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The Three Stages of Money Laundering

 
Feb 10, 2023 Red Flag Alert Updated On: April 18, 2024
The Three Stages of Money Laundering

Money laundering serves as the financial backbone for criminal enterprises, facilitating funding and profits derived from various illicit activities such as arms sales, drug trafficking, human exploitation, contraband smuggling, financial fraud, bribery, and insider trading. 

In addition to organised criminal syndicates, there exist professional money launderers who specialise in providing laundering services as a central part of their business operations.

The Scale of Money Laundering 

Assessing the global scale of money laundering proves challenging, however, a commonly cited statistic from the United Nations Office on Drugs and Crime (UNODC) suggests that money laundering schemes amount to approximately 2-5% of the world's total GDP, equating to an estimated $2 trillion.

Money laundering is a big issue in the UK. According to research from Credas, £88 billion is laundered every year in the country.  

This makes the UK the second worst money laundering hotspot in the world—second only to the United States, which sees £216.5 billion laundered annually.

However, in some ways, the UK is worse than the USA as laundered money represents 4.3% of the UK GDP, but only 1.4% of the US GDP.

It’s therefore no surprise that the UK government is increasing pressure on businesses to perform anti-money laundering (AML) checks. 

One requirement of AML legislation is that everyone at your organisation who deals with customer transactions knows what the money laundering process is, and how to spot financial criminals. Discover the details below…

What Is Money Laundering?

Money laundering is the process of disguising the source of illegally obtained money. Criminals and corrupt foreign regimes usually engage in it to ensure that money from criminal activity appears to have been obtained from legitimate sources.  

Activities associated with the money laundering process include:

  • Drug trafficking
  • Terrorism
  • Tax evasion 
  • Fraud
  • Theft
  • Embezzlement

The money laundering process usually involves taking money that was acquired illegally and mixing it with legitimate takings that are channelled through a business. 

The money is then directed back to the criminals. At this point, it becomes tough for law enforcement to trace it back to them. The gangs can use the illegal funds to reinvest in their criminal activities or fund a lavish lifestyle.

What types of businesses are targeted by money launderers?

Any business is at risk of being involved in the money laundering process. 

But those that enable high-value transactions face the biggest risks. 

 

 

Industries subject to money laundering regulation 

Financial Institutions: Banks, credit unions, insurance companies, and other financial entities are at the forefront of AML regulations due to their role in facilitating financial transactions.

FinTech Companies: With the rise of digital finance, FinTech firms that offer financial services through technology platforms are increasingly subject to stringent AML checks. 

Real Estate: Real estate transactions involving large sums of money are susceptible to money laundering. Regulations are imposed to prevent illicit funds from being integrated into property transactions.

Gaming and Gambling: Casinos, online gambling platforms, and other gaming establishments are subject to AML regulations due to the potential for large cash transactions and the anonymity afforded by gambling activities.

Precious Metals and Stones: Industries dealing with precious metals, gems, and jewelry are regulated to prevent money laundering through the purchase and sale of high-value items. 

Professional Services: Law firms, accounting firms, and other professional services may inadvertently facilitate money laundering through client transactions, making them subject to AML regulations.

High-Value Goods: Dealers of luxury goods such as art, cars, and antiques are regulated to prevent the use of these items to launder money. 

Non-Profit Organisations: Charities and non-profit organisations may be used to disguise the origin of illicit funds, necessitating regulations to ensure transparency and prevent abuse. 

Virtual Assets and Cryptocurrency Exchanges: With the emergence of virtual currencies like Bitcoin, regulations have been established to prevent money laundering through cryptocurrency transactions.

 Import-Export Businesses: Import-export businesses are susceptible to trade-based money laundering, where illicit funds are concealed within legitimate trade transactions.

These industries are subject to money laundering regulations to mitigate the risk of financial crime and ensure the integrity of the global financial system.


The Three Stages of Money Laundering 

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The three stages of money laundering are:

1. Placement

2. Layering

3. Integration

 

All three typically involve suspicious activities—but that doesn't mean they're easy to spot.

That’s because criminal gangs go to great lengths to disguise the source and destination of illegally acquired funds. The ways they launder money are constantly changing. 

As a result, countries continuously update their legislation to keep pace with existing and emerging financial crimes.

This makes staying abreast of money laundering laws a challenge for regulated businesses. 

Let’s take a look at each of the three stages of money laundering in greater detail.

1. Placement

This is when illegal money is separated from criminal activity and introduced into the legitimate financial system. 

It is usually broken up into smaller, less suspicious quantities and deposited into several bank accounts. 

Techniques used during the placement stage include: 

  • Mixing illegal profits with a business’s takings. This works well with businesses that have little variable costs. 
  • Invoicing for products or services that haven’t been purchased.
  • Using trusts and offshore businesses.
  • Taking small amounts of money abroad and depositing them in foreign bank accounts. 

2: Layering 

Once the money is in the legitimate financial system it is fed through a complex web of financial transactions. This helps to complicate and obscure the trail that leads back to the criminals and their illegal activity.

