Money is a powerful motivator. Criminal entities have been forced to become creative in finding ways to utilize their profits without alerting authorities to their origin. The need to mask profits as legal streams of income has manifested various commonalities in the stages of money laundering.
What is Money Laundering?
To understand the reasons behind the strategies used to launder money, it is important to have a clear definition of money laundering.
Money laundering is the process of “cleaning” the profits of criminal activity, such as drug trafficking or human smuggling. The end goal is to mask illegal profits as having come from legitimate sources. When left unchecked, “money laundering has potentially devastating economic, security, and social consequences. It provides the fuel for drug dealers, terrorists, illegal arms dealers, corrupt public officials, and others to operate and expand their criminal enterprises.”
What Are the 3 Stages of Money Laundering?
Money laundering schemes vary in their complexity and methods, but there are three common stages for successful laundering: Placement, Layering and Integration. Let us look at the individual stages.
Placement is the term given to the process of moving dirty cash into the legitimate economy and further away from its illegal source
1. The Placement Stage
The initial stage of money laundering – The Placement Stage – occurs when the launderer introduces their illegal profits into the financial system. Criminals commonly accomplish the placement stage of money laundering through scaling. Scaling is when money launders take large amounts of money and divide them into less obvious and harder-to-track sums.
Scaling
This can allow criminals to deposit these smaller sums of money directly into bank accounts, or purchase other legal financial instruments such as money orders and checks– which are then moved elsewhere to be deposited at another location. This is done in order to move money away from its criminal source and closer to clean or legitimate accounts. Scaling can also mean putting money in a number of places at the same time in an attempt to obfuscate investigators searching for laundering. The more spread out the money is, and the more distance between it and criminal activity, the harder it is for law enforcement to trace its origin.
Offshoring
Another popular strategy used in the placement stage of money laundering is offshoring. Criminals may choose to move money overseas, far away from the source of the ill-gotten gains. By transferring the funds abroad, it moves the cash away from the source, putting some distance between the criminals and the cash. While the money may now be located in a different country the criminal entity still has control of the funds.
Use of Cash-Intensive Businesses and Financial Institutions
The money then moves through financial institutions (FIs), exchange houses and/or other businesses. The most likely institutions used are those known as cash-intensive businesses, such as casinos, independent ATMs, bars, strip clubs, car washes, mom-and-pop type convenience stores and so forth. Essentially any business that has a high volume of cash transactions in its day-to-day business.
In addition to utilizing cash-intensive businesses, these small-scale illicit funds may be deposited in a bank, added to the accounts of an existing business or disguised as a transaction (for example, for products that are never provided). Placement is often achieved through a series of regular small transactions as criminals who make the mistake of depositing large amounts of unaccountable cash are often quickly caught.
Of course, some people who attempt money-laundering schemes have no experience and do not know what behaviors are likely to be flagged – but organized crime syndicates are unlikely to make it so obvious.
2. The Layering Stage
Layering is the second stage of money laundering. Its purpose is to make the money as hard to detect as possible, further moving it away from its illegal source(s). It can often be the most complex stage of the laundering process.
Layering is where illicit money is blended with legitimate money, or placed in constant motion, from one account to another. Layering often involves generating many different transactions so that the cash disappears and becomes laundered.
Layering Methods
Methods of layering include using the illegally obtained money to briefly gamble in a casino (where buying and cashing out chips can help make the funds appear more legitimate) or by placing cash in the stock market and moving it around through different financial products or foreign currency exchanges.
The funds might be wired through a series of accounts at various banks around the world and across borders. Using widely dispersed accounts for laundering is common in those jurisdictions that do not cooperate in anti-money laundering investigations. In some instances, the launderer might disguise the transfers as payments for goods or services, thus giving them a legitimate appearance.
No matter which layering tactics are used, the purpose remains to throw up enough hurdles that even the most skilled accounting investigator has trouble differentiating money from legal transactions from dirty cash that was layered to be laundered.
Layering is typically one of the safer stages of money laundering, in comparison to placement, as placement provides various opportunities for criminals to make mistakes by doubling daily transactions or other major departures from usual activities.
Layering and Cryptocurrencies
Pseudonymity, decentralization, and ease of cross-border transfers make cryptocurrencies attractive for money launderers in the layering stage. One common layering technique in crypto money laundering is tumbling or mixing, where illicit funds are rapidly moved through a complex web of wallet addresses, making it difficult to trace the source.
