Things You Need To Know About 3 Stages of Money Laundering

You can not see it if you do not understand it. Understanding the nuances of the three stages of money laundering is crucial as every stage involves sophisticated but shady modules led by known factors. A trillion-dollar industry with minimum to no traceable amount has become a challenging field where corrupt actors and protectors of the global economic system are in a constant war of tug.

The dirty gains (money) of illicit activities (crimes) are sought to look legal while disrupting the natural flow of money in financial systems. Laundering dirty money is a globally recognized crime that deteriorates the stability of the global economic landscape.

The financial systems process is divided into three steps: placement, layering, and integration.  In this blog, we will critically analyze and understand the complexities of each money laundering stage while keeping in mind that the not-so-traceable financial crime has been estimated to cost the world around $2 trillion each year.

Before digging into the details of the infamous phenomena of money laundering, let’s take a sneak peek at the human perception and history of the said activity.

A Brief Recap of Money Laundering History

What comes to your mind when you hear the word Money Laundering? Does it reflect the very term of doing laundry where dirty clothes are washed to make them wearable again? The similarity is uncanny while the only different thing made to look clean and legitimate is dirty money instead of clothes.

History tells us that the term laundering was established when an infamous gangster Al Capone laundered his illicit proceeds through his laundry business. It also states the origin of laundering money from the Watergate scandal, dated back to 1973.

Compliance experts and analysts explain the process of money laundering from two perspectives: legal and economic.

Economic Point of View: It demonstrates the process of collecting funds from illegal activities from white and blue-collar crimes followed by legalizing those proceeds.

Legal Point of View: The legal perspective explains money laundering in four ways: conversion of a property that was derived through illegal ways, concealing the source of the illegal property, owning or buying the illegal property, and facilitation of these illegal properties through any criminal activities.

The infamous Watergate scandal, which exhibits the political crisis and abuse of power, was facilitated through money laundering where different criminal tactics were used to exploit the national economy and stability of financial systems.

Money laundering in its every aspect not only encourages criminal activities but brings severe ethical and economic consequences. Below is a comprehensive map of the aftershocks of money laundering that gave birth to the establishment of authorities and laws striving to curb the plague.

Unforgiving Regulatory Reforms Against Money Laundering

A collective effort to stem criminal activities and facilitated acts of money laundering was initiated when drug and human trafficking overtook the streets of the United States and Europe. UNODC (United Nations Office on Drugs and Crimes) estimated that around $800 billion drug generated money is laundered each year, which presents the only detected stats while millions of dollars go undetected.

The modern world has seen and heard a lot about rigorous enforcement actions taken by governing bodies, establishing a known term of Anti-Money Laundering (AML) measures. These globally recognized and endorsed AML laws are devised to implement strict screening and verification protocols to detect and prevent money laundering and associated predicate crimes.

The establishment of the global regulatory body FATF (Financial Action Task Force) in 1989 and the indictment of BSA (Bank Secrecy Act) in 1970 in the United States are proof that money laundering and the later added mandate of financing of terrorism should not be tolerated at any level and cost.

Note: Read more about AML Laws in the US that govern AML compliance efforts.

The endorsement of BSA/AML measures can be better understood by the increasing enforcement fines institutions, particularly financial institutions have paid so far. Monetary costs aside, violations of AML laws have caused institutions legal and reputational burdens.

Note: Learn more about the most infamous scandals witnessed by the financial sector where AML in banking went wrong and caused havoc in the global economic landscape.

Highlighted below are some major cases that show how rigorously enforcement actions can be when institutions fail to detect money laundering and indifferently facilitate the corrupt actors.

Though it is difficult to measure the exact scale of money laundering, there are agreed statements that support a few sectors being prone to money laundering. Let’s take a look at them.

4 Major Sectors Prone to Money Laundering Stages

There are several ways that money launderers use to hide or legalize their illicit proceeds. A research was published in a journal of Crime, Law, and Social Change which states some general ways aimed to hide their assets and never be linked to those assets if identified. Below are general statements that were made to highlight the conventional behaviors while laundering money.

