Through money laundering, criminals fund and profit from illicit activity such as arms sales, narcotics, human trafficking, contraband smuggling, embezzlement, insider trading, bribery, and fraud schemes. In addition to organized criminal groups, professional money launderers perform money laundering services on behalf of others as their core business.
The scale of money laundering globally is difficult to assess. Still, a widely quoted figure from the United Nations Office on Drugs and Crime (UNODC) estimates that money laundering schemes cost 2-5% of the world’s total GDP – an estimated $2 trillion.
There are typically three stages of the money laundering process to release laundered funds into the legal financial system. These three stages of money laundering are:
- Placement
- Layering
- Integration/extraction
Money Laundering Stage 1: Placement in the financial system
Placement is when “dirty money” is introduced into the financial system. This is often done by breaking up large amounts of cash into less conspicuous smaller sums to deposit directly into a bank account or by purchasing monetary instruments such as checks or money orders that are collected and deposited into accounts at other locations.
Other placement methods include:
- Adding illicit cash from a crime to the legitimate takings of a business, particularly those with little or no variable costs
- False invoicing
- Smurfing, where small amounts of money below the AML reporting threshold are inserted into bank accounts or credit cards and used to pay expenses, etc
- Hiding the beneficial owner’s identity through trusts and offshore companies
- Taking small amounts of cash below the customs declaration threshold abroad and lodging it in foreign bank accounts before being re-sent
Money Laundering Stage 2: Layering the funds
The layering stage is when the launderer moves the money through a series of financial transactions with the goal of making it difficult to trace the original source.
The funds could be channelled through the purchase and sales of investments, a holding company, or simply moved through a series of accounts at banks around the globe. Widely scattered accounts are most likely to be found in jurisdictions that do not cooperate with AML investigations. In some instances, the launderer could disguise the transfers as payments for goods or services or as a private loan to another company, giving them a legitimate appearance.
While the three stages of money laundering also apply to cryptocurrencies, layering is the most common entry point for crypto, as criminals use it alongside the traditional financial system to disguise the origins of their funds.
Layering tactics to look out for:
- Chain-hopping — converting one cryptocurrency into another and moving from one blockchain to another
- Mixing or tumbling — the blending of various transactions across several exchanges, making transactions harder to trace back to a specific exchange, account, or owner
- Cycling —making deposits of fiat currency from one bank, purchasing and selling cryptocurrency, and then depositing the proceeds into a different bank or account
Money Laundering Stage 3: Integration into the legitimate financial system
The integration stage of money laundering is the final step in the laundering process. This is when the launderer attempts to integrate illicitly obtained funds into the legitimate financial system. To use the funds to buy goods and services without attracting attention from law enforcement or the tax authorities, the criminal may invest in real estate, luxury assets, or business ventures.
They are often content to use payroll and other taxes to make the “washing” more legitimate, accepting a 50% “shrinkage” in the wash as the cost of doing business.
Common Integration tactics include:
- Fake employees – a way of getting the money back out. Usually paid in cash and collected
- Loans – to directors or shareholders, which will never be repaid
- Dividends – paid to shareholders of companies controlled by criminals
Mitigate Money Laundering Risks with Efficient AML Solutions
Through procedural filtering, predictive analysis, and machine learning capabilities, efficient AML solutions can help financial institutions detect and prevent suspicious money laundering activity.
With a real-time risk name screening solution, firms can quickly identify blocked/sanctioned persons and prevent them from placing potentially illicit funds into the legitimate financial system. When screening new or existing customers, firms should also screen for politically exposed persons (PEPs) and adverse media – negative news found across various sources that show an increased risk in conducting business with the person or entity at hand.
To identify suspicious patterns in customer transactions, firms should utilize a transaction monitoring solution that can adapt to detect changes in customer and criminal behaviors. Risk indicators related to layering and integration methods should also be considered when implementing risk-based rule sets that align with a firm’s risk appetite.
While not all money laundering cases will use the three-stage process – they could be combined or stages repeated several times – the rule of three stages of money laundering frames the thinking of many compliance teams.
