Fintech

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8 min read

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August 8, 2022

3 Stages Of Money Laundering Process

Want to know about the money laundering stages? Here's a detailed guide on the three stages of money laundering process, examples & best ways to protect your business!

Criminals know their money is ‘dirty’—a result of proceeds from unauthorized activities—and they will go to any lengths to ‘clean’ it up. The first thing they would be looking to do after they receive the illegal money is to ‘launder it’ or turn it into legal investments and money. They will be doing so in ways that avoid the eyes of the authorities from reaching them. The term given to covering up the illegal origin of the money from authorities and reinvesting it in legal purposes is referred to as money laundering. There are three money laundering stages: Placement, Layering, and Integration. 

Placement

The placement stage involves placing amounts of illegal money into legal financial institutions in a way so as not to attract any attention. However, the initial sum of money is so large that even if that is divided into smaller sums, it is still large enough to gain unwanted attention. So it is generally at the placement stage that money launderers generally get caught. 

Layering

The layering money laundering stage (also called structuring), which involves the movement of finances internationally, is generally the most complex. This is because it involves the layering or structuring of other transactions into the transaction history, obscuring the audit trail and making it very difficult for law enforcement officials to track the source of the illegal money. In the layering phase, the criminals rely on the fact that the authorities would have to delay themselves till they have actionable evidence or to acquire a warrant to take action. 

Integration

In the integration stage, the last of the stages of money laundering, the laundered money is returned back to the criminal through a number of legitimate sources. This way the transaction happens without the risk of the government necessarily inspecting how the money came to the person, and even if they do, the complex layering that happened in the previous stage will keep the authorities at bay. 

Examples of Money Laundering Stages

Money laundering happens across sectors and is rampant in certain countries. Let us now look at the various ways in which launderers clean dirty money across the three money laundering stages.

Placement

Some examples of placement stage in money laundering are:

  1. Repayment of loans or credit card bills: Dirty money may be used to repay loans or credit card bills with digital lenders who may not be under the scanner of authorities.
  2. Dummy invoices: Criminals can send through dummy invoices to match cash lodged. Sometimes, they may also over-invoice or under-invoice, or falsely describe goods and services provided to others to match the amount of money to be placed. 
  3. Blending funds: Mingling dirty money with the day’s sales from a legitimate business allows criminals to cover up the dirty money and make it difficult for AML (Anti-Money Laundering) enforcement agencies and the FATF to track them.
  4. Gambling: Purchasing gambling chips at a casino or placing a bet on a sports event in one of the many possible venues also allows a way to launder money, though there will be some loss incurred in such cases, due to the gamble. 
  5. Currency smuggling: Criminals may also move illegal currency across the border to a country where the money can be used legitimately.
  6. Foreign currency exchanges: Purchasing foreign money by using illegal funding in  exchanges.

Layering

Some examples of layering in money laundering are:

  1. Moving money: They may move money electronically from one country to another, taking advantage of loopholes that exist in legislation in both countries. 
  2. Investing in stocks: Criminals might invest the money in stocks, long-term 
  3. Investing in real estate: Investing in property not only gives criminals an asset they can own but it also may be difficult to track for authorities if the sale of the deed happens without proper documentation.
  4. Investing in shell companies: Criminals might invest their illegal money in shell companies that have a functional front.

Integration

Some examples of how integration happens in money laundering are:

  1. Fake employees: They can have a fake office setup where they can list a number of employees, people who don’t exist, and the payments can be made out to them regularly as salary, but which will be going to criminals. 
  2. Investments: By purchasing things of very high value such as property, costly pieces of art, luxury vehicles and jewelry etc, criminals can then sell these later for actual income. 
  3. Loans: The company can give out loans to executives on the board or to shareholders and these loans will never have to be repaid.
  4. Dividends: These payments can be made to shareholders in companies that are controlled by the criminal behind the money laundering operation.

Money laundering is a serious problem

Money laundering is being given increasing importance by law enforcement agencies. The FATF or Financial Action Task Force was built to combat this very evil. Money laundering is a serious problem because the conversion of illegal money allows criminals the opportunity to spend the money in legal ways, like opening up a garment store or running a laundry business (from which the term “money laundering” was derived!). The clean money gained from the last of the three money laundering stages is virtually indistinguishable from clean money and helps fuel criminal activities undetected. Modern technological advancements and the extent of globalization of the financial services industry, with each country having its own set of policies (not necessarily robust) to combat crime also poses a challenge to agencies enforcing AML laws. 

How can businesses prevent money laundering

To help manage KYC and AML compliance, most places where the laundered money is placed use what is called customer due diligence (CDD). The customer’s information, including name, date of birth and a government ID such as a passport or a driver’s license is obtained before they pledge the money they have, to ensure that the customer is not involved in criminal activities of any kind. This process can simply also be referred to as KYC (know your customer). In countries where the risk of money laundering is higher, an additional check known as extended due diligence (EDD) may be performed. EDD generally checks for the source of the funding. If the source of the funding is clean, then the customer can go ahead and place his money. Else, the customer is caught red-handed!

How HyperVerge can help battle money laundering

HyperVerge can help in the fight against money laundering by providing KYC support in the form of high accuracy OCR (optical character recognition) and face recognition. The fact that the system is continually trained on samples in each region ensures that the accuracy is top-notch.

  1. The Hyper Turing engine, a proprietary in-house AI engine, helps sharpen the accuracy of the OCR. 
  2. The face recognition system, which also runs parallel 1:N checks to determine identity is NIST ranked #3 in the world for its accuracy. 
  3. The face recognition system is also iBeta certified for passive liveness detection, accurate and extremely user friendly, allowing a larger number of users to onboard in a given period. 
  4. The code for face recognition and OCR are also benchmarked against those of competitors to yield better accuracy over time. 

This makes for an AML check which is compliant with standards and makes no misses. Money laundering is essentially the root of all evil in the criminal underworld. If one is able to uproot money laundering, it will help as much weeding helps the plants grow. It will bring peace to the nation, prosperity to businesses and obedience to law and order in the country. Join us in our fight against money laundering. If you are an enterprise that needs help ensuring AML compliance, talk to us today!  

FAQs on Money Laundering

What is the most common form of money laundering?

The most common form of money laundering is smurfing. In smurfing, a large amount of cash is broken down into smaller amounts that don’t invite suspicion, and then moved from  one country to another in business transactions, to avoid falling under the radar of AML agencies.  

At which of the three money laundering stages is money laundering most difficult to detect and where is it easiest to detect?

Money laundering is very difficult to detect during the integration stage of money laundering. This is because at this stage the launderer would have made it virtually impossible to tell the legal money from the illegal one as he has successfully obscured its source or replaced it with a genuine one. Money laundering is easiest to detect at the placement stage of money laundering.

In which phase of money laundering is the money clean?

Again the money is clean during the integration stage of money laundering, when the money is returned to the criminal and is virtually indistinguishable from clean money.

Where do money launderers usually seek to launder money?

Usually money launderers carry out their work in countries or sectors where the chances of detection are very low and where the AML laws are very weak or ineffective.

How can we get rid of money laundering?

One important step in fighting money laundering is to set up an AML team within your institution and also communicate regularly with other agencies fighting money laundering. Second, you can improve the search process for money launderers with the help of intelligent technology. Third, use data analytics, powered by AI and ML to identify suspicious patterns.

What is the World Bank doing about anti-money laundering?

The World Bank has a website that presents its policies and the best practices for anti-money laundering that both governments and institutions can follow. The Basel Index assesses the threat of money laundering and terrorist financing around the world at a given time.

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