Decoding the Three Money Laundering Stages- Here’s How They Work

Introduction 

Money laundering has become a persistent threat to financial institutions around the world. It is a complex process that fraudsters utilize to conceal the unlawful origins of their funds. Money laundering involves three key processes designed to allow criminals to conceal and “clean” their ill-gotten wealth behind apparently legal transactions. Institutions need to understand the workings of these money laundering stages to grasp the complexities and magnitude of the issue and devise effective counterstrategies.

What Is Money Laundering?

Money laundering is the illicit practice of making substantial sums of money generated through criminal activities appear to have originated from a rightful source. The money obtained through illicit conduct is deemed unclean, and the process “launders” it to make it appear to be clean money.

In plain terms, money laundering is a crime that refers to the practice of creating the illusion that huge amounts of money earned through major crimes have originated from a permitted source. According to the UN, the amount of money laundered globally in one year is believed to be 2–5% of global GDP, or $800 billion–2 trillion USD.

The sources of cash often targeted for money laundering include tax evasion, counterfeiting, offshore accounts, organized crime, corruption and bribery, drug trafficking, terrorist funding, and financial scams. The operation typically happens in phases and each of the money laundering stages are intricately designed by fraudsters to conceal the source of their ill-gotten funds.

Authorities and financial institutions can only battle money laundering and protect the integrity of the financial system by understanding the inner workings of the process and implementing countermeasures.

Impact of Money Laundering on the Business Landscape

Money laundering not only compromises the integrity of financial systems but also harms the entire business ecosystem. When exposed to money laundering activities, organizations of all sizes face serious consequences. The multifaceted impact of the money laundering process has consequences for their operations, finances, and overall competitiveness.

Money laundering hampers the growth of the private sector and impacts the business landscape in several ways.

• Regulatory and Legal Implications: Regulators may impose penalties or even criminal charges depending on the severity of the money laundering offense that has taken place. 
• Reputational Harm: Businesses involved in money laundering can incur serious reputational harm, resulting in a loss of trust and credibility among customers, investors, and partners. This can lead to fewer business prospects and a tainted brand image.
• Financial Damage: Companies that may aid money laundering will have to incur huge losses and face monetary repercussions, which leads to significant financial losses. 
• Economic Instability: Money laundering distorts financial markets, which causes imbalances in the business economy, like artificially inflated asset prices which leads to the weakening of financial systems. 
• Global Business Challenges: When businesses want to engage with regions associated with money laundering transactions, they have to face several concerns. The effects of money laundering impact opportunities for cross-border trade and investment. 

How Are Illicit Gains Converted Into Clean Funds? – Decoding the Money Laundering Stages

Money laundering aims to conceal the true source of the funds, producing a false appearance of legality that allows criminals to enjoy the illicit proceeds without attracting scrutiny. The money laundering stages typically involves three different steps, which are:

1. Placement
2. Layering
3. Integration

The Three Stages of Money Laundering- Explained

• Placement:

This is the money laundering stage, wherein the illicit funds are covertly introduced into the legitimate financial system. Illegal money is placed or deposited into financial institutions in a way that does not draw attention. 

Here are several strategies that criminals typically employ to achieve placement in money laundering:

1. • Cash Deposits: The illegal funds are blended with legitimate business earnings and deposited into bank accounts.
   • Offshore Accounts: Criminals place their money in offshore accounts which are financial accounts, held in foreign countries, which helps fraudsters with their increased financial privacy and tax benefits. 
   • Invoice Scams: Money launderers manipulate transactions in trade by over-invoicing, under-invoicing, or falsely describing goods and services, and using phantom shipments to facilitate the movement of their illicit money.
   • Shell Corporations: Criminals may create bogus companies or exploit existing shell companies to carry out fraudulent transactions and divert illicit funds.
   • Smurfing: This is the method by which criminals break down a large amount into smaller, less suspicious transactions which fall below the reporting limit. It is then deposited into one or more banks by a single person over long periods or by multiple individuals, known as smurfs. 
   • Taking Small Amounts of Cash Overseas: Criminals can also place money below the customs threshold abroad and then transfer it to foreign bank accounts before sending it back home. 
   • Money Muling: Criminals also use money muling, i.e., the practice of using individuals known as money mules to transmit and conceal unlawfully obtained funds and make them appear genuine by moving funds through several accounts or jurisdictions.

