Ever wonder how criminals conceived money laundering and camouflage for the source? Money laundering is used to finance and profit from illegal operations like arms sales, narcotics, contraband smuggling, embezzlement, bribery, and fraud schemes.
Beyond criminal organizations, professional money launderers also engage in money laundering services for others as a business of its own. Regulators, too, have to think like criminals when combating the threats of money laundering.
They should be constantly monitoring emerging vulnerabilities and criminal applications of technology in financial crime. So, in this article, let us take a closer look at how money laundering works and get a better understanding of the stages of money laundering.
Financial Concepts on Money Laundering
Money laundering (ML) is the process of disguising the origin of money obtained illegally, i.e., from illegal activities such as drug trafficking, bribery or fraud. The point is to mix illegal money with the financial system as “clean” currency, so crooks can have fun with it without attracting the unwanted attention of the authorities.
In fact ML can at times happen with no knowledge of a company’s staff. Only financial firms are at risk of money laundering is a pure myth, with criminals increasingly targeting a growing list of sectors, including sports and art, to launder dirty money. Even charities are an often surprising tool of money laundering.
Bonus: Learn how anti-money laundering is commonly interlinked with anti-terrorism financing (TF), as both ML and TF involve redirection of money.
Three Steps Of Money Laundering
Generally, the money laundering process involves three important stages in injecting laundered money into the legal financial system. Money laundering includes three stages as follows:
- Placement
- Layering
- Integration
Stage 1: Placement In The Financial System (Money Laundering)
The placement stage of money laundering is the first stage; dirty money is placed in a financial institution. This is consistently done
(a) as practice in the fragmentation of considerable sums of cash into lower, yet rather dubious, sums, the quantity of which is specifically saved directly into a bank account, or
(b) where cash-based instruments like checks or money orders are gained, and the returns are progressed toward becoming cash and stored back into records at another area.
Alternative Approaches To Placement include
- “Dirty” cash from crime used to salt legitimate takings of a business, especially through a business with few if any variable costs.
- The phenomenon you describe as Smurfing, in which amounts are less than the AML reporting threshold are landed into bank accounts or credit cards and used to pay bills, and so on.
- Their strategy was to smuggle abroad small value amounts of cash, staying under customs limits abroad to deposit into foreign bank accounts before being re-sent.
Step 2 Of Money Laundering: Layering The money
At this stage, the launderer is going to make a number of transactions that will obscure the original source of the money.
The money could have flowed through buying and selling investments, passed through a holding company or simply moved through a series of accounts at banks globally. Across jurisdictions that do not support positive AML investigations, accounts will be dispersed. A launderer could legitimize the transfers in some cases by disguising them as payment for goods or services, or as a private loan to another company.
The 3 stages of money laundering also apply to crypto. Still, layering is the most popular entry point for crypto, as criminals often use it in conjunction with the traditional financial system to obscure the source of their funds.
Stage 3 Money Laundering: Integration Into the Economy
Integration is the final stage of the money laundering process. This s phase is the phase consolidated money into the legitimate financial system this is only the money obtained illegally
To be able to use the money to buy products and services, it is not up to the law enforcement authorities or the tax authorities, the alleged criminal can invest in real estate, luxury assets, or a business project. They frequently assure themselves by employing payroll and other taxes to render the “washing” more legitimate and assume a 50 percent “shrinkage” in the wash as the cost of doing business.
Red Flags of Money Laundering
Red flags for the three Steps of money laundering include a person being overly secretive or suspicious about money, making large cash transactions, owning what appears to be a shell company, conducting potentially complex financial transactions that seem to serve no real purpose, or conducting multiple transactions just below the reporting limit. It also has all the fake invoices and fake companies like shell companies.
Anti-Money Laundering (AML) Detection And Prevention
A comprehensive AML compliance program must be instituted to protect businesses. It should outline how the business identifies, uses to estimate, and reports monetary crime to execute the following actions:
- CDD and EDD service consists of getting the customer’s information so that he can take action to verify his identity and check whether he is involved in any such crime.
- In cases with a higher risk for money laundering, companies perform a process called Enhanced Due Diligence.
- Regular due diligence monitoring of customers and transactions comes under additional risk management because this is ongoing monitoring.
- Independent AML audit help businesses detect the shortcomings and failures in their AML strategy and correct their shortcomings well ahead of regulatory inspections to avoid a fine.
- A reliable transaction monitoring tool identifies any suspicious patterns and examines suspicious transfers and transactions carried out in digital, fiat or any other currency.