Common examples of techniques used during the layering stage include:

  • Staking money at a casino or another form of gambling.
  • Purchasing securities, financial products or assets like property.
  • Funneling funds through a holding company as loans or purchases.
  • Buying foreign currencies—especially those that don’t comply with AML regulations.
  • Purchasing cryptocurrencies and other unregulated assets—it’s common for criminals to switch between several crypto exchanges and between different coins and tokens. 

3. Integration

This is the final stage. It’s when criminals integrate their funds into the economy. 

By this point, the funds appear to have come from legitimate sources, which means it is safe for them to spend the money without raising suspicion. 

Criminals take the money from the complex transactions they made during the layering stage and use it to make large-scale investments.

Often, laundered money is used to purchase property, shares, and luxury assets that make criminal money seem even more legitimate. 

Some common ways to integrate laundered money via companies include:

  • Criminals create fake employees and pay into a bank account which belongs to them. 
  • Paying loans to themselves that they won’t repay.
  • Paying dividends to shareholders of the company. 
  • 7 Common Money Laundering Techniques
  • Criminals always find new ways to cover up illicit money. For example, cryptocurrency has provided lots of opportunities for laundering money. 

Three Stages of Money Laundering

Here are some of the more common money laundering methods. They can be used across all three stages of money laundering. 

Blending

The criminal gang mixes dirty money with the takings of a legitimate business. Cash businesses are best for this. Some examples include:

  • Car washes
  • Betting shops
  • Bars
  • Tanning salons
Smurfing

This involves splitting large amounts of dirty money amongst small transactions. This makes money laundering activities less suspicious. It also means that the value of the transaction is too low to be subject to AML legislation.

Illegal funds are deposited into multiple bank accounts by people known as smurfs. This activity takes place over an extended period so it isn’t detected. 

Smurfing makes it look like the money has come from legal activity. It is much harder for banks to spot than huge cash deposits.

Invoice fraud

This is when criminals use a company to over or under-bill for goods or services. They might also falsify invoices. Doing this allows them to keep the excess money, which now appears to have been spent legitimately. 

Of course, the company’s accounts or stock levels now won’t match up, so it’s not foolproof.

Phantom shipping is an excellent example of invoice fraud. It involves taking orders that are never actually shipped. This allows criminals to transfer illicit funds to other countries.

Offshore accounts

This is one of the most high-profile ways for money launderers to avoid law enforcement agencies and the Financial Action Task Force.

Some countries have very low regulatory know your customer (KYC) and due diligence requirements. It is therefore difficult for official bodies to identify the true beneficial owners of offshore and overseas bank accounts. This makes them ideal places for criminals to launder money. 

Depositing cash abroad 

Another way to launder money is to carry it overseas and put it in a foreign bank account. This is usually performed using small sums of money to avoid the customs declaration threshold or going through AML checks.

Aborted financial transactions

Solicitors, accountants and financial institutions can help criminals transfer money into the legitimate financial system. The criminals put the funds into a client account, supposedly to pay for legitimate business transactions—for example, stamp duty on a large property. But the transaction is then cancelled.  

The criminal gang requests repayment of the money, which makes it appear to have come from a legitimate source. Accountants can also enable money laundering through fraudulent bookkeeping or helping criminals to evade paying tax. 

Shell companies

Shell companies are companies that exist in name only. They have no actual assets or business. They exist solely as a front to take illegal money payments and channel them elsewhere. They are often used in the layering phase of money laundering. 

Small cash-based businesses

Sometimes functional businesses are used as well. As mentioned earlier,  these are often small enterprises that frequently take cash payments, making it difficult to tell dirty money from that earned by offering a legitimate product or service.

Real-World Money Laundering Examples 

Unfortunately, money laundering is still widespread in the UK.

Successful money laundering schemes are regularly broken up by law enforcement and the criminals are brought to justice. Sometimes the businesses involved did not realise that they were aiding money laundering or handling illegal wealth.

Usually, these businesses have poor AML and KYC practices. As a result, they often receive a fine. However, some businesses knowingly enter into money laundering. Directors at these businesses will be personally liable and are often given a prison sentence. 

Here are some recent examples of money laundering schemes:

Staffordshire truck gang

In January 2023, six employees from a Staffordshire logistics company were jailed for a combined total of 40 years for money laundering.

The employees would transport large sums of dirty money across the UK and abroad on behalf of criminal gangs. 

The money launderers would be given postcodes from an anonymous gangster. The truck drivers would then collect the money and deliver it to London to be laundered.

In total, the gang helped launder more than £30 million.

Small translation business

In late 2022, Santander UK Plc was fined £107,793,300 for having serious and persistent gaps in its AML controls.

The fine applied to its business banking service between 2012 and 2017.

During this time, a small translation company started banking with the company. It was expected to make deposits of around £5,000.

However, millions of pounds started to appear in its account and the owners quickly began transferring dirty money to other accounts. 

Santander agreed to close the company’s account. But there was a severe delay so the account remained open for two years, allowing the criminals to launder millions of pounds.

The only way to protect your business from money launderers or a regulatory fine is to have excellent AML processes that comply with the law.

Red Flag Alert helps you do this by providing the tools you need to perform KYC and AML checks on your customers get your free trial today !




 

  
Published by Red Flag Alert February 10, 2023

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