• They tend to avoid the most regulated industries such as banks and rather exploit areas with minimum to zero AML regulations including real estate and antiquities markets.
• Money launderers choose middlemen generally known as strawmen to launder their illicit gains to hide the real beneficiary of assets. An artist with an art degree and background and a professional with an accounts background can be selected to launder money in antiquities and consultant firms respectively.
• The corrupt actors target those jurisdictions with less active responses to money laundering activities to plot their schemes. Cross-border weak cooperations facilitate laundered in hiding and laundering their black money.
• The blend of both clean and dirty money is another suitable way to confuse law enforcement agencies to identify the money linked with laundering.
• Money launderers utilize the expertise of professionals with access to financial and compliance systems who facilitate them in executing their shady schemes by constructing undetectable routes within the system.

After walking through the general aptitude of money launderers, let’s dig into the industries that are prone to money laundering due to their specifics to empower these shady traits.

Money Laundering Through Banks

Increased AML scrutiny in banking systems does not stop money laundering activities as the primary compliance of banks keeps on identifying the beneficial owners of accounts. Hiding the beneficiary by using strawmen where the original launderers do not have to deal with banks.

Moreover, banks with targets to meet sales prefer to go with trusting their clients and often overlook the due diligence. On top of that, the complex structures of shell companies and offshore accounts make it difficult to identify laundering activities.

The results of conducted interviews in the research study exhibited that financial institutions particularly, banks are suitable for money laundering.

Money Laundering Through Consulting Firms

The global and flexible nature of consulting firms is ideally exploited by money launderers. The verification processes are trespassed by using complex corporate structures, a combination of clean and illegitimate proceeds, and the artificial authenticity of these firms.

These consulting firms are usually portrayed to offer legitimate services to local clients which can be verified while providing ambiguous services to regions with less transparent compliance systems. The operations of such firms are run by strawmen where real beneficiaries never come out front, making it easy for launderers to exploit regulatory gaps.

Money Laundering Through Antiquities

The undetectable prices of antique materials make them ideal for money laundering purposes. The prices of such materials depend on the buyer’s preference or interest in the art pieces, which makes it difficult to estimate the real price of a material.

Such pieces generally require one-time asset verification and are then sold many times in different jurisdictions to trespass the compliance bars. The other most likely opportunity abused by money launderers is setting up an antique shop in remote areas where legitimate business activities happen to cover up the suspicious transactions.

Money Laundering Through Real Estate

The most suitable sector for money launderers, real estate is exploited by corrupt actors in terms of hefty cash transactions and manipulation of property valuations. From buying a real estate property to renovating it in partial cash payments can benefit both parties in terms of evading taxes.

These renovated buildings are then rented out for extended periods while the illegal proceeds are mixed with rental income and black money turned clean. In the final stages, the property is sold with elevated prices calling it hikes in market prices and eventually, the laundered money enters into legitimate financial systems.

Note: Read more about regulatory transformation in the real estate sector to avoid non-compliance.

Below is the quantitive analysis of the above-discussed sectors with a likelihood of money laundering, supported by the research study.

Having the most vulnerable areas of industry identified for money laundering, let’s wait no more to delve into the three stages of money laundering that are used to launder illicit funds into legitimate financial systems.

The Three Stages of Money Laundering

Below are the stages of money laundering that need to be identified for the effective detection of financial crimes that deteriorate the stability of global economic systems.

Placement

William Rosenblatt proposed the first stage of an organized predicate crime, money laundering, as the placement of money laundering collected from illegal activities such as drug or human trafficking. In this stage, financial offenders usually hand the cash to mafias who organized such crimes. However, when extensive money is involved in the crime, simply hiding or handing it over to the person is not suitable for criminals.

