What are the three stages of Money Laundering?

To establish AML checks, it is first helpful to understand the processes involved in the crime.

30 Sep 2022 | 10 minutes read time Share on Facebook Twitter share Share on Viber LinkedIN share Email share

What Is Money Laundering?

Money laundering is a financial crime in which the source of illegally acquired funds or property is concealed from law enforcement and financial authorities by creating the impression of legality for illicit gains. Individuals, tax evaders, criminal organizations, corrupt government officials, and even terrorist financiers are capable of engaging in money laundering to conceal the source of funds or items.

 

What are the different variants of Money Laundering?

Smurfing (also known as "structuring") is a prevalent method of laundering funds. In order to evade discovery, the criminal divides huge sums of money into smaller little contributions, typically distributing them across numerous accounts. Currency swaps, wire transfers, and "mules" (cash smugglers who sneak huge quantities of cash over borders and deposit them in foreign accounts where money-laundering regulation is lax) can also be used to launder money. Other ways of money laundering include:

  • Investing in goods, such as jewels and gold, that can be readily transported to other countries;
  • Investing in and selling precious assets such as real estate, automobiles, and boats with discretion;
  • Casino gambling and money laundering, counterfeiting, and the use of shell organizations are prohibited (inactive companies or corporations that essentially exist on paper only).

 

What are the stages of Money Laundering?

In order to establish anti-money laundering checks, it is first helpful to understand the three processes that are involved in the crime.

1. Placement

Placement is the first stage of money laundering: criminals move illicit funds into a legitimate source of income. At this stage, anti-money laundering procedures would focus on sniffing out illegitimate sources of funds. Criminals are vulnerable during the first stage because they’re moving a large bulk of money and placing it directly into the financial system. Here is a list of some of the most common strategies utilized during the placement stage:

  • Producing phony bills and invoices
  • Investing money in companies that operate solely on cash.
  • Establishing accounts at other countries' banks
  • Establishing businesses in offshore locations
  • Transferring relatively insignificant sums of money one at a time

2. Layering

The second stage, which is known as layering or structure, takes place after the money has been put into place. In order to accomplish this, big sums of money are split up across a number of individual transactions. It is hypothesized that these less significant transactions will not trigger any red flags because they are below the minimum required by anti-money laundering legislation. Layering frequently takes place across international borders. Strategies for this stage may include the following:

  • Buying and selling on several international markets
  • Purchasing money orders from other countries
  • Dealing in currencies other than one's own
  • Transactions involving the purchase and sale of luxurious assets

3. Integration

The final step in the process of laundering money is the reintegration of the funds into the lawful bank accounts of the criminal. As was the case with prior stages, this one often entails a succession of less significant transactions. For instance, the money could have been spent on the acquisition of a high-end asset such as jewellery or land. It is possible to sell the luxury asset, which will leave a paper trail of monies that were properly sourced. They could also employ strategies such as:

 

  • Creating fictitious workers and including them on the payroll
  • Loans to directors of a shell business being repaid with company funds
  • The practice of paying dividends to shareholders in enterprises run by criminal organizations

Why Is It Important to Fight Against the Practice of Money Laundering?

The goal of anti-money laundering, often known as AML, is to deprive criminals of the income that they make from their unlawful businesses, so removing the primary incentive that drives them to participate in such evil operations. Millions of people throughout the world are put in danger by illegal and risky operations such as drug trafficking, people smuggling, sponsoring terrorism, smuggling, extortion, and fraud, which also impose great social and economic costs on society. Combating money laundering may result in a reduction in criminal behaviour, which would be a considerable advantage to society as a whole. This is because money laundering gives the appearance of legitimacy to the proceeds of illegal acts.

How Can You Tell If Someone Is Laundering Money?

There are a number of warning signs to look out for that could indicate money laundering is taking place. Some of these indicators include suspicious or secretive behaviour by an individual in relation to financial matters, conducting overly complex transactions, owning a company that appears to have no real purpose, conducting large-scale transactions using cash, and conducting a number of transactions that are just under the threshold for which they must be reported.  

What is AML compliance?

The implementation of efficient Anti-Money Laundering (AML) procedures helps to ensure that ill-gotten gains do not enter the lawful financial system. AML compliance is an essential prerequisite for all regulated enterprises, including banks, financial institutions, and businesses that provide money services. The organization's ability to meet compliance standards and establish confidence in its operations is aided by the utilization of efficient AML policies & processes, training, and technologies.

Why is AML compliance important?

AML regulations were created in the first place with the intention of making it more difficult for criminals to get away with their ill-gotten profits. Because the majority of illegal activities are motivated by financial gain, obstructing criminals' ability to profit from their activities is an effective strategy for reducing corruption, tax evasion, theft, fraud, and other illegal activities. That is money that ought to be spent on things that are more productive, so making individual lives and society as a whole better.

This fundamental principle, that anti-money laundering (AML) is an essential element of a just and well-functioning society, lies at the heart of an efficient program. AML compliance is not a desirable feature or an obligation; it is an indispensable prerequisite. Make it a priority to ensure that any decision-maker who can have an effect on your organization's finances or operations is aware of, and recognizes, the genuine significance of compliance.

How can Truvity help?

Truvity offers smart, easy, and powerful solutions for compliance management and customer onboarding processes in the SEE region. Our user-friendly software checks over 1000 public sources of information to extract a consolidated profile of an individual or company. This allows customers to conduct KYC checks within a matter of seconds and find out additional information about related or associated parties, Politically Exposed Persons, and Adverse Media Entities. All of this data is then stored in one easy-to-use dashboard that can reduce administrative burden and complex workflow.

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