Money launderers may also use cryptocurrency exchanges to hop between different cryptocurrencies and accounts, converting the funds multiple times to obscure the money trail.
Unregulated exchanges or over-the-counter brokers are frequently used for layering and crypto wash trading, particularly if they have lax KYC processes. Recently, criminals have turned to more innovative methods, like purchasing NFTs, in-game items, or other digital assets with illicit funds and then selling them to convert the money into an ostensibly legitimate form.
Red flags of layering via cryptocurrencies include transfers rapidly moving through many wallets with no clear economic purpose, crypto activity misaligned with a customer’s profile or stated investment goals, and using mixing services to conceal transaction trails.
See Cryptocurrency Money Laundering to learn more about how cryptocurrencies are exploited by money launderers and our AML Checklist For Cryptocurrency Exchanges to discover how exchanges can mitigate AML compliance risks.
3. The Integration Stage
Having successfully processed criminal profits through the first two phases, money launderers then move the funds to the third stage – integration. This is where the cash re-enters into the legitimate economy. This final stage of money laundering successfully puts the so-called ‘cleaned’ money back into the economy.
After the money is transferred from legal businesses or investments, or the trail has become too difficult to follow, the money can then be placed into major investments. Integrated money laundered cash can be spent on luxury assets, real estate holdings, and long-term investment vehicles or in new business ventures. Integrated cash can also purchase assets that can be used to facilitate future money laundering.
It is critical for all businesses to ensure they comply with anti-money laundering (AML) regulations and report any activities that suggest illegal activity. Regulators have levied hefty fines recently against banks and institutions that failed to prevent money laundering.
Money Laundering Example: How Placement, Layering and Integration Work Together
Criminals combine the three stages of money laundering into a coherent strategy to successfully launder illicit funds. There are many ways to clean money, some of which are extremely complex. However, the straightforward example below shows the basic principles.
Placement
A drug trafficker accumulates $500,000 in cash proceeds from street sales. To place the money into the financial system, he recruits associates to make small cash deposits into various bank accounts, keeping each transaction below the $10,000 reporting threshold to avoid detection. This “smurfing” process takes several weeks, but the full $500,000 is eventually deposited.
Layering
To conceal the funds’ illicit origin, the drug dealer or his confederates transfer the money from the bank accounts to an offshore shell company he controls. He then instructs the shell company to invest in various financial instruments, including cryptocurrencies. The crypto funds are tumbled through multiple wallets before being converted to cash and wired to a legitimate business account in another jurisdiction.
Integration
The funds in the business account are used to buy a luxury car dealership. On paper, the dealership is a profitable, legitimate enterprise. The drug dealer slowly funnels the laundered money back to himself by falsifying sales records and invoices, disguising the transfers as operational expenses and salary payments. To an outside observer, the newfound wealth from a successful car dealership appears genuine.
Common Money Laundering Schemes:
How Money is Laundered Through Casinos
By converting cash into casino chips, launderers then convert them back into cash after they are played or just kept by the launderer for a time.
Laundering Through Cash Businesses
There are many businesses that handle most of their transactions in cash and allow illicit cash to be inserted among their legitimate business transactions. This can be used to launder large amounts of cash.
The Process of Smurfing
Smurfing in money laundering occurs with the distribution of small amounts of a larger cash sum to a series of partners who then deposit the money in increments. This is used to get around the currency reporting requirements in many countries. Smaller deposits from many partners are less likely to trigger reports.
Foreign Investment Schemes
This occurs when the launderer delivers the cash to the foreign investor, who then returns it by making an investment into the launderer’s own business.
Anti-Money Laundering Measures to Take
As you can see, the various stages involve complex strategies for criminal entities to be able to utilize their illicit profits. As a result, financial regulators monitor the transfer of funds to attempt to disrupt illegal activities. In order to avoid investigations into your business’s finances it is important to develop a strong AML compliance program.
At Alessa, we provide a complete AML compliance solution to help your organization comply with compliance requirements and regulations. Our solution is tailored to meet the needs of a variety of industries – all within a single platform. The solution integrates with existing core systems and includes:
- Real-time due diligence
- Transaction monitoring and screening
- Watchlist and sanctions screening
- Automated regulatory reporting
- Advanced analytics like anomaly detection and machine learning
- Dashboards, workflows and case management
Contact one of our risk specialists today to determine how Alessa can help your company prevent and detect all three stages of money laundering and the regulatory penalties that may come with it occurring in your business.
