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. Financial Action Task Force (FATF) is one of the most efficient actors in this field.
Stage One: Placement
Money laundering placement 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.
Stage Two: 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.
Stage Three: 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.
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 can use "clean" money without getting caught. In general, detection and identification of laundered funds are provided through informants. 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 a pervasive problem with serious global implications. Its impact extends far beyond the immediate actors and activities involved, affecting economies, security, and societies on a large scale. The illegal funds generated by money laundering activities provide funding for a range of illegal activities, including drug trafficking, terrorism, and human trafficking, which destabilize countries and undermine legitimate businesses. At this point, global economy appreciates the efforts of anti-money laundering compliance to protect the system.
Furthermore, money laundering is a highly sophisticated activity that takes advantage of rapid technological advances and the increasingly interconnected nature of the global financial system. This makes it difficult to detect and disrupt these activities, allowing criminal organizations to profit from their illegal activities.
As emerging economies continue to open up their financial sectors, they become increasingly vulnerable to money laundering activities. These activities can lead to sudden fluctuations in capital flows and exchange rates, which can significantly impact global economic stability. It is crucial that global institutions and governments take proactive measures to prevent and combat money laundering while applying anti money laundering regulations to ensure a safe and stable future for all.
What Should Businesses Do 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 complex compliance processes for companies.