The process of well-organized laundering starts with placing dirty money into the accounts of middlemen or those who provide financial services. The whole purpose of changing the course of money travel is to hide its origin. Now depositing money into accounts is also done in multiple ways to avoid a breach of the transaction threshold as set by law enforcement.

As discussed above, different methods and modes are used to deposit black money into accounts for placement including money mules or strawmen. These middlemen can be criminals’ friends or relatives or hired professionals in exchange for some portion of the total amount.

Layering

The placed money then goes through a complex layering process to hide the origin of funds, called layering. It can be done through international money orders or intricate wire transfers. In the layering process, money mules play the main character role, or depending on the extent of laundering, the job is performed by highly trained and organized professionals. With their expertise in legal, accounts, and compliance departments, it becomes difficult for compliance watchdogs to identify shady transactions.

Money laundering as a service makes it the most shady job which is then empowered by regulatory gaps in some jurisdictions and financial innovations. According to CIFAS, anti-crime agencies identified more than 40,000 accounts of money mules that were being used for systemized money laundering purposes. Ironically, out of them, 50% were under 26 years old or younger who were hired through social media channels.

It does not stop here as the transferred money reaches different destinations which can be shell companies or foreign accounts with ambiguous beneficial ownership. Weak regulatory reforms in some countries make launderers’ jobs easy with minimum to no due diligence or verification processes in place.

Layering is supplemented by trust and company service providers who help launderers with a shell company that is abandoned by a previous client and has no real business activity going on. The legitimacy of shell companies is made possible through fake contracts and organized documentation to satisfy FATF compliance mandates.

Another opaque technique used by money launderers is trade-based money laundering which assists the criminals in successfully hiding the origin of illicit funds. Targeted to be transferred between two different companies in different countries, money can be laundered in the form of goods or by just existing on paper.

Integration

Once the layering is done, the dirty money is ready to enter into legitimate financial systems through its integration. It is done through investments in real estate, purchasing expensive goods, or more complex schemes such as loan-back schemes.

The money through layering systems is spent in less regulated and cash-intensive sectors including arts and entertainment, tourism, and construction industries. The infamous Hawala money laundering can be associated with the essence of money laundering done through Hawaldars, goods, or properties across borders without getting caught.

A similar framework of integrating illicit funds into the legal economy exists in different regions of the world. Hawala Hundi is notorious for money laundering purposes in the Indian Subcontinent while flying money known as Fei Chien in China.

Irrespective of the fact that substandard due diligence and regulatory gaps facilitate money laundering activities and associated financial crimes, it is important to understand that many efforts are being made to stop this epidemic from spreading. Increased regulatory reforms in countries such as the U.S., Europe, the U.K., and other developed countries are enough motivations for institutions to maintain AML compliance within their systems.

How Anti-Money Laundering Compliance Can Be Achieved?

To stem money laundering indifferently facilitated through financial subsidiaries, unforgiving compliance reforms have been imposed on partner jurisdictions to survive in the global economic war. It is inevitable for institutions to follow the regulatory guidelines and help law enforcement agencies in fighting against these mules.

Compliance Culture & Awareness

Compliance measures are easy to implement once understood well. To create a credible and accountable compliance culture in the system, institutions are in dire need of providing awareness to staff on how crucial these measures are. The long-term impacts of non-compliance can be one of the motivations but protecting the global economic platform from these corrupt actors is essential.

Know Your Customer & AML Checks

Following the globally recognized regulatory mandates, businesses are obliged to conduct appropriate verification and screening processes for their new and existing customers. To facilitate these verifications, KYC (Know Your Customer) and AML screening are integrated into compliance programs.

Note: Do not miss any red flags and ensure the AML Compliance checklist by diving into this article.

How AML Watcher Can Help You?

In the growing pressure of compliance and technological advancements, research and innovation is the key to meeting regulatory demands. AML Watcher is your partner to maintain compliance and easy AML checks with an extensive coverage of data and jurisdictions.

Reach out to meet your customized compliance needs and stay ahead of the regulatory curves.