Money laundering is considered to be a sophisticated financial crime that siphons billions from economies worldwide. According to the estimation of UNODC, this illegal activity costs the global economy around $1.6 trillion per annum. On the other hand, FATF, a global watchdog, revealed that nearly 90% of money laundering operations follow a structured process which further involves three key stages: placement, layering, and integration.
The three Stages of money laundering are carefully orchestrated to personate the illegal origins of funds which make them appear legal as the complexity of these operations has led to increased scrutiny from the regulators. It is interesting to know that 70% of financial institutions are reporting challenges in identifying these stages.
How many stages does money laundering have?
Following is an examination of the money laundering pattern as the money laundering process has been further divided into three steps which are covered below:
Placement: The process of bringing back the illegal money into the loop of the financial system.
Layering: this stage tends to execute repetitive transactions to hide the illicit source of the funds.
Integration: reintegrating the money that has been laundered into the legal economy.
Money Laundering Stage 1(Placement)
Blending illegal cash with legal business revenue is another money laundering placement technique, especially in sectors with minimal variable costs. Another strategy is smurfing which entails making small deposits into multiple accounts to get round the need to identify the elements of money laundering.
Furthermore, the true ownership of such assets often gets overshadowed by offshore companies and trusts. In order to avoid customs disclosure requirements, some criminals also move small sums of money over international borders and deposit it in foreign bank accounts.
Case Study Example:
HSBC Mexico Scandal: A Case Study in AML Failures
The HSBC Bank Mexico scandal of 2012 depicts a reminder of how weak anti money laundering controls can result. In the HSBC case, drug cartels managed to deposit large sums of illegal cash directly into HSBC accounts because of their systemic flaw.
Money Laundering Stage 2 (Layering)
The layering stage in AML entails hiding the source of illegal cash through a series of intricate activities, such as holding companies, investments, or simple money transfers between several accounts under various legal authorities and financial institutions. Moreover, scammers aim to conceal their illegal roots by scattering the funds and disguising them as legal payments.
The fact that cryptocurrencies have gained popularity as a tool for money launderers, particularly during the layering stage, when they are combined with conventional banking systems, is intriguing.
Chain hopping is a process in which criminals exchange one cryptocurrency for another and move across blockchains to obfuscate the trail, and is a crucial layering technique in money laundering. In order to conceal the money flow, another technique is mixing or tumbling which entails combining several transactions from different exchanges.
Case Study Example:
Danske Bank Scandal: A Case Study in Layering
In the past, the Danske Bank scandal exposed the dangers of poor anti money laundering controls where criminals exploited the Estonian branch to layer approximately $200 billion in suspicious transactions through a complex network of shell companies. These criminals were also successful in laundering enormous amounts of illegal funds by hiding the real beneficiaries and transferring payments between multiple jurisdictions.
Money Laundering Stage 3 (Integration)
Last but not the least, illegal money is reintroduced into the legal financial system at the integration step which is called the final stage of money laundering as well. Furthermore, in order to conceal their true source, criminals may use the money they have laundered to invest in luxury products, real estate, or companies. It is interesting to know that they might also use it to pay taxes or salaries further to legitimate the funds as the final stage aims to make the illegal funds appear as legal earnings which allows the criminals to enjoy the proceeds of their crimes undetected.
Commonly used integration tactics include:
- Creating fake employees to withdraw funds in cash.
- Issuing loans to directors or shareholders with no intention of repayment.
Case Study Example:
1MDB Scandal: A Case Study in Integration
The scandal of 1MDB can prove to be a prime example of how illegal funds can be integrated into the legal economy where funds were diverted from a Malaysian sovereign wealth fund and used to purchase high value assets like real estate and artwork. Perpetrators attempted to mix the illegal origin of the funds by integrating the stolen money into the legal investments.
How can AML WATCHER be a savior?
AML Watcher’s Advanced Transaction Monitoring detects suspicious activity across all stages of money laundering in real time. It provides help to institutions to identify and mitigate risks quickly by ensuring compliance and safeguarding against financial crime.
