AML Layering

What is Money Laundering & What are the Money Laundering Stages?

What is money laundering & what are the money laundering stages? Money Laundering refers to the process carried by criminals to conceal the origins of illegal profits by placing them into the legitimate financial system. The process of money laundering involves converting the proceeds of illegal activities into ‘clean’ money. Money laundering can occur through a series of complex bank transfers or financial transactions, which prevents government officials from tracking the origins of the illegal income. Using different methods and multilayered schemes, both small and large groups of terrorists can utilize their illicit funds without any detection from the law enforcement agencies and use them further to sustain criminal resources or carry out various unlawful acts/terrorist attacks.

The Financial Action Task Force (FATF) which is an inter-government policymaking body and is responsible for eradicating financial crime, defines money laundering as “the processing of… criminal proceeds to disguise their illegal origin” in order to “legitimize the ill-gotten gains” of crime.

The reasons to launder money have multiplied over time. Although, initially it began as a consequence of illegal trafficking of drugs, where drug cartels would transform the monetary amounts into legal financial instruments or other assets. Nowadays, criminals are profiting from innumerable illegal activities – be it through corruption, donation amounts, sales of arms, child/human trafficking, and various other means of exploitation. Despite the level or nature of the crime, the launderers make use of 3 different stages of money laundering to convert their illicit proceeds from the illegal acts. What are the money laundering stages? The three different stages are:

1. Placement: It’s the first stage, where the illicit proceeds are introduced into the legal financial system. There are various techniques of placement – be it smurfing, electronic transfers, bulk movement, asset conversion, etc. In the case of smurfing, the criminal can do multiple transactions in different banks in a single day, less than the threshold amount ($10,000) so that the transfers go undetected by the bank or law enforcement agencies. The deposited amount may be transferred to a third party for safekeeping or to a security firm.

2. Layering: This is the second stage where the origins of the funds are concealed by moving them around in a series of complex bank transfers or financial transactions. Out of the various techniques of layering, the most common is to make electronic transfers between different jurisdictions and through offshore accounts. For instance, the criminal may wire the proceeds to a corporation in an overseas island where the money trail doesn’t end because the same corporation can be owned by a trust on another island.

3. Integration: The last stage where the proceeds can no longer be detected by the officials and are integrated back into the economy. The different methods of integration include the sale and purchase of real estate properties, expensive gifts, loans, false import/export invoices, which in turn helps to hide the source of the illegal income and reintroduces the funds into the financial system, for the use of criminals.

The countries that are suffering the most due to money laundering have complex financial systems, ineffective AML/CFT compliance programs or operations which leads them to become vulnerable to various criminal activities. Even so, the above stages of money laundering can occur in any country as they can be performed separately, without any trace of the original scene of the crime.

What are the Steps of Money Laundering?

What are the steps of money laundering? There are various methods to launder money, be it through multiple deposits of small amounts for sale/purchase of antiques or expensive art pieces. Or to transfer illicit proceeds through a series of complex bank transfers made from offshore accounts in different countries, money launderers can go to any length or degree to utilize their funds undetected. Here are the steps of money laundering that are most commonly used by terrorist groups to hide the original source of their illegal income:

1. Step 1 – Placement is the first step or the initial stage which involves placing the illegal proceeds of the crime into a legal source through the use of financial instruments or financial institutions, to help conceal its origins. The process of placement is tedious since the money is in bulk, so the large cash amounts are broken into various small amounts and deposited at different occasions over time. They may be deposited into a single financial institution with different offices or in multiple institutions. The amount is broken from one currency into another, converted from a smaller note to a larger denomination, whichever separates the funds further from the criminals as well as the scene of the crime. The monetary amount may also be converted into different financial instruments, money orders, assets to confuse the authorities further, divert the suspicion or prevent detection.

2. Step 2 – Layering comes next in the stage. Once the proceeds have entered the financial system, and their origins are separated from the criminal source, then the funds are moved, dispersed, and disguised to lessen the suspicion or prevent detection from the law enforcement. The funds are broken into smaller transactions and transferred overseas to keep the money moving internationally and prevent the authorities from tracking the finances easily. Since the money is transferred electronically, it becomes even easier to trade the money overseas. In recent times, money launderers can use the proceeds to trade various stocks overseas in various markets, hide the transfer as a payment for goods/services, or transfer the funds to a shell corporation.

