Is Layering In Money Laundering An Institutional Failure or Criminal Smartness?

Is it institutional failure or criminal smartness that layering has become easier for criminals?

Money laundering isn’t just a term; it’s an intricate dance of ideas, methods, and sophisticated processes all choreographed to mask the tainted roots of money that’s been acquired through unlawful means, transforming it into funds that can pass as honest earnings.

Launderers have been using financial institutions to insert ill-gotten money where the system has created some loopholes for criminals in the global economic system.

This article will discuss what makes the layering phase important in money laundering and why layering occurs so effectively. Is it due to institutional failures or criminals’ cleverness? Let’s discuss it in detail.

Can Money Laundering  Ever Be Stopped?

Adding so many legitimate layers to illegal funds through the complex web of financial transactions makes it very difficult for anti-money laundering authorities to detect the origin of illicit funds. The technique is well known as layering in money laundering.

It all started with the success of the first phase (placement) of the three stages of money laundering, when launderers, by finding loopholes, open multiple bank accounts. In the initial phase, criminals find structuring and smurfing helpful in depositing dirty money into the legal financial system.

The layering methods are not limited to electronic transfers to other bank accounts and countries but also include adding money to shell companies and purchasing high-value goods like diamonds, cryptocurrencies, and property.

The intricacies of financial transactions at this stage of money laundering hinder authorities from detecting the money trail, as criminals have been observed executing the calculated process to disguise the dirty money’s origin and successfully infuse it into the legal system.

However, there is enough evidence showing that money laundering may be reduced where  AML monitoring and screening processes are in place.

Here are 6 facts to know about money laundering!  

From Clean to Dirty and Back Again

Is layering the most essential phase in money laundering?

One can say yes, but there are two other stages, placing and integration, that aren’t less important when it comes to detecting and combating money laundering.

1. Introduction of dirty money – Placement

The game of washing dirty money starts by placing it into the legal financial system a term called placement in money laundering. This is done by masking illegal money’s origin, breaking it down into smaller amounts, smurfing, and using legitimate businesses with high cash turnover to mix illicit funds with genuine revenues.

Although this is the riskiest phase in money laundering, its success guarantees the criminals that corrupted money has officially been deposited into the financial system.

2. Concealing the origin- Layering

Layering, the most complicated phase among all money laundering stages, involves trying to add a legitimate touch to the dirty money.

Different techniques are applied to avoid the detection of their illegally obtained money.  It involves complicated financial transactions within the country and with foreign accounts.

Creating shell companies, transferring money to offshore accounts, purchasing cryptocurrencies and withdrawing the money under the reporting threshold, making hotel and ticket booking transactions, and purchasing properties are noticeable examples of layering in money laundering.

If the layering process is successful, it will make the detection process quite difficult because adding too many layers to the transaction process makes it hard to differentiate between legal and illegal activities.

Cryptocurrency has emerged as a major platform for money laundering. In 2022 alone, nearly $24 billion was transferred in digital currency through unidentified addresses. It becomes even more intriguing when it is discovered that a significant portion of these transactions occurs during the layering stage.

3.The Final Stage- Integration

Reaching the third stage of money laundering means that dirty money has been officially transformed into clean money, effectively erasing the line between legitimate and illicit money. At this stage, the money becomes almost impossible to detect as illegal.

Now, the laundered money can be used freely without raising suspicion.

Some common integration methods include investing in legitimate businesses, buying and selling property, and covering personal expenses.

Are Shell Companies & Offshore Bank Accounts Easier Targets?

According to the FATF findings, criminals see shell companies and offshore bank accounts as the easiest and most common tactics for transferring money in the layering stage of money laundering.

Criminals get the benefits of the secrecy law under the shell companies are created – the process that makes the detecting process even harder for the Anti Money Laundering authorities to know the company’s ultimate beneficial owner.

The Russian Laundromat scheme (2010-2014) is a prime example of how the layering stage in money laundering can be crucially effective. This scheme involved moving billions of dollars using hundreds of shell companies and offshore bank accounts.

Financial Institutions Or Criminal Smartness?

The success of the layering stage in money laundering often points to a combination of institutional failures and the sophisticated strategies criminals employ.

Here’s a breakdown of how financial institutions may inadvertently allow the layering process to succeed:

Weak Regulatory Frameworks

Inadequate or outdated regulations can create gaps that criminals exploit to move illicit funds without detection. In some jurisdictions, the enforcement of anti-money laundering (AML) laws is not stringent enough, providing criminals with opportunities to layer funds with minimal oversight.​

Inadequate Monitoring and Detection Systems

Financial institutions sometimes need more advanced technologies to monitor and detect suspicious transactions effectively. Traditional monitoring systems might need to be equipped to handle the sophisticated methods used in the layering stage. Relying on outdated technology can result in missed red flags and undetected illicit activities.​

Failure in Implementing KYC and EDD Measures

Know Your Customer (KYC) and Enhanced Due Diligence (EDD) are critical in preventing money laundering. If financial institutions do not rigorously implement these measures, they may not fully understand their customers’ financial behavior needs or the origins of their funds. This lack of thorough scrutiny can allow criminals to exploit the system and successfully layer illicit funds.​

Top 2 Ways of Monitoring Layering

Various AML regulations are in place that oblige financial institutions to implement, detect, and prevent money laundering.

These two ways allow institutions to identify the layering process in money laundering and ensure the arrest of involved criminals.

Transaction Monitoring System

Financial Institutions must build a system that continuously tracks and analyses customer transactions by implementing an AML compliance program within their monitoring and screening system. Failure to do so can cause long-term financial and reputational damage to the organization.

Institutions can configure the system to trigger alerts based on predefined rules and thresholds, helping to identify potential layering activities​.

Know Your Customer

For Businesses to comply with the AML regulations, they must undertake the customer due diligence process on both new and existing customers. This helps in identifying the layering process. For better consequences, a business must integrate the KYC and screening process to make the detection process more accurate.

What AML Watcher can do for You?

Detecting and identifying the Money laundering activities at the initial stages makes the financial institutions compliant. However, the success lies in the improved and advanced AML screening system that complies with the regulatory compliance program.

AML Watcher, with the right tools and updated global watchlists of criminals and PEPs, could be a game changer for your business in the fight against money laundering and other financial crimes.

So, what prevents you from being compliant and free from false positive headaches? Contact us today and see the difference in your workflow.