Money Laundering is the process of “cleaning” the proceeds of criminal activity, such as drug trafficking or human smuggling appear to have come from legitimate sources. When left unchecked, “money laundering has potentially devastating economic, security, and social consequences. It provides the fuel for drug dealers, terrorists, illegal arms dealers, corrupt public officials, and others to operate and expand their criminal enterprises.”
Common stages in laundering
Money laundering schemes vary in their complexity and methods, but there are three common phases for successful laundering: Placement, Layering and Integration. Let us look at the individual stages.
The initial stage of money laundering – Placement – occurs when the launderer introduces their illegal profits into the financial system. This might be done by taking a large amounts of money and dividing it into less obvious sums.
This can allow criminals to deposit the money directly into bank accounts or purchase other legal financial instruments such as money orders and cheques – which are then moved elsewhere to be deposited at another location – moving the money away from the dirty source and closer to clean or legitimate accounts. It can also mean putting money in a number of places at the same time in an attempt to obfuscate investigators searching for laundering.
Placement is the term given to the process of moving dirty cash into the legitimate economy and further away from its illegal source
By placing the money in accounts or other financial instruments, the criminals hope the course of their criminal activity will be hidden from view by disguising it and distancing it from the crime.
Another popular way for criminals to move money is to have it so offshore – far away from the source of the ill-gotten gains. By laundering the funds abroad, it moves the cash away from the source and puts some distance between the criminals and the cash – at least on paper. They still have control over the funds the whole time.
Afterwards, the money moves through FIs, exchange houses and other businesses. The most likely institutions are those known as cash intensive businesses, such as casinos, independent ATMs, bars, strip clubs, car washes, mom and pop type convenience stores and so forth.
With the placement step, funds may be deposited in a bank, added to the accounts of an existing business or disguised as a transaction (for example, for products that are never provided).
Placement is often achieved through a series of regular small transactions as criminals who make the mistake of depositing large amounts of unaccountable cash are often quickly caught.
Of course, some people who attempt money-laundering schemes have no experience and do not know what behaviors are likely to be flagged – but organized crime syndicates are unlikely to make it so obvious.
Layering is the second stage of laundering money, and it involves making the money as hard to detect as possible, and further moving it away from the illegal source. It can often be the most complex stage of the laundering process.
Layering is the stage where the illicit money is blended with legitimate money or placed in constant motion from one account to another. Layering often involves generating so many different transactions that the cash disappears and becomes laundered.
Methods of layering include using the illegally obtained money to briefly gamble in a casino (where buying and cashing out chips can help make the funds appear more legitimate) or by placing cash in the stock market and moving it around through different financial products or foreign currency exchanges.
Layering can work in different ways depending on the schemes, which can often be dramatic.
The funds might be wired through a series of accounts at various banks around the world and across borders. Using widely dispersed accounts for laundering is common in those jurisdictions that do not co-operate in anti-money laundering investigations. In some instances, the launderer might disguise the transfers as payments for goods or services, thus giving them a legitimate appearance.
No matter what scheme is employed, the purpose of layering is to throw up enough hurdles that even the most skilled accounting investigator has trouble differentiating money from legal transactions from dirty cash that was placed to be laundered.
Layering is typically a safer stage than placement for the criminals, as they can still be caught easily if they make mistakes by doubling daily transactions or other major departures from usual activities.
Having successfully processed criminal profits through the first two phases, money launderers then move the funds to the third stage – integration. This is where the cash comes back into the legitimate economy. This final stage of money laundering successfully puts the so-called ‘cleaned’ money back into the economy.
After the money is transferred from legal businesses or investments, or the trail has become too difficult to follow, the money can then be placed into major investments. Integrated cash ends up being spent on luxury assets, real estate holdings, and long-term investment vehicles or in new business ventures. Integrated cash can also purchase assets that can be used to facilitate future money laundering.
It is critical for all businesses to ensure they comply with AML regulations and report any activities that are illegal or suggest widespread illegal activity. Regulators have levied hefty fines recently against banks and institutions that failed to prevent money laundering.
Some common money laundering schemes:
Casinos: By converting cash into casino chips, launderers then convert them back into cash after they are played or just kept by the launderer for a time.
Cash business: There are many businesses which handle most of their transactions in cash and allow illicit cash to be inserted among their legitimate business transactions. This can be used for laundering large amounts of cash.
Smurfing: occurs with the distribution of small amounts of a larger cash sum to a series of partners who then deposit the money in increments. This is used to get around the currency reporting requirements in many countries. Smaller deposits from many partners are less likely to trigger reports.
Foreign investment schemes: This occurs when the launderer delivers the cash to the foreign investor, who then returns it by making an investment into the launderer’s own business.