One of the most organized crimes that take place across the globe is money laundering. To help you understand what money laundering is, let’s take a look at the three stages of money laundering and what businesses can do to avoid it from happening through their firm.
Defining Money Laundering
In simple terms, money laundering refers to the act of criminally acquiring money. In this type of fraud, cash is illegally obtained and “washed” to make it appear as “clean”. Once the three stages of money laundering have been completed, the funds are introduced back into the financial system.
The three equally difficult stages of money laundering make the funds untraceable. Because of this, this crime is an ongoing threat. As reported by the NCA (National Crime Agency), money laundering worth as much as £100 billion affects the UK’s economy every year.
Anti-money Laundering agencies, such as the NCA, are concerned with both finding the perpetrator and the source of the illegal funds. Both of these have to be detected on time as money laundering often facilitates financial crimes such as the financing of terrorist activities. Additionally, global regulatory bodies have also made anti-money laundering compliance mandatory for financial institutions.
The Three Stages of Money Laundering
The process of money laundering is completed in three stages: placement, layering, and integration. Because of the criminal activity involved, each of the three stages of money laundering are extremely complex. Let’s take a closer look at the stages one by one.
In the first stage of money laundering, the dirty cash has to be placed into the financial system. Hence, the name “placement” stage. Once the criminal has acquired illegal cash through schemes such as bribery, theft, or corruption, it has to be moved away from its original source. This where the money is “washed” off its illegal origin and disguised by introducing it into, for example, an offshore account.
Once the dirty has been introduced into the legal, financial system, the next step is “layering”. During this, a web of transactions takes place in an attempt to make the money untraceable by regulatory authorities.
With the help of fraudulent bookkeeping and layering of transactions, the audit trail of the dirty cash is completely disguised, making it appear legitimate.
This stage is of crucial importance and is the stage where most of the money launderers get caught. To create complexity and conceal the funds, the transactions generally take place from numerous banks, different branches, and from various cities.
The final stage of the process is the integration stage. The illegally obtained funds are now engulfed into the economy, for example through the purchase of a real estate property or luxury yacht. Once the funds have been successfully placed and layered, the dirty cash is re-introduced into the legitimate system, posing as a legal tender. This stage is executed very carefully, as it allows the money launderer to create a plausible explanation of where the money came from in the first place.
It should be noted that money laundering does not always take place in these steps. In fact, these three stages of money laundering often overlap. This is because, at times, the money does not require the placement stage.
How Is The Placement Stage Achieved?
- By blending the dirty cash with legal funds. This is usually done through salons, casinos, and car washes
- Over-voicing or under-voicing
- Smurfing (during which large sums of money are broken down int smaller and less-suspicious counterparts right below the reporting threshold)
- By hiding it through offshore accounts, which also allows the launderer to avoid paying taxes
- By transporting small sums of funds abroad
How Is The Layering Stage Achieved?
- By finding loopholes in the legislations, launderers layer the cash by moving the funds through electronic means
- Often, criminals hide their funds by converting them into stocks
- The dirty cash is invested in real estate or in shell companies, both of which have a functional front
How Is The Integration Stage Achieved?
- Luxury items are bought, such as high-end cars, jewelry items, property, artwork, and so on
- False financial statements with the over-valuation of the price of products exported or imported into a country
Can Businesses Shield Themselves Against Money Laundering?
While fraudulent activities such as money laundering are showing no signs of slowing down, regulatory bodies have come up with new mechanisms to counter this problem. AML compliance was made mandatory keeping in view the scale and frequency with which money laundering occurs.
To comply with these standards, banks and other financial institutions opt for third-party AML providers that offer the technology to accurately implement background screening measures. Using this risk-based approach, the bank becomes aware in advance of the risks associated with every existing and potential customer.
The AML verification process involves verifying the customer against :
- Criminal watch-lists
- Politically Exposed Person (PEP) lists
- Global sanction
- Adverse media news
Using this advanced technology along with strong AML compliance policies, businesses can easily defend themselves against the damages that may be caused by money launderers.