In 2022, the United Nations Office on Drugs and Crime (UNODC) said 2 to 3 percent of global GDP is laundered yearly. Unfortunately, many businesses, even without knowing it, are aiding perpetrators in their illegal financial transactions, making them accessory to the crime when caught.
Money laundering damages businesses. It can cause reputational harm, loss of revenue, multi-million dollar fines, or even the suspension of an operating licence.
To detect and prevent this financial fraud in your business, you need to understand the three main stages through which people launder money.
In this article, you will learn about these stages in great detail and how to combat these fraudulent practices in your business by leveraging efficient Anti-Money Laundering (AML) solutions.
The three main stages of money laundering
Let’s face it: successfully laundering illegal funds is complex. In many cases, there have to be multiple people and entities involved in the criminal activity, knowingly or otherwise. As an organisation, you should recognise the stages of the money laundering process to identify when you may be an unwilling participant.
The three steps to money laundering often include:
- Placement
- Layering
- Integration (sometimes called extraction)
Let’s look into these segments in depth and some common examples of laundering strategies that fit into these stages.
Stage 1: Placement
Placement is the initial stage of a money laundering scheme where the "dirty" money is introduced into the financial system. A common tactic to do this is called Smurfing. Smurfing means breaking down large sums of money into smaller, less suspicious amounts. For example, a launderer may deposit cash in small amounts into banks or use it to gamble at a casino. The goal is to distance the illegal funds from their source.
Prevention Tip: Placement is the most straightforward stage to detect money laundering since the money launderer is at the most vulnerable point of their process. This is because the initial, high inflow of money makes it easier for anti-money laundering agents to notice differences in a customer's behaviour.
Imagine someone has a large amount of cash they earned from illegal activities, like selling drugs. They can't just deposit this money into a bank because it would raise suspicions. So, during the placement stage, they use tricks to put this "dirty" money into the regular economy.
Here's how they might do it:
- Bank deposits: They might make small, frequent deposits into different banks rather than one big deposit to avoid attracting attention.
- Sending money to offshore foreign bank accounts: They might exchange the dirty cash into a different currency, making it harder to trace the source.
- Buying stuff: They could buy expensive items like jewellery or art with dirty money and then sell them later. This way, they transform the cash into something valuable.
- False invoicing: this involves the creation of fake or inflated invoices to justify the movement of money.
- Gambling: They buy chips with illicit funds, gamble only minimally, and then cash out the chips, making the money appear as legitimate gambling winnings
The goal of the placement stage is to get illegal money into the regular financial system without being noticed.
Once it's in the system, they can move on to the next stages of money laundering to obscure its origin further.
2. Layering
Layering is like putting layers of disguise on the illegally obtained money to make it hard to recognise.
The main difference between layering and placement is that placement only involves introducing the funds into the financial system. In contrast, layering entails concealing the source of these funds with various financial transactions.
After the "placement" stage, where the launderer has snuck the "dirty" money into the regular financial system, they’ll want to make it even more confusing for anyone trying to figure out where it came from.
Some common practices include:
- Mixing and shuffling: The money launderers move the money around a lot. They might transfer it between different bank accounts or send it to various locations.
- Investing and trading: Crypto investment can be instrumental for any ML stage, but it’s common during the layering stage. The illicit financiers can use the money to buy different cryptocurrencies on various blockchains to make it look like they're buying and selling valuable assets. They might convert the money into digital currencies and then back into regular money.
- Use of shell companies: Many money launderers set up fake businesses (shell companies) and use them to move the money. These companies exist only on paper, making it challenging to trace the funds.
The idea behind layering is to create a web of transactions so tangled and complicated that it's nearly impossible to figure out where the money came from.
This makes it very challenging for authorities to track the illegal source. The more layers the launderer adds, the more confusing it becomes.
Prevention Tip: The standard layering technique often involves trading crypto and fiat currency back and forth. Suddenly, purchasing a large volume of crypto could indicate layering.
3. Integration (sometimes called extraction)
Now that the trace of the funds has been obscured, the launderer introduces the money back into circulation in the legitimate economy. During the integration phase of money laundering, the launderer legally transfers the illicit funds back to themself to be spent. The key here is to use the money as usual and appear to earn it legally.
Integrating it into everyday financial activities makes it almost indistinguishable from any other capital in the system. This way, it avoids suspicion and scrutiny from authorities.
Often, launderers in the integration stage use illegal funds to purchase high-priced assets like artwork, jewellery, cars, or real estate.
Prevention Tip:Anticipating the illicit cash flow at this stage is nearly impossible for anti-money laundering agents as the launderer has worked hard to obscure the origin of the funds and make them appear legitimate.
How you can spot the stages of money laundering
Despite the possible confusion, frustration, and tricks that the layering stage can cause during the money laundering process, specified AML strategies are available to monitor certain tell-tale transactions and cashflow behaviours, which can help combat the money launderers.
Companies can employ various measures and mechanisms to spot the stages of money laundering and help prevent it. Here are some ways they can do this:
- Know Your Customer (KYC) procedures: Your organisation should have solid KYC procedures in place to verify the identity of your clients or customers. Gather customer information, such as identification documents, business information, and transaction history. Then, thoroughly investigate any inconsistencies or suspicious data. KYC is critical for AML prevention as it catches potential launderers early before they can move finds through your platform.
- Transaction monitoring: Your company can detect unusual or suspicious financial activities by implementing transaction monitoring systems. You can configure these systems to track transactions for patterns like frequent large cash deposits or transfers to high-risk jurisdictions.
- Ongoing Customer Due Diligence (CDD): Conduct ongoing Customer Due Diligence to keep track of customer behaviour. Authenticating users during large transactions and reporting sudden and significant changes in a customer's transaction patterns can even prevent integration-stage laundering from occurring.
- Be AML Compliant: Ensure the company complies with local and international AML and anti-terrorist financing regulations. Governments are watching from common schemes and updating regulations accordingly. Staying current with these regulations and making necessary adjustments to company policies and procedures puts you in a better position to detect these stages.
Using automated solutions to prevent money laundering activities
It’s challenging to stay launder-proof against money launderers, mainly if your organisation operates within the financial sector. Automated AML solutions can be useful tools to screen users against thousands of known fraudsters and provide real-time alerts.
Smile ID’s automated AML solutions can screen new and existing users against over 1100 global and African watchlists and help you automatically:
- Check global and local sanctions: The AML solution will review the sanctions list issued by governments and organisations in 32 African countries and many more worldwide.
- Reveal political risk and associations: SmileID maintains a global Politically Exposed Persons (PEP) list of approximately 1.5 million PEPs and their associates across three levels.
- Build complete user profiles: By integrating SmileID’s AML solutions, you can combine KYC and AML checks to build complete user profiles with verified personal information and AML results.
- Check negative news on users: The AML tool checks the individual against negative information from reputable news agencies. We have over 75,000 news sources from every country in the world.
- Get the most updated information: SmileID’s watchlists are updated daily to ensure fraudsters don’t slip through the cracks.
Any business is at risk of being involved in money laundering. Those who enable high-value transactions, such as financial institutions and service providers, casinos and betting websites, luxury goods dealers, and even payment agencies, are especially at risk.
The good news is that you can protect your business from money launderers and detect these stages of illicit cash “washing” by having AML processes and automated solutions that catch bad actors early.
Book a free demo to learn more about Smile ID’s AML prevention tools and how we can help you prevent money laundering at any stage.
