wire transfers, or other means. The placement stage involves depositing money into financial institutions such as banks, casinos, shops, and other businesses.
During this phase, various techniques are employed to conceal the source and ownership of the funds.
- For example, the money may be broken up into smaller sums and deposited into multiple bank accounts to avoid detection.
- Alternatively, cash may be transported across borders and deposited in offshore financial institutions to make tracing the funds more difficult.
- Another common technique is to use illicit funds to purchase high-value assets, such as artwork, diamonds, and gold, which can be resold later for payment by cheque or bank transfer, further distancing the illegal proceeds from their source.
Money Laundering Stage 2: Layering
What is layering? Layering's meaning is the process of separating the proceeds of criminal activity from their origin through the use of layers of complex financial transactions. Layering money laundering is gradually adding legitimacy to the source of illicit money, making it difficult to detect. It is generally considered the most complex component of the money laundering process, and companies experience struggles with this process during their AML compliance steps. It intentionally involves multiple financial intermediaries and transactions to confuse AML checks. Some of the pathways utilized during this step include:
- Changing the money's currency.
- Multiple inter-bank transfers.
- Multiple structured deposits and withdrawals, aka "smurfing."
- Purchasing high-value items such as diamonds, cars, or property.
- Multiple wire transfers between different accounts in different countries.
- Opening "shell" companies.
- Investing in businesses with minimal paperwork, such as currency exchanges, art galleries, and car washes.
- Using money "mules."
It is essential to understand its place in the money laundering process to detect layering. First, the cash is moved to different accounts through a series of financial transactions designed to hide the money's origin in the layering stage. This layering phase can involve legitimate transactions like buying real estate and lawful businesses, placing money in investments such as stocks and bonds, or using a shell company to hide the real owners of the business.
Money Laundering Stage 3: Integration
Integration money laundering is the process of using legitimate transactions to disguise illicit proceeds. In the integration stage, the funds are reintroduced into the economy to appear to belong to legitimate sources. This helps the criminal to launder money, clean the dirty money, invest it, and profit from it. As a result, the integration stage is exceedingly difficult to distinguish between legal and illegal.
In the final stage, after going through multiple laundering pathways, the dirty money re-enters the mainstream financial system as a legitimate transaction. This often takes the form of business investment, purchase, or the sale of an asset bought during the layering stage. By this point, the criminal can use "clean" money without getting caught. In general, informants detect and identify laundered funds. The known methods used are:
- Property dealing.
- Front companies and fraudulent loans.
- Foreign bank complicity.
- False important/export invoices.
The Global Impact of Money Laundering
Money laundering is not just a crime but a global problem, devastatingly affecting the economy, security, and society. It brings in an estimated 2-5% of global GDP annually—about $800 billion to $2 trillion—not only making a variety of illicit businesses, from drug trafficking to terrorism to human trafficking, harder. These activities not only destabilize states but undermine the integrity of legitimate institutions, posing a serious threat to international stability.
Due to technological advances and the interconnectedness of the global financial system, the complexity of money laundering has increased, making it more difficult to detect and intervene. These challenges fall on criminal organizations' benefit, and they benefit invisibly from their crimes.
Emerging economies are more susceptible to unintentional spending in an effort to open up financial markets. This sentiment could lead to volatility in capital flows and fluctuations in exchange rates, further threatening global financial stability. Given these risks, it is important for governments and international organizations to take proactive measures to combat money laundering. Strengthening AML legislation is essential to protecting the global economy and ensuring a secure future for countries around the world.
Why Is It Important to Combat Money Laundering?
Tackling money laundering is vital for a multitude of reasons, and here's why:
- Illicit funds pose a significant threat to the global financial system. They can increase criminal activity, reduce investor confidence, and negatively impact the economy. It's crucial to be aware that such funds can undermine the stability and integrity of the entire financial system.
- Money laundering often facilitates illegal activities such as the financing of terrorist acts, drug trafficking, and human trafficking. Governments can disrupt these criminal networks and protect their citizens by preventing money laundering.
- The battle against money laundering can be likened to turning on the lights in a dark room. The primary objective is to promote transparency and accountability in areas where corrupt activities might otherwise be hidden. This is crucial in cultivating an environment of integrity where good governance is not just a choice but a necessity.
- It contributes to the rule of law and ensures that businesses operate fairly and ethically. Overall, tackling money laundering is essential to safeguard the integrity of the financial system and protect the public from the harmful effects of illegal financing.
How To Prevent Money Laundering?
Tax evasion should be prevented in all steps, from production to consumption, and large amounts of cash movements should be monitored.
- The media should fully support the fight against organized crime and should not broadcast to legendary mafia members.
- In the private sector, cartels should be prevented, and the underground economy should be reduced by eliminating tax-free earnings as much as possible.
- Businesses can protect themselves from financial crimes and strengthen AML compliance processes using AML software like Sanction Scanner.
Sanction Scanner has more than 3000 sanction lists. These lists consist of other global and local sanctions and moral lists, including data provided by the US, UK, UN, and other international significant and minor government regulators. Sanction Scanner always keeps its lists up to date. In addition, sanction and pep lists are checked and processed every fifteen minutes. In short, Sanction Scanner compliance software simplifies companies' complex compliance processes. Request demo today.