3. Step 3 – Integration is the last step in the stage, where the funds are integrated back into the economy/financial system, for the use of the criminal. The process of integration can happen through any means – be it purchase/resale of real estate, expensive goods, luxurious assets such as jewellery, diamonds, or any item that amounts to huge sums of money without much suspicion or attention from the government. In this last step of money laundering, criminals or terrorist groups can easily retrieve the laundered money and fully integrate it into a legal system and use it for their purpose.

Stages of Money Laundering – Layering in Money Laundering

Stages of money laundering – layering in money laundering: Amongst the three different stages of money laundering, as mentioned above, the second stage – layering is where most of the action happens in order to conceal the original source of the illegal proceeds. The name ‘layering’ is derived from the different layers through which the funds are legitimized. The different layers denote the sequence of complex financial transactions which mix up the funds through the international financial transfers and camouflage the illegal profits. The launderer will try to move the funds between various bank accounts and through different countries by using different financial institutions so that the money trail is far too complex to be traced back to the original criminal or the original source of income. The funds can be shifted/moved up to more than ten times before they are integrated back into the financial system.

Understanding the Process of Money Laundering through an Example

Understanding the process of money laundering through an example: Let us suppose that a terrorist organization owns a legal business and is running a restaurant. The money that they make through criminal activities over a period of time, is transferred into a bank through the restaurant. In order to do this, the restaurant will need to showcase a cash sale higher than the true income. For instance, the daily income is USD $3000 and an additional income of USD $3000 are the illegal proceeds then the cash sales for a day will be USD $6000 in total. This amount is deposited in the business’s legal bank account which will appear as an ordinary deposit. Till here, the placement stage of money laundering has taken place.

Now, in order to tackle issues related to the taxes, so that the restaurant doesn’t end up with a high tax bill, recording a higher revenue than what it actually generates, while also disguising the illegal proceeds further, the restaurant can invest in another legal business, such as real estate. In order to make matters even more complex, the criminals will make use of shell companies/holding companies that have taken charge of various business enterprises and through which the laundered money will be funnelled further. This is where “layering” takes place, it involves multiple transactions, through various accounts and companies, such as pass-through casinos as gambling winnings, be transferred through foreign currency exchanges, used as an investment in financial markets, and finally be transferred into accounts in offshore tax havens where the transactions won’t be under much scrutiny or regulations. These multiple ins and outs through one account to another entity make it increasingly difficult for the law authorities to trace the funds and tie it back to the original illicit income source.

Finally, as part of the integration process, the funds are placed as legal investments – business or personal. These investments can be used to purchase any goods which are highly-priced such as jewellery or expensive cars. Or else it may also be used to build another business entity which will be a source for the rest of the illegal proceeds to be laundered in the future. By this final step, the money is laundered enough for it to be used by any criminal without it being traced back to any illegal activities. The money is usually invested or exchanged for expensive pieces of property.

Read More: About the Financial Action Task Force (FATF) organization.
Read More: What is the role of a Money Laundering Reporting Officer (MLRO)?
Read More: Which countries are stated in the FATF Countries List?

 

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Despite its general strength, the US federal banking system is apparently susceptible to the ongoing economic weakness caused by the rampant spread of coronavirus. Earlier this month, The US Office of...

Money Laundering Amid COVID-19: What Regulators Across Globe Say

As the world continues to fight against the COVID-19 pandemic, there are reports that criminals are taking advantage of the difficult situation. They are seizing the moment to proliferate their crimin...

How will Art Cease to Be a Preferred Money Laundering Vehicle?

Money laundering via high-end art and antiquities is not new yet it is difficult to detect. Art-related money laundering amounts to about US$3 billion per year, according to this blog, quoting the Uni...

Beware! Money Mules in Demand amid COVID-19. Here’s an Effective Cure

If reports are to be believed, cybercrooks are taking advantage of the COVID-19 situation. They are targeting people who were laid off or working from home due to the pandemic to work for them as mone...

How do we weather a tornado of change?

“Great works are performed not by strength but by perseverance” – Samuel Johnson All of us are in challenging times. However, we cannot afford to be lethargic to life, work, and busi...

