3 Stages of Money Laundering

3 Stages of Money Laundering Explained – An insight to efficient AML

Eye opening & eyebrow raising facts about Money Laundering:

Here are some Money Laundering facts that show how much this illicit activity has creeped into our financial system.

  • Research shows that $300 billion is laundered through the United States of America every year.
  • Criminals & Drug Paddlers launder $800million to $2trillion each year.
  • Money Laundering costs around 2 to 5% of the world’s total GDP.
  • In the US, Money Laundering totals 15-38% of global Money Laundering.
  • 90% of Money Laundering activities go unidentified.

Overview of Money Laundering

Before diving into the actual topic, let’s take a look at the prime definition of money laundering.

Firstly, you should understand that Money Laundering is a punishable crime and an illegal activity globally. Ideally, no country supports or legalizes Money Laundering.

Now, Money Laundering is a process by which criminals turn their black money into white money. As the name suggests, Laundering is a process of cleaning or washing clothes. SImilarly, there are transactions and financial procedures which convert the illegal money into legalized one.

Process of Money Laundering

Primarily, it is a process through which crime-earned money is brought into the legal financial system. 3 Money Laundering stages are explained below:

  • Money Laundering Placement

First stage of the money laundering process is the placement of Money itself. Here, the illegal funds penetrate the legal financial and economic cycle. Any coverup business or cash is registered or deposited in the bank. Tactfully, these transactions are kept small enough to appear non-suspicious and non-risky.

Placement of Money is done through different entities and various procedures. Some of the are listed below:

  • Cash through business

Cash is added in a legitimate circle through businesses with minor to zero variable costs. These businesses include car parks, car washes, etc.

  • False Invoicing

Inserting the fake invoices that match the cash flows. This looks like a settlement or a legal payment against some purchase or expense.

  • Smurfing

Storing or recording small amounts of cash that goes undetected by AML activities in the bank accounts or credit cards. This cash is then used to pay expenses

  • Offshore companies & Trusts

This hides the real owner’s identity and liability is shifted on a smear name that might not exist in reality.

  • Foreign Bank Account

Physically, transporting small amounts of cash legally or illegally and depositing it in foreign accounts. Afterwards sending this money to the home country account.

  • Halted/Aborted Transaction

A legal professional or an accountant is involved to hold the client’s account. The proposed transaction through this account is canceled and funds are returned back from an undetected source

  • Layering of Money

Now the second stage in 3 stages of Money Laundering is called Layering. It refers to the separation of funds/money from the source. In the Money Laundering Placement stage, the funds can still be tracked to the source of funds. Hence, the layering is required which can have further stages. Simply, layering covers the tracks through adding more transactions, procedures making it difficult to track. Anti-money laundering authorities find it nearly impossible to reach the exact source of Launderes if the layering is done properly. So, the more layers are added, the more difficult it is to track the source.

Moreover, Financial assets, real-estate and other complicated businesses are used for Layering in Money Laundering. Criminals invest their money into a layer of legitimate business activities for diversifying their funds. This makes it difficult for the regulators to track due to multiple layers.

  • Integration of Funds

Thirdly, the funds are integrated where money is cleaned and legalized. Effectively, it appears legitimate and is usable anywhere legally. This is the final stage of the 3 stages of Money Laundering. Also, it is done by being undercover so that law enforcement doesn’t get notified. Keeping a low profile is another technique while integrating money laundering. The Money Launderers often include payrolls & other taxes to wash out their money. So, they get nearly 50% leverage in terms of ‘shrinkage’.

Some methods of integration in the Money laundering are listed below:

  • Fake Payrolls: For payrolls employees are paid through the accounts. Sometimes fake employees are shown in statements. Mostly, the deductions from employees salaries are also a part of integration.
  • Lending to Shareholders or BoDs: These loans are never repaid as per source.
  • Dividends: criminals pay the dividends to the shareholders of companies.

Money Laundering Schemes

Basically, the types of money laundering are the schemes. Commonly, 6 schemes of Money Laundering are famous that facilitate Money Laundering. From Money Laundering Placement till the Integration, all the 3 Stages of Money Laundering are carried out by the schemes.

Following are the 6 schemes of Money Laundering:

  • Structuring/ Smurfing

In this process, the Launderers split the funds in smaller amounts so that the transactions appear noo-suspicious. Normally, FIs are obliged to report any transaction equal to or greater than $10000. So, while depositing a larger sum of money can raise an alarm to the regulators and law enforcement. Through enlisting in multiple countries for the help of friends, relatives and other related parties. Relatively, these parties are trustworthy to the money launderer so he uses them for smurfing.

  • Round Tripping

Commonly, the shell companies, individuals & multiple accounts are used for Round Tripping. It is similar to the layering process.

  • Cryptocurrency Money Laundering

Since its inception the cryptocurrency has been used to launder money. Virtually being untraceable in many aspects here are a few statistics of Money Laundering through Cryptocurrency.

  • 99% cryptocurrency transactions are regulated through AML compliant exchanges.
  • During 2020, the cybercrimes through cryptocurrency fell due to strong money laundering regulations and KYC/AML procedures.
  • Bitcoin Money Laundering is 0.9% of the total Money Laundering in the US. and 0.3% globally.
  • Money Laundering through Trading

Due to the complex international laws & regulations in trade and trade barriers, money launderers exploit the situation. The invoices of value of goods and services can be a tool for this illicit practice worldwide. Hence, due to the AML check having limitations in international trading the Launderers get away with it.

  • Reselling Assets

Seemingly, cash is legitimate through reselling of assets. Big price items might be bought and resold at the earliest. So, they go for luxury cars, elite real estate and other commodities for Money Laundering Placement.

  • Online Gambling

Undeniably, gambling moves billions of dollars so the illicit money can easily be laundered in betting & other forms of gambling. The 3 stages of Money Laundering are fully applicable in gambling as casinos offer a wide range of services. Hence placement, layering and integration can be fully exercised at a massive level in gambling.

Final Word

Money laundering is a stage wise and complex activity to catch. But with the passing years AML trends in 2023 are getting stronger. Also, the digitization of the KYC/AML is supporting a lot in this course. Still the Money Launderers are also becoming advanced and introducing new ways to launder money. As every system has loopholes, it is necessary for the authorities to regulate the systems with advanced AML compliance.

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