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Originally published July 26, 2022, updated December 19, 2022
FAQs
Is money laundering a 3 step process? ›
Money laundering schemes vary in their complexity and methods, but there are three common phases for successful laundering: Placement, Layering and Integration.
What is the last stage of money laundering? ›Integration. The third of the stages of money laundering is 'integration'. The 'dirty' money is now absorbed into the economy, for instance via real estate. Once the 'dirty' money has been placed and layered, the funds will be integrated back into the legitimate financial system as 'legal' tender.
What is the first stage in money laundering? ›The first stage of money laundering is when the individual participating in criminal activity places cash proceeds into the financial system. This is done so that they can get rid of the cash that is derived from criminal sources.
What stage of money laundering is layering? ›This is the second stage where the origins of the funds are concealed by moving them around in a series of complex bank transfers or financial transactions. Out of the various techniques of layering, the most common is to make electronic transfers between different jurisdictions and through offshore accounts.
What is an example of layering in money laundering? ›Layering can include changing the nature of the assets, i.e. cash, gold, casino chips, real-estate, etc. Complex layering schemes involve sending the money around the globe using a series of transactions. The more countries the money enters and leaves, the harder it is to uncover the “dirty” source of the money.
What is the most common way to launder money? ›What Are Common Ways to Launder Money? The traditional forms of laundering money, including smurfing, using mules, and opening shell corporations. Other methods include buying and selling commodities, investing in various assets like real estate, gambling, and counterfeiting.
How do you detect money laundering? ›Cash Transaction Reports - Most bank information service providers offer reports that identify cash activity and/or cash activity greater than $10,000. These reports assist bankers with filing currency transaction reports (CTRs) and in identifying suspicious cash activity.
What is money laundering in simple words? ›Money laundering is a financial crime in which the source of illegally acquired money or goods is hidden from law enforcement and financial regulators by generating the appearance of legitimacy for the illicit gains.
What is suspicious transaction in money laundering? ›Rule 2(1)(g) of PMLA-2002 defines suspicious transactions as: A transaction whether or not made in cash which, to a person acting in good faith- (a) gives rise to a reasonable ground of suspicion that it may involve the proceeds of crime; or (b) appears to be made in circumstances of unusual or unjustified complexity; ...
What are suspicious transactions? ›Any transaction or dealing which raises in the mind of a person involved, any concerns or indicators that such a transaction or dealing may be related to money laundering or terrorist financing or other unlawful activity.
Which of the following is a red flag for money laundering? ›
Unusual transactions
Customers trying to launder funds may carry out unusual transactions. Firms should look out for activity that is inconsistent with their expected behavior, such as large cash payments, unexplained payments from a third party, or use of multiple or foreign accounts. These are all AML red flags.
Smurfing, or sometimes referred to as “structuring” is a type of money laundering that involves breaking up large transactions into smaller ones to avoid detection. The name comes from the similarity between the way funds are broken down and the way that cartoon characters known as “smurfs” divide up tasks.
What is an example of layering? ›Some of the many methods of layering are: Electronic fund transfers to and from offshore bank accounts, or between countries or jurisdictions. Shifting of funds between several different financial institutions, or between multiple accounts within a single institution.
What is placement vs layering vs integration? ›Placement is the process of getting illegal funds into the financial system, layering is the process of moving illegal funds through a series of transactions to disguise the source of the funds, and integration is the process of returning the funds to the criminal in a way that appears to be legal.
What is cash structuring? ›Definition of Cash Structuring
Cash structuring is the act of breaking up what would otherwise be a single significant financial transaction into a series of smaller transactions to avoid scrutiny by regulators and law enforcement. Cash structuring is also known as “smurfing” in the industry.
phrasal verb. If someone tips you off, they give you information about something that has happened or is going to happen. Greg tipped police off on his car phone about a suspect drunk driver. [
What is the difference between placement and layering in money laundering? ›Money laundering typically includes three stages: placement, layering and integration stage. Placement is the first step of money laundering which is the process of moving the money into the legitimate source via financial institutions, casinos, financial instruments etc. and at the same time, hiding its source.
