Money laundering is the process of presenting illegally obtained funds as having come from a legitimate source. It entails putting the money through a series of commercial transactions to “clean” it. AML-KYC Compliance Officers oversee internal anti-money laundering policies and ensure that banks, credit unions, and other financial institutions are in compliance with important regulations.
They ensure that current AML regulations and other relevant legislation are followed. Furthermore, they create and maintain a risk assessment framework for products and services, as well as clients and customers. In this blog, we will know about the stages of Money Laundering. Let us get started!
Stages of Money Laundering
Money laundering has three major steps (placement, layering, and integration), and various controls are in place to monitor suspicious activity that could be involved in money laundering.
The first stage of money laundering is the placement
‘Dirty money’ is introduced into the financial system during the initial placement stage of money laundering. This is frequently accomplished by dividing large sums of cash into smaller sums that can be deposited directly into a bank account or by purchasing monetary instruments such as checks or money orders that can be collected and deposited into accounts at other locations.
Other methods of placement include combining the proceeds of a crime with the legitimate profits of a business, particularly one with few or no variable costs. False invoicing is also used, as is smurfing, which involves depositing small sums of money below the AML reporting threshold into bank accounts or credit cards and using them to pay bills, etc.
Other placement strategies include using trusts and offshore companies to conceal the beneficial owner’s identity or using foreign bank accounts – taking small amounts of cash below the customs declaration threshold abroad and depositing it in foreign bank accounts before re-sending it.
Layering is the second stage of money laundering
The layering stage occurs after the funds have entered the financial system, with the launderer moving the funds around to distance them from their source and conceal the money trail.
The funds could be channeled through the purchase and sale of investments, a holding company, or simply transferred through a series of accounts at banks worldwide. Widespread accounts are most likely to be discovered in jurisdictions that refuse to cooperate with AML investigations. The launderer may disguise the transfers as payments for goods or services or as a private loan to another company in some cases, giving them a legitimate appearance.
While the three stages of money laundering apply to cryptocurrencies, layering is the most common entry point for criminals, who use it alongside the traditional financial system to conceal the origins of their funds.
Layering Strategies to Avoid:
- Chain-hopping refers to the process of converting one cryptocurrency into another and moving from one blockchain to another.
- Tumbling or mixing — the blending of various transactions across multiple exchanges, making it more difficult to trace transactions back to a specific exchange, account, or owner.
- Cycling is the process of depositing fiat currency at one bank, buying and selling cryptocurrency, and then depositing the proceeds at a different bank or account.
Integration is the third stage of money laundering.
The funds are finally integrated into the legitimate economy in the final stage of money laundering. To avoid attracting the attention of law enforcement or tax authorities, the criminal may invest in real estate, luxury assets, or business ventures with the funds.
They are frequently content to use payroll and other taxes to legitimize the “washing,” accepting a 50% “shrinkage” in the wash as the cost of doing business.
Typical integration strategies include:
- False employees – a way to get the money back. Typically paid and collected in cash
- Loans to directors or shareholders that will never be paid back
- Dividends are payments made to shareholders of criminally controlled companies.
While not all money laundering cases will follow the three-stage process – stages may be combined or repeated several times – the rule of three stages of money laundering shapes the thinking of many compliance teams. Let us now look at some controlling measures.
Anti Money Laundering – Controls
Here are some of the ways –
Criminalization
To prevent money laundering, many governments, financial institutions, and businesses impose controls. The first is government criminalization. The United Nations Convention on Transnational Organized Crime established guidelines to assist governments in prosecuting individuals involved in money laundering schemes.
Understand Your Customers – KYC
To help prevent money laundering, financial institutions must also implement “know your customer” policies. This entails monitoring client activity and identifying the types of transactions that should raise red flags. Financial institutions are required to notify a financial investigation unit of any suspicious activity.
Software Filtering and Record Management
Financial institutions and businesses also keep detailed transaction records and use software that detects suspicious activity. Customer data can be classified based on various levels of suspicion, and transactions can be denied if certain criteria are met.
Holding Time
Many banks require deposits to be held in an account for a set period of time (usually around five). This holding period reduces the risk of money being moved through banks to launder money.
Innovative Technology
The technology used to detect suspicious activity associated with money laundering is evolving and becoming more accurate. AI and Big Data software, for example, enable these systems to become more sophisticated.
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Last Words
The Financial Action Task Force (FATF) is a non-governmental organization whose mission is to combat money laundering and terrorist financing. It was established in 1989 to set global standards for AML and CFT regulations and to promote their adoption. Meeting AML requirements is not a one-time event. Businesses should also consider the specific requirements of local regulatory bodies.
