Key Stages of Money Laundering

Key Stages of Money Laundering

Money laundering is usually a three-stage process:

  1. Placement -Illegal funds are paid into legitimate financial arrangements with reputable institutions, such as life assurance policies or building society accounts.
  2. Layering -Layering will involve a number of transactions to hide the original source of the
    criminal funds. The number of transactions is unlimited depending upon how far the criminal wants to go in hiding the source of funds. Often large sums of money from criminal activities are broken up into smaller amounts before the laundering process takes place.
  3. Integration -This is the process by which the criminal funds finally look clean, in that they appear to be fully integrated into the economy having gone through several transactions to hide their origins.

Money Laundering

Making transactions via financial services products is a method often favoured by criminals trying to hide the source of illicit funds. If an investment is made, for example when it is encashed, a legitimate source of funds is established.

In the case of general insurance products, there may be an instance where a high value premium is paid for insurance which is then cancelled quickly, resulting in repayment by cheque from a legitimate account.

These funds could then be moved through the system using a series of other transactions before finally being considered clean by the criminals.

Lets look at this in more detail:

The Placement Stage

The placement stage represents the initial entry of the “dirty” cash or proceeds of crime into the financial system. Generally, this stage serves two purposes: (a) it relieves the criminal of holding and guarding large amounts of bulky of cash; and (b) it places the money into the legitimate financial system. It is during the placement stage that money launderers are the most vulnerable to being caught. This is due to the fact that placing large amounts of money (cash) into the legitimate financial system may raise suspicions of officials.

The placement of the proceeds of crime can be done in a number of ways. Some common methods include:

Loan Repayment – Repayment of loans or credit cards with illegal proceeds
Gambling – Purchase of gambling chips or placing bets on sporting events
Currency Smuggling – The physical movement of illegal currency or monetary instruments over the border
Currency Exchanges – Purchasing foreign money with illegal funds through foreign currency exchanges
Blending Funds – Using a legitimate cash focused business to co-mingle dirty funds with the day’s legitimate sales receipts

The Layering Stage

After placement comes the layering stage (sometimes referred to as structuring). The layering stage is the most complex and often entails the international movement of the funds. The primary purpose of this stage is to separate the illicit money from its source. This is done by the sophisticated layering of financial transactions that obscure the audit trail and sever the link with the original crime.

During this stage, for example, the money launderers may begin by moving funds electronically from one country to another, then divide them into investments placed in advanced financial options or overseas markets; constantly moving them to elude detection; each time, exploiting loopholes or discrepancies in legislation and taking advantage of delays in judicial or police cooperation.

The Integration Stage

The final stage of the money laundering process is termed the integration stage. It is at the integration stage where the money is returned to the criminal from what seem to be legitimate sources. Having been placed initially as cash and layered through a number of financial transactions, the criminal proceeds are now fully integrated into the financial system and can be used for any purpose.

There are many different ways in which the laundered money can be integrated back with the criminal; however, the major objective at this stage is to reunite the money with the criminal in a manner that does not draw attention and appears to result from a legitimate source. For example, the purchases of property, art work, jewellery, or high-end automobiles are common ways for the launderer to enjoy their illegal profits without necessarily drawing attention to themselves.