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. When funds from illegal activity are integrated into the financial system, it appears that they belong to legitimate sources like trading in drugs, financing terrorism arm and weapons smuggling, prostitution, and human trafficking. Criminals do this by hiding the sources or moving the money to a place where it is less probable to attract attention. This process involves three stages as follows; Placement, Layering, Integration.
Stage One: Placement
Goal: Deposit criminal proceeds into the financial system
Placement is the process of placing unlawful proceeds into financial institutions through deposits, wire transfers, or other means. The money is placed into the financial system through banks, casinos, shops, and other businesses in the placement stage. This phase can involve various types of transactions like breaking up large amounts of money into smaller sums and depositing them directly into bank accounts, transporting cash across borders to deposit the money in financial institutions abroad, or buying precious goods like artwork, antiques, diamond, and gold. That can be resold for payment by cheque or bank transfer.
Stage Two: Layering
Goal: Conceal the criminal origin of proceeds
Layering meaning is the process of separating the proceeds of criminal activity from their origin through the use of layers of complex financial transactions. Layering for money laundering is gradually adding legitimacy to the source of illicit money, making it as difficult to detect as possible. Layering is generally considered the most complex component of the money laundering process. 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."
To be able to detect layering, it is essential to understand its place in the money laundering process. The money is moved to different accounts through a series of financial transactions designed to hide the money origin in the layering stage. This layering phase can involve legitimate transactions like buying in 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 finally.
Stage Three: Integration
Goal: Create an apparent legal origin for criminal proceeds
Integration 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 clean the dirty money, invest it, and profit from it. As a result, it is exceedingly difficult to distinguish between legal and illegal well by the integration stage.
After going through multiple laundering pathways, the dirty money finally 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 is generally able to use the "clean" money without getting caught. In general, detection and identification of laundered funds provide through informants. The known methods used are:
- Property dealing.
- Front companies and false loans.
- Foreign bank complicity.
- False important/export invoices.
Why Money Laundering A Serious Problem?
Money laundering has potentially devastating economic, security, and social consequences. It gives the fuel for drug dealers, terrorists, illegal arms dealers, corrupt public officials, and others to operate and extend their criminal enterprises. Crime has become increasingly international in scope. The financial aspects of crime have become more complicated due to rapid technological advances and the financial services industry's globalization.
Money laundering is a problem not only in the world's major financial markets and sea-side countries but also in emerging markets. As emerging markets open up their economies and financial sectors, they are becoming increasingly appropriate targets for money laundering activities. Money laundering creates unpredictable shifts in money demand and causes large fluctuations in global capital flows and exchange rates.
If you want to learn more about the negative effects, you can read our "Negative Effects of Money Laundering" article.
What Should Businesses Do To Prevent Money Laundering?
In all steps from production to consumption, tax evasion should be prevented, and large money movements should be monitored.
- The media should fully support the fight against organized crime and should not broadcast to legend 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 such as Sanction Scanner.