Stages of Money Laundering

What is Money Laundering?

Money laundering is the process of “washing” illicitly earned money into clean money to disguise its original source. There are many stages of money laundering, which will be explained in this blog. The stages create a process involving an underlying, profit-making crime, such as organised crime, fraud, drug trafficking. It is the concealing, transferring or converting the proceeds of this crime.  

The aim of money laundering is to integrate the “dirty” money back into the normal financial system, allowing criminals to profit and live from illicit funds. Criminals want to conceal the origins of the money, to allow people to use it in the same way most of us would use hard-earned money.  

The United Nations Office on Drugs and Crime (UNODC) estimates are that roughly only 1% of all laundered money is detected. This is a global problem and allows people to profit from organised crime, human trafficking and weapons smuggling. 

Stages of Money Laundering

There are three distinct stages of money laundering:  

• Placement: This is the first stage in the money laundering process. This is where the proceeds of the criminal activity enter the financial system.
• Layering: This is the second stage and is often the most difficult in the process and can involve the international movement of the funds. This stage involves concealing the source of the money through a series of transactions and bookkeeping tricks. This objective is achieved by adding layers of financial transactions to thwart the audit trail so as to cut the link with the original crime. 
• Integration: This is the final stage of the money laundering process and is where the money is reintroduced into the legitimate economy. The criminal proceeds are now fully reconditioned and integrated into the financial system giving off the appearance of legitimacy. Examples of this can include the purchases of businesses or properties, luxury items such as artwork, jewellery, or high-end cars. 

Each stage is crucial for the process of money laundering. Each of the three stages can occur simultaneously, separately or they can overlap. However, it is important to note that the offence of money laundering will occur during each individual stage. The FATF report on Money Laundering explains each stage of the process.

Placement

This initial stage is crucial to the of the money laundering process as it is when the money earned by criminal acts enters the financial system. This can be done through deposits, wire transfers, or other means. The money is placed into the financial system through banks, casinos, shops, offshore businesses and other businesses in the placement stage. 

This phase can be done by breaking up the original sum of money into many smaller sums and depositing them directly into bank accounts. This can help to disguise the illicitly earned money and reduce the risk of detection. It can also involve transporting cash across borders to deposit the money in financial institutions abroad, or buying precious goods like artwork, antiques, diamond, and gold.  

Layering

This step in the money laundering stages involves separating the proceeds of criminal activity by layering with complex financial transactions. This allows the sum of money to get lost and remove its connection to the original crime. This process is gradually adding legitimacy to the money by making it as difficult to detect as possible. 

This stage of layering is the most complex component of the money laundering process. It intentionally involves multiple financial intermediaries and transactions to confuse anti-money laundering checks. The process of layering further distances criminal proceeds from their source, but it primarily serves to reinforce the appearance of legitimacy by passing money through “layers” of transactions or financial instruments.

Integration

Now that the criminal money has been distanced from the crime, this final process in the stages of money laundering, involves absorbing the sum into the legal economy. By using legitimate transactions to disguise illicit proceeds it will be turned back into legal tender. This allows the criminal to clean the dirty money, invest it, and profit from it. At this stage it is very difficult to distinguish between legal and illegal wealth. 

While layering costs may have decreased the value of the placed funds, during integration, they will likely still be used to make high-value purchases, such as real estate, luxury goods or residential or commercial property. 

Red Flags of Money Laundering

Some warning signs of money laundering include: 

• Frequent transactions which end with exact amounts. 
• Funding speeds: deposits of money into accounts that are then rapidly withdrawn. 
• Frequent transfers between accounts within the same institution.  
• Frequent use of wire transfers into and out of accounts. 
• The destination and source of funds: to or from high-risk countries or accounts. 

Detecting Money Laundering: Despite the intent to confuse and frustrate AML controls, there are strategies to identify layering activities. AML programs and Transaction Monitoring may be set up to monitor for certain signs or red flags.  

Consequences of Laundering Money

Money laundering has an impact not only on the criminals themselves and the exploited company. The consequences are broad in different areas. In the following graphic we have listed impacts. These affect the financial sector, society, economy and politics.

How to Stop Money Laundering?

With the advancement in technology, anti-money laundering actions are being developed as well. The FATF as well as national regulatory bodies have put compulsory anti-money laundering regulations in place to reduce the risk of money laundering. Anti-money laundering refers to processes, actions, laws and compliance regulations that are designed to make it harder for criminals to profit from crime.  

Ongoing transaction monitoring and sanction screening allow for licensed financial institutions to better identify suspicious activity and report them through SAR, read more about SAR here. AML Compliance are Processes, policies and controls designed to ensure that companies comply with the requirements Anti-Money Laundering regulations and understand the AML relevant risks of conducting business. The aim of transaction monitoring is to be the first step in reduce the risk of money laundering and other forms of financial crime. It is important that a country is seen as having robust AML regulatory framework with financial firms effectively implementing AML systems and controls as it dissuades criminals from targeting that financial system. 

How can DX Compliance Solutions Help

DX Compliance uses the most effective technology to reduce the risk of money laundering throughout every stage: placement, layering and integration.

DX Compliance offers two products to support our Clients in Europe, the UAE and beyond. A world class real-time full solution AI Transactions Monitoring system enables LFIs (Licensed Financial Institutions) to detect, investigate and report suspicious transactions. Moreover, we offer CheckAML that is the only instant AML solution with full PEP & sanctions screening, ongoing monitoring and customer risk assessment worldwide.

DX aims to help achieve regulatory AML compliance by empowering compliance people in AML. We use technology to help complete their workload with greater speed, reduced costs and allowing the people to focus on the tasks at hand and let us take care of the technological solution.

For more information, reach out to us here.