Roundtable Rewind: Embracing Next-gen Tech & Collaboration Key to Sustainability

As a regtech player with a vision to enable sustainable compliance programs in financial institutions, Tookitaki organized a first-of-its-kind industry roundtable in Charlotte, NC, USA to discuss oppo...

Tookitaki Appoints Industry Veteran Joe Friscia as Advisor

Tookitaki Holding Pte. Ltd. appointed industry veteran Joe Friscia, former President of NICE Actimize and BAE Systems as Advisor to the Company’s Advisory Board. Joe brings over 25 years’ extensi...

Should Modern Machines Be Ethical?

There are mounting concerns across the globe about the reliability and safety of artificial intelligence (AI) based systems and its enabling technologies such as machine learning (ML). On the air are ...

Tookitaki Raises Another US$11.7 million in Series A; Closes Round at US$19.2 million

– by Abhishek Chatterjee, Founder & CEO The Tookitaki team and I are excited to announce that we have raised an additional US$11.7 million in Series A funding, taking the total investment in...

30 Years of FATF: Notable Facts About Global AML Watchdog

The Financial Action Task Force (FATF), the intergovernmental body formed in 1989 to combating money laundering, is celebrating its 30th anniversary this year. Since its inception, the global agency p...

Tookitaki Joins Aite Financial Crime Forum as Sponsor

Technological advances have fundamentally changed the operational landscape of financial institutions. However, there are also new risks emerging in forms of sophisticated financial frauds and complex...

Will Machine Learning Replace Compliance Professionals?

The impact of modern technologies such as artificial intelligence (AI) and machine learning on job security has been a widely discussed topic today. Of course, AI has advanced very quickly in the last...

6 Most Prevalent Cyber-Laundering Methods in APAC

Despite being a medium to exchange information in real-time and with scale, the Internet is being misused in several ways. Among the slew of financial crimes facilitated by the Internet, money launder...

What Made Us Earn the WEF Technology Pioneer Title

Tookitaki has bagged another global acknowledgement for its outstanding works in the regulatory compliance field. Our company was selected among hundreds of candidates as one of the World Economic Fo...

We Stay as a Team, We Win as a Team and We Flourish as a Team

“Teamwork is the ability to work together toward a common vision. The ability to direct individual accomplishments toward organizational objectives. It is the fuel that allows common people to a...

ABA Regulatory Compliance Conference: 10 Sessions You Can’t Miss

The 2019 edition of the American Bankers Association (ABA) Regulatory Compliance Conference is a few more days away. Organized by the Washington, D.C.-based trade association, the conference is touted...

Tookitaki AMLS Wins SBR Technology Excellence Award 2019

Tookitaki’s Anti-Money Laundering Suite (AMLS), an end-to-end machine learning-powered transaction monitoring and names screening solution, has bagged the inaugural Singapore Business Review Tec...

Watchdogs Grow Optimistic about AI Prospects at Banks

Proper regulation of banking operations is important as any failure in the banking system would affect the wider economy. Therefore, banking is one of the most regulated industries across the globe. F...

Pitfall of Black Box AI at Banks: Explaining Your Models to Regulators

The use cases of artificial intelligence (AI) and machine learning in front-office, middle-office and back-office activities at banks are growing slowly but steadily. The major areas of AI play includ...

AI for Regulatory Compliance at Banks: 4 Assessments Before You Okay the Solution Proposal

Banking is one of the industries where artificial intelligence and machine learning find their applications at a rapid pace. Regulatory compliance within banking is an area which has become a costly a...

We Believe in Innovation, the Key to Survival and Growth

“Innovation distinguishes between a leader and a follower.” -Steve Jobs What comes on the top of your screen when you google the meaning of the word innovation is – the introduction of somet...

Compliance Functions in Need of a Technological Overhaul. Can Machine Learning be the Game-Changer?

McKinsey in its latest compliance benchmarking survey found that compliance function at financial institutions has reached “an inflection point” and current compliance standards are in an “incho...

Tookitaki Raises US$7.5 mn Series A from Global VCs to Transform Regulatory Compliance

Tookitaki, a regulatory technology company that aims to enable financial institutions to develop sustainable compliance programs, has raised US$7.5 million in Series A round. The round was co-led by L...

