How do criminals get their dirty money to look clean? The process of concealing the illegal source of their money is called money laundering, which occurs in three steps: placement, layering, and integration. But understanding these stages of money laundering also called as money laundering life cycle is important not only for law enforcement, but for businesses of all kinds, as it can help us identify and combat this ever-evolving crime.
Stopping money laundering isn’t just a job for the authorities. Businesses and financial institutions need to do that, too. Implementing strict regulations, closely monitoring transactions, and providing employee training are what organizations can do to prevent money laundering. In this article we’ll unpack the stages of money laundering and simple ways to prevent it.
What are the Three Stages of Money Laundering
The 3 stages of money laundering are placement, layering and integration — depositing the money back into the system as legitimate money.” They all use different pathways to cleanse their whack, all of which rely on concealment, movement or placing them via the banking system
Stage 1: Placement, Money laundering
The first phase of money laundering is placement, the initial step in money laundering. This step aims to separate the funds from their illegal source through placement into financial institutions or other financial products.
How Does Placement Work?
In placement, criminals usually place large amounts of deposits through the following:
- Bank deposits: Big amounts of cash are deposited into bank accounts.
- Casino transactions: Lawbreakers might use gambling as a front, buying chips for cash and then cashing out later.
- Buying high-end goods: Expensive items such as jewelry or vehicles can be purchased with dirty money and then sold.
The main goal at this stage is to get the dirty cash into the financial system in a manner that does not raise immediate suspicion. However, banks and financial institutions can pick up on red flags, such as unusually large cash deposits.
Layering: Hiding the Source of Funds
The second stage, layering in money laundering, involves obscuring the dirty money through a series of financial transactions. The ultimate goal is to hide the source of the funds by routing money through a variety of entities and converting it to different asset types. This is a key stage of achieving enough distance from law enforcement that tracing the money is more difficult.
How Does Layering Work?
Layering can involve numerous financial transactions, often in different currencies of different countries, as well as other types of accounts or assets. Some common methods include:
- Wire transfers: The movement of funds from one bank account to another, often between individuals in different countries, in a manner that makes tracking the money path difficult.
- Currency exchanges: Converting illegal dollars into another currency makes the cash even harder to trace.
- Shell companies: Criminals could open up fictitious companies or fake accounts to mask the actual ownership of money.
The strategy is to make it as difficult as possible to detect suspicious transactions or connections and to disorient financial institutions, regulators, and law enforcement.
Integration: Turn illicit money into real money
This is where dirty money enters the economy without arousing suspicion. This is often the most difficult stage for investigators because the money appears to originate from legitimate sources.
How Does Integration Work?
After cleaning money, criminals will deposit money into businesses, investments, or other assets to make them look legitimate.That makes it difficult to trace the money back to its illegal source.
After that, the money can be used, without raising suspicion. For instance, someone would purchase a restaurant and take the money and say that they made money selling food. Then they can freely spend the money making it appear as if it was earned legitimately.
How Can Businesses Prevent Money Laundering?
Robust compliance measures and leveraging the latest technology against laundering schemes are steps to stay ahead.
By confirming the identities of customers and then tracking their transactions for unusual patterns, financial institutions can make sure they aren’t doing business with criminals. Moreover, continuous systems for risk assessment and monitoring of transactions help to detect “red flags” that may signal the potential presence of dirty money.
Proactive Prevention of Money Laundering
By becoming aware of the factors that signify each stage: placement, layering, and integration, institutions can prevent money laundering stages before it gets a foothold in those systems. This comprises the introduction of robust AML policies and ongoing awareness training for its employees to detect indicators of money laundering. Educating employees on red flags when it comes to clients or transactions can help businesses identify potential issues early on.
Another key approach is to leverage technology to monitor transactions in real time. Most automated systems are capable of detecting irregularities based on network activity and flagging it for review.
