Veriff
Blog

What are the 3 stages of money laundering?

The actual process of laundering money is more complex than this definition makes it sound. In fact, there are 3 stages of money laundering, and each of these contains its own complexities. With this in mind, let’s take a look at each stage in greater detail.

March 23rd, 2022

Share

Share

Love this blog? Why not share it with the world?

Money laundering can be a complex crime. To help you learn more about how the crime works, we’ve put together this guide. We’ve answered popular questions like “What are the 3 stages of money laundering?”, “What are examples of money laundering?”, and “How can you prevent money laundering?”

What is money laundering? 

Usually, a criminal enterprise or an individual involved in financial crime will end up with a large amount of cash that needs to be hidden from authorities.  

To do this, a criminal will willfully conceal money obtained from illegal activities, “wash” it within the financial system, and get it back in a “clean” way. This process is known as money laundering.

Essentially, money laundering has one purpose: to turn the proceeds of crime into cash or property that looks legitimate and can be used without suspicion.

However, the actual process of laundering money is more complex than this definition makes it sound. In fact, there are 3 stages of money laundering, and each of these contains its own complexities. With this in mind, let’s take a look at each stage in greater detail.

The 3 stages of money laundering explained

Each stage of the money laundering process is unique and presents its own challenges. To help you learn more, here’s a breakdown of the 3 stages of money laundering, and an overview of exactly what each stage involves.

Placement

In the placement stage of money laundering, “dirty” money is placed into a legitimate financial system, such as an offshore account or a financial instrument.

In the process of moving the cash from its source, the money is “washed” and disguised to look like a legitimate source of income.

At this stage of the process, criminals are vulnerable because they’re moving a large bulk of money and placing it directly into the financial system.

Layering

Layering is the second part of the money laundering process. At this stage, multiple small transactions are made in different markets and across borders. The goal here is to distance the funds from their origins as far as possible.

The aim of this process is to obscure the audit trail through the strategic layering of financial transactions and fraudulent bookkeeping. If this is done well enough, the original source of the funds can be concealed and it will be near-impossible to prove who owns the illegal funds. By spreading the funds across borders, it also makes it more difficult for anti-money laundering officials to spot foul play.

Integration

The final stage of the money laundering process is the integration stage. At this stage, the “dirty” money is returned to the criminal, seemingly from legitimate sources.  

Once the “dirty” money has been placed and layered, the funds will be integrated back into the legitimate financial system as “legal” tender. This process must be carried out extremely carefully and the money must come from legitimate sources.

Examples of money laundering stages

The 3 stages of money laundering are highly complex. In reality, each of these stages often overlaps. In addition, each stage can also involve multiple individuals.

Placement examples

There are a number of different ways that laundered money can be placed into legitimate financial systems. For example, criminals can use:

  • Cash businesses: cash gained from crimes is added to legitimate takings. This strategy works best in businesses that have little or no variable costs, such as car parks, car washes, or casinos. Historically, it used to be done through launderettes, hence the term “money washing.”
  • False invoices: criminals can put through dummy invoices to match cash lodged, making it look like the cash has been used to settle an outstanding invoice. Sometimes, things may also be over-invoiced or under-invoiced, or goods and services may be falsely described.
  • Smurfing: this involves lodging small amounts of money that fall below AML reporting thresholds. These illegal funds are then deposited into bank accounts. One single person may do this over a long period, or multiple people (known as smurfs) may deposit the cash into multiple accounts.
  • Foreign bank accounts: this involves physically taking small amounts of cash abroad (generally an amount just under the customs declaration threshold), lodging it in a foreign bank, and then sending it back to the country of origin. This process easily hides the identity of the real owners and is a way to evade paying tax to HMRC
  • Aborted transactions: for this, funds are lodged with a lawyer or an accountant so the money can be used to settle a proposed transaction. However, after a short time, the transaction is aborted. When the money is returned, it is from an unimpeachable source.

Layering examples

Layering involves turning “dirty” money into large sums of “clean” and untraceable funds.

Layering is incredibly complex, but it generally involves the following tactics:

  • Moving money electronically between different countries using loopholes in legislation
  • Converting money into stocks and other financial instruments
  • Investing in real estate or “shell” companies with a functional front

During this stage, criminals will make as many transactions as possible in order to create extra “layers”.

Integration examples

The final stage of the money laundering process involves getting the money out of the financial system so that it can be used. However, it’s important to the criminals that they do not attract the attention of law enforcement or tax authorities. Due to this, criminals are often content to pay payroll and other taxes to make the “washing” more legitimate. Techniques used include:

  • Fake employees: these non-existent employees are usually paid in cash
  • Loans: these are given to directors and shareholders and are never repaid
  • Dividends: these are paid to shareholders of companies that are controlled by criminals
  • Investments: criminals may also purchase property, high-end cars, artwork, or jewelry

Once the integration stage has been achieved, a criminal will enjoy their legal wealth, believing that the laundered money won’t be traced back to them.

How can you prevent money laundering?

Money laundering is a serious crime and criminals could try to target your business. As a result, it’s vital that your business adheres to anti-money laundering (AML) guidelines and reports all instances of suspected money laundering.

If your company is at risk of financial crime, then you’re required to implement an anti-money laundering compliance program. The main goal of this is to detect, respond, and avoid money laundering and fraud-related risks. You can achieve this by:

  • Having an effective reporting structure in place: if money laundering activity is detected at your business, you’ll need to immediately deliver information regarding the activity to the authorities
  • Being aware of the risk level of your customers: before you accept any customers, you should evaluate their risk profile and make sure they’re processed and monitored accordingly
  • Having a compliance officer as a team member: AML processes are not easy to manage. A compliance officer can review the suitability of your processes and make sure you’re following the ever-changing regulations and laws surrounding money laundering

If you’re looking to become AML compliant, then a great starting point is online identity verification. Our AML & KYC compliance solution provides end-to-end anti-money laundering compliance and can help you fight financial crime.

Powered by AI, our software verifies identities, checks global sanctions and PEP watch lists, and checks for negative news about predicate offenses. It can also monitor clients on an ongoing basis in case something changes. With the help of our software, you can show regulators that you take financial crime and compliance seriously.

Book a consultation with Veriff

Interested in learning more about how we can help your business fight financial crime and ensure that you know your customers?Book a consultation with our team today. We’ll provide you with a personalized demo, so you can see the benefits for yourself.

 

Stay up to date on Veriff news, product updates, and more

Veriff will only use the information you provide to share blog updates. You can unsubscribe any time. For more details, check out our privacy policy.

Related articles

What is enhanced due diligence (EDD) in banking?

Blog

What is enhanced due diligence (EDD) in banking?

EDD in banking involves gathering information in order to verify the identity of customers and calculate the exact level of money laundering risk each customer poses. During the EDD process, the customer is asked for a much greater amount of information than they are during the CDD process, as this information can be used to mitigate the risks involved.

What is due diligence in finance?

Blog

What is due diligence in finance?

When carrying out due diligence, a financial institution must determine whether they should perform customer due diligence (CDD) or enhanced due diligence (EDD). This is because FATF guidance suggests that companies should adopt a risk-based approach to due diligence that reflects the specific level of risk that each individual customer presents.

What is synthetic identity theft?

Blog

What is synthetic identity theft?

Synthetic fraud is incredibly dangerous and is a major problem facing the financial sector. Unlike third-party fraud, where an entire identity is stolen and used to defraud enterprises and victims, synthetic fraud frequently has no specific consumer victim.