What is the main reason people launder money? ›Money laundering involves disguising financial assets so they can be used without detection of the illegal activity that produced them. Through money laundering, the criminal transforms the monetary proceeds derived from criminal activity into funds with an apparently legal source.
What businesses launder money the most? ›Cash businesses like laundromats, vending machines, restaurants, lawn services, car washes, and street vendors are often used to launder money. Because of the large amounts of cash flowing into the business already, it is harder to prove that dirty money is being cleaned with these businesses.
What businesses are most used for money laundering? ›The most common businesses involved in money laundering include those that handle large amounts of cash, such as restaurants, nightclubs, charity trusts and casinos. Others deal with inventory that is difficult to value, like art or jewelry.
Can you launder money without knowing? ›
Even if you were helping someone launder money without knowing it, you may still face federal charges of mail fraud, wire fraud, money laundering, bank fraud, and even identity theft. These felony charges carry serious penalties with jail time and fines.
How can you tell if a money is laundering front? ›...
Unusual source of funds
- bank statements.
- recently filed business accounts.
- documents confirming the source, such as a sale of a house or shares.
Essentially, any transaction you make exceeding $10,000 requires your bank or credit union to report it to the government within 15 days of receiving it -- not because they're necessarily wary of you, but because large amounts of money changing hands could indicate possible illegal activity.
What is another word for money laundering? ›Alternate Synonyms for "money laundering":
concealment; concealing; hiding.
On both the state and federal levels, money laundering is a felony conviction. These allegations could affect your life far beyond an initial jail sentence and fines, whether or not you even committed a crime.
What can I do with large amounts of cash? ›- Fully fund your emergency cash account.
- Invest excess cash using a brokerage account.
- Increase contributions to a 401(k), 403(b), or IRA.
- Consider using the funds to pay the tax on a Roth IRA conversion.
- Refinance your mortgage.
- Pay off student loans or bad debt.
File reports of cash transactions exceeding $10,000 (daily aggregate amount); and. Report suspicious activity that might signal criminal activity (e.g., money laundering, tax evasion).
How much cash can you deposit in the bank without being questioned? ›Banks must report cash deposits totaling $10,000 or more
But the deposit will be reported if you're depositing a large chunk of cash totaling over $10,000. When banks receive cash deposits of more than $10,000, they're required to report it by electronically filing a Currency Transaction Report (CTR).
The $10,000 Rule
Ever wondered how much cash deposit is suspicious? The Rule, as created by the Bank Secrecy Act, declares that any individual or business receiving more than $10 000 in a single or multiple cash transactions is legally obligated to report this to the Internal Revenue Service (IRS).
The initial burden of suspicious activity monitoring has traditionally fallen on frontline staff at financial institutions. The teller alerts a supervisor or manager, and then an investigation is conducted. In some instances multiple departments may be involved in researching an account.
What do banks flag as suspicious activity? ›
As FinCEN—the Financial Crimes Enforcement Network—has helped describe, transactions that “serve no business or other legal purpose and for which available facts provide no reasonable explanation” are one of the most common signs of suspicious activity.
How do banks identify suspicious activity? ›Banks regularly track accounts for illegal activities such as money laundering. Large amounts of money obtained by illicit activity are deposited in bank accounts and passed around to appear as though they came from a reputable source. Banks also freeze accounts due to suspicions of terrorism funding.
At which of the 3 stages is money laundering generally easiest to detect? ›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.
What are the three 3 methods commonly used by the criminals in money laundering processes to hide their illegal proceeds? ›Commonly, there are three stages of the money laundering process: placement, layering and integration. Illicit funds are separated from their illegal source. This typically happens when illegal funds are placed into a reporting institution.
What is the process money laundering? ›Money laundering has three stages: placement, layering, and integration. In the placement stage, the launderer introduces the illegal profit into the financial system. In the layering stage, the launderer engages in a series of conversions or movements of the funds to distance them from their source.
What is Section 3 of Prevention of money laundering Act? ›3. Offence of money-laundering. —Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime and projecting it as untainted property shall be guilty of offence of money-laundering.