• Layering:

Disguising the illegal source of money is one of the critical components of money laundering, which is achieved through layering. At this money laundering stage, the source of illegal money is concealed through a sequence of transactions. The illicit funds are subjected to a series of intricate transactions to disguise their origin and create a web of financial complexity. 

Money launderers can engage in thousands of transactions once their cash has been successfully placed into the financial system. They create sophisticated layers of transactions to move the money around inside the legal financial system.

Layering can include transactions like multiple transfers of funds between accounts, conversion of money into different assets, and mixing with legal money. These transactions intend to anonymize the offender’s identity and cover up the audit trail.

They make it difficult for authorities to detect any laundering activity by strategically structuring and layering their financial transactions along with false paperwork to obscure the audit trail.

• Integration: 

This is among the final money laundering stages where the laundered cash is integrated into the regular economy. Fraudsters accomplish this by using the funds for legitimate purposes, such as investing in businesses, purchasing real estate and other assets, etc.

Through such transactions, the ‘dirty’ money will now be absorbed into the economy. The goal of this money laundering stage is to make illegal money appear legitimate and indistinguishable from lawful money.

After ‘placing’ his funds as cash and ‘layering’ them through multiple transactions, the illegal proceeds are now fully ‘integrated’ into the financial system and can be utilized for any purpose.

The major goal of this phase is to reunite the money with the criminal in a way that does not draw attention and appears to come from a reputable source. They do so using various techniques, like:

1. • Investments :

      Investing in high-value assets like jewelry, luxury vehicles, expensive art pieces, and property.

   • Business Investments :

      Creating a fictitious business with fake employees and paying out salaries that go into the criminal’s hands.

   • Stock Market Manipulation :

     To legalize their unlawful funds, money launderers may engage in stock market activities such as purchasing and selling stocks.

   • Gambling:

     Money launderers may turn illicit payments into casino chips or gambling wins by using casinos or internet gambling platforms. The proceeds can then be cashed out for apparent gaming winnings.

   • Dividends and Loans :

     Companies owned by criminals may give out loans or dividends to their shareholders to legalize their funds.

Combating Money Laundering: Why AML/CFT Is Vital For Business Sustainability?

Money laundering presents substantial challenges to not only the security of a country’s economy but also the stability of the world economy. Money laundering practices compromise the integrity of financial systems, which necessitates the implementation of effective measures to combat such illegal financial operations.

AML/CFT, which stands for Anti-Money Laundering and Combating Terrorist Financing, is one such critical framework that helps businesses counter money laundering. Businesses can better protect themselves, their customers, and the larger economy from the dangers associated with the various stages of money laundering by setting up robust AML and CFT strategies.

Anti-money laundering practices play a crucial role in protecting businesses against threats and ensuring their continued sustainability. By combating money laundering, businesses can preserve their brand image, retain trust with their customers and investors, and mitigate financial risks effectively.

Having a strong anti-money laundering program to counter illegal financial activities like money laundering helps businesses in several ways including,

• Mitigating financial and legal risks
• Building trust among customers and stakeholders
• Ensuring regulatory compliance
• Creating a safe and sustainable operating environment
• Contributing to the worldwide battle against financial crime

Creating comprehensive AML and CFT frameworks helps companies contribute to a secure business environment that customers trust. Businesses can do so by implementing a strong customer verification system using methods like digital KYC.

Mitigate Money Laundering Risks With SignDesk’s Smart KYC Solutions

Money laundering may or may not involve all three stages, i.e., placement, layering, and integration, or they may be mixed or performed several times. Regardless, the goal of any of the money laundering stages is to conceal the true source of the funds, producing a false appearance of legality that allows criminals to enjoy the illicit proceeds without attracting scrutiny.

This illegal action of money laundering not only jeopardizes the integrity of financial institutions, but also has far-reaching implications for businesses, governments, and society at large.

SignDesk’s AI-enabled digital onboarding solution helps companies verify customers before onboarding them, helping them maintain a secure business environment for customers to transact.

Real-time ID verification, and facial recognition, along with image, video, and chat-based verification procedures, help businesses verify customers faster and onboard them easily.

Get in touch with us to learn more about how your business can combat money laundering using smart online KYC.