From Wachovia to Danske Bank: Biggest Money Laundering Cases in Recent Times

Money laundering – the criminal activity of processing criminal proceeds to disguise their origin – is one of the gravest problems faced by the global economy, and its size is growing rapidly. It ...

A Modern Approach to Address the Reconciliation Challenges of Financial Services

Reconciliation of transactions is deemed critical for the smooth running of every financial institution. The speed and accuracy of data reconciliation can distinguish a successful institution from its...

Busting a Myth: Compliance Officer’s Job is All About Risk

Regulatory compliance has become a dreadful task for banks after regulators across the globe set stricter norms in the aftermath of the 2008 financial crisis in an effort to prevent financial crimes s...

SocGen Goes Next-Gen with Tookitaki Reconciliation Suite

Société Générale leveraged Tookitaki’s Reconciliation Suite to automate the bank’s existing break reconciliation system. Key Challenges Addressed The bank’s finance department was unable to ...

Attending ACAMS Conference in Singapore? Tookitaki Awaits You with Its Disruptive AML Solution

“In today’s era of volatility, there is no other way but to re-invent. The only sustainable advantage you can have over others is agility, that’s it.”- Jeff Bezos Singapore is hosting ACAMS’...

MAS’ Stress on Transaction Monitoring for Effective AML/CFT Compliance and Machine Learning is the Answer

Singapore is known for its top-notch AML/CFT regime created through up-to-date legislation, stringent policy and uncompromising supervision to safeguard against the abuse of the city state’s financi...

Mifid II and the Pressing Need for a New Reconciliation Approach

The financial services industry in the EU has been confused with the introduction of a revamped version of the Markets in Financial Instruments Directive (Mifid II). The ambitious regulatory reforms t...

Is Automated Reconciliation Next to Impossible in Today’s Complex Financial World?

The 2008 global financial crisis and fairly new regulatory requirements like Basel III asked financial institutions (FIs) to cut operating costs and adopt a lean operations structure, pushing FIs to r...

Modern Tech to Reshape US AML Compliance with Regulators’ Recent Handshake

George Bernard Shaw once said: “Those who cannot change their minds cannot change anything.” The past week has seen a significant change of mind from financial regulators in the US in their ardent...

Skills Development: We Have Talents and We Strive to Multiply Them

“Mastery lies on an infinite continuum, and as a result, we will never reach the end. We can, however, see to it that we are as far along that continuum as our circumstance allows.” ― Chris Mat...

It’s Our Fourth Founding Day; Taking a Pause to Cherish Our Simple but Awesome Journey

Today, as we step into our 4th year of foundation, I feel proud and honored to be leading Tookitaki that has been successful in creating added value to all its stakeholders. I was never a CEO and Took...

Tookitaki Expands into the US with New Office in Charlotte

SINGAPORE, Sept. 24, 2018: Tookitaki Holding Pte Ltd, a leading regulatory technology company, is pleased to announce the official opening of its North American office in Charlotte, NC, in the Unite...

We Tame Machines but We Unleash Human Spirits

We are well aware of the fact that our progress as an organization is in the hands of our employees. The more energy, time and attention we invest in them, the more yield we receive. So, we always mak...

5 Methods That Modern Money Launderers Use To Beat Detection

Society prepares the crime, the criminal commits it. DID YOU KNOW? Every year, an estimated amount in the range of US$800 billion-US$2 trillion (2-5% of global GDP) is being laundered globally Regulat...

Risk Management Conference: Positive Vibes from All Corners

The Risk Management Association’s (RMA) premier annual event, the Risk Management Conference, came to an end on 6 November, and Tookitaki had the privilege to attend the event which we believe was ...

Singapore Fintech Festival: Tookitaki to showcase advanced machine learning solutions in financial services

Singapore is assured of the Fintech world’s unwavering attention next week, as the city state, is hosting this year’s Fintech Festival during 12-16 November. Touted as the world’s largest platfo...

The RMA Clarion Call to Address Risks and the Tookitaki Way

Risk officers, doing your best today is good while preparing hard for tomorrow is extraordinary. Risk management at banks has become difficult due to operational and regulatory changes. The Risk Manag...