Money laundering is typically carried out by criminal organizations seeking to make effective use of illegally obtained funds. Large amounts of illegal cash are inefficient and dangerous to deal with. Criminals require a method to deposit money in legitimate financial institutions, but they can only do so if the money appears to be coming from legitimate sources. Let us learn three stages of money laundering in this blog!
What exactly is money laundering?
The process of converting criminal proceeds into legitimate cash or assets is referred to as money laundering. Stolen funds, for example, could be used to buy real estate. The property is sold, and the legal proceeds are deposited into a bank account. To reach this point, the money must pass through three stages, with anti-money laundering checks in place at each stage to prevent it.
Different stages of Money Laundering
The money laundering process is typically divided into three stages:
- Placement
- Layering
- Integration
Because of the criminal activity involved, each individual money laundering stage can be extremely complex. Below is the description of these activities –
Placement
The first stage of money laundering is known as ‘placement,’ and it involves the placement of ‘dirty’ money into legal and financial systems. Financial criminals move cash from its source after obtaining it illegally through theft, bribery, and corruption. This is the stage at which criminal funds are ‘washed’ and disguised by being placed in a legitimate financial system, such as offshore accounts. Here are a few examples of common placement strategies:
- Creating bogus invoices
- Investing in cash-based businesses
- Creating a foreign bank account
- Creating offshore businesses
- Transferring small sums of money at a time
Layering
After the money is in place, the second stage is known as layering or structuring. This entails dividing large sums of money into smaller transactions. The idea is that these smaller transactions will fall under the scope of anti-money laundering regulations and will not raise any red flags. Cross-border layering is frequently used to make it more difficult for UK-based anti-money laundering officials to detect wrongdoing. Tactics could include:
- International market trading
- Buying foreign currency orders
- Foreign currency trading
- Buying and selling luxury items
Integration
The funds are finally integrated back into the criminal’s legitimate financial accounts at the end of the money laundering process. As with earlier stages, this is typically accomplished through a series of smaller transactions. For example, the funds could have been used to buy luxury items such as jewelry or real estate. The luxury asset can be sold, leaving a trail of legitimately obtained funds. They may also employ strategies such as:
- Putting phony workers on the payroll
- Making loans to the directors of a shell company
- Dividends paid to shareholders of criminally controlled companies
Money Laundering Subtypes
Smurfing (also known as “structuring”) is a common method of money laundering. To avoid detection, the criminal divides large sums of money into multiple small deposits, often spread across multiple accounts. Money laundering can also be accomplished through the use of currency exchanges, wire transfers, and “mules”—cash smugglers who cross borders and deposit large sums of cash in foreign accounts where money-laundering enforcement is lax.
Other methods of money laundering include:
- Investing in commodities that can be easily moved to other jurisdictions, such as gems and gold;
- Investing in and selling valuable assets such as real estate, cars, and boats discreetly;
- Casino gambling and money laundering
- and counterfeiting
- Using dummy corporations (inactive companies or corporations that essentially exist on paper only).
Importance of Combating Money Laundering
Anti-money laundering (AML) attempts to deprive criminals of the profits from their illegal enterprises, thereby removing the primary incentive for them to engage in such nefarious activities. Drug trafficking, people smuggling, terrorism funding, smuggling, extortion, and fraud endanger millions of people worldwide and impose enormous social and economic costs on society. Because money laundering legitimizes the proceeds of such activities, combating money laundering may result in a reduction in criminal activity and thus a significant benefit to society. Here is some more information for you –
How Can You Tell If Someone Is Trying to Launder Money?
There are several red flags to be aware of that may indicate money laundering. Some of these include an individual’s suspicious or secretive behavior regarding money matters, making large cash transactions, owning a company that appears to serve no real purpose, conducting overly-complex transactions, or making several transactions just below the reporting threshold.
Using Real Estate for Money Laundering
Undervaluation or overvaluation of properties, buying and selling properties in rapid succession, using third parties or companies to distance the transaction from the criminal source of funds, and private sales are some of the common methods used by criminals for money laundering through real estate transactions.
Role of Cryptocurrencies in Money Laundering
In a June 2021 report, the United States Financial Crimes Enforcement Network (FinCEN) stated that convertible virtual currencies (CVCs)—another term for cryptocurrencies—have grown to become the currency of choice in a wide range of online illicit activities.
CVCs are increasingly being used to layer transactions and obfuscate the origin of money derived from criminal activity, in addition to being the preferred form of payment for purchasing ransomware tools and services, online exploitative material, drugs, and other illegal goods online. Criminals use a variety of cryptocurrency money-laundering techniques, including “mixers” and “tumblers,” which break the connection between an address (or crypto “wallet”) sending cryptocurrency and the address receiving it.
Preventing Money Laundering
Aside from raising your awareness of the anti-money laundering policy, how can your company aid in the fight against money laundering at each of the three stages?
To begin, you can sweep your transactions and monitor any unusual activity using artificial intelligence and data-driven technology. Data analytics assists businesses and financial institutions in tracking patterns and identifying anomalies. It’s worth training everyone in your organization to ensure everyone is on the same page when it comes to fraud detection, starting with understanding the three stages listed above.
To get in-depth knowledge about Anti Money laundering, you can take up the Certified AML-KYC Compliance Officer by Vskills, Vskills offers the Certified AML-KYC Compliance Officer to improve the quality of compliance with RBI directives in combating illegal operations and the movement of funds through banking channels. You can use the Practice Tests to see if you are ready to face the most recent Interview Questions!
