It is estimated that about 5% of the world’s GDP is laundered each year - coming to nearly 2$ trillion! In India alone, 3,110 money laundering cases were registered under the Prevention of Money Laundering Act between 2020-2023. Instead of a downward trend, financial crime and methods of money laundering has become more sophisticated.
Governments across the globe are cognizant of this ballooning issue and have laid down their own respective Anti-Money Laundering (AML) regimes to counter the rise of money laundering. A common baseline that all AML policies rest upon is a robust implementation of Know-Your-Business, Customer Due Diligence, and Enhanced Due Diligence processes.
The Three Stages of Money Laundering
There’s a reason why its called money “laundering”. Just like clothes, the “dirty money” is separated, washed, and rinsed to become - well, ‘clean’ money. All money that is laundered goes through certain stages where its trail is masked and it is successfully blended with legitimate funds.
The three stages of money laundering that help disguise the origins and convert illicit funds into legitimate money are:
- Placement
- Layering
- Integration
The Placement Stage
In this stage, illegal funds are “placed” in the financial system by dividing a large sum of cash into smaller, less suspicious sums and then depositing them into a single bank account or several bank accounts. The immediate goal of this stage is to hide the source of the illegal funds.
Examples of ‘Placement’:
- Smurfing or dividing a large amount of money into amounts that are below the reporting threshold
- Buying foreign currency
- Buying securities or insurance with cash
- Purchasing assets in industries that have less stringent AML regulations (Ex: precious metals, artwork)
- Gambling on sports events
- Creating offshore companies
- Blending the ‘legal’ and ‘illegal’ money in cash-intensive businesses
Blocking “Placement” in Money Laundering
Since this is the first stage in money laundering, this is also the most vulnerable stage for financial criminals. Laundered cash is often deposited into the bank accounts of victims of money mules.
Fraud prevention and identity decisioning companies like Bureau can use highly developed technologies like Link Analysis to identify these mule accounts and stop funds from transferring further.
The Layering Stage
The next stage ‘Layering’ is to purposefully separate the illegally obtained funds from their source and mislead an audit. This stage is meant to protect the origins of the crime and the perpetrator and is usually considered the most complex stage because of the multiple transactions involved.
The most used method in ‘layering’ is using the ‘placed’ money to create a mesh of transactions where the funds are ultimately utilized to purchase a legitimate asset.
Examples of ‘Layering’:
- Transferring funds to different countries
- Chain hopping (Read more here)
- Establishing trusts
- Circulating the money between multiple bank accounts in multiple jurisdictions
Blocking ‘Layering’ in Money Laundering
Since this stage is the most complex, we need a data-led approach. Advanced transaction monitoring systems that use artificial intelligence and machine learning can analyze transaction data in real-time. These systems can detect complex patterns and hidden relationships between transactions that may indicate layering.
This stage also sees the maximum amount of cross-border transactions which makes global cooperation imperative. Through information-sharing agreements and networks, entities can access a broader set of data, helping to trace complex cross-border transactions more effectively
The Integration Stage
Integration is the third and final stage in the entire chain of money laundering. In this stage, the illicit funds have successfully been converted to “clean” money and are now integrated into the legitimate financial ecosystem through purchases that are deemed valid and legitimate.
It's usually extremely difficult to catch fraudsters in this stage since the funds can no longer be directly tied to them. This allows them to transfer all the funds back to their account to spend it freely.
Methods of ‘Integration’
- Selling off assets bought abroad to earn foreign currency
- Reselling the assets purchased (Real estate, jewelry, vehicles, artwork, and more). The buyers in this stage are often unaware that they are buying assets previously bought with laundered money.
- Setting up fake businesses and then distributing the money as some text
- Payroll
- Loans to “fake customers”
- Investments
Blocking ‘Integration’ in Money Laundering
Since integration often involves the purchase of real estate, luxury vehicles, art, and other high-value assets, regulators should work closely with these sectors to ensure they are also applying anti-money laundering controls. This includes requiring these industries to perform their own enhanced due diligence on clients and report suspicious activities.
Financial institutions should enforce stringent due diligence procedures not only at the start of a business relationship but continuously over its duration. This includes verifying the source of funds and the legitimacy of transactions, particularly for high-risk customers and those involved in industries vulnerable to money laundering.
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