Money Laundering: A Three-Stage Process
The money laundering cycle can be broken down into three distinct stages;
however, it is important to remember that money laundering is a single process. The stages of money laundering include the:
Placement Stage
Layering Stage
Integration Stage
The Money Laundering Process
Money laundering is not a single act but is in fact a process that is accomplished in three basic steps. These steps can be taken at the same time in the course of a single transaction, but they can also appear in well separable forms one by one as well. Traditionally it has been commonly accepted that the money laundering process comprises three main stages:
a) Placement b) Layering c) Integration
Process of Money Laundering The Placement Stage
The placement stage represents the initial entry of the "dirty" cash or proceeds of crime into the financial system. Generally, this stage serves two purposes: (a) it relieves the criminal of holding and guarding large amounts of bulky of cash; and (b) it places the money into the legitimate financial system. It is during the placement stage that money launderers are the most vulnerable to being caught. This is due to the fact that placing large amounts of money (cash) into the legitimate financial system may raise suspicions of officials.
The placement of the proceeds of crime can be done in a number of ways.
For example, cash could be packed into a suitcase and smuggled to a country, or the launderer could use smurfs to defeat reporting threshold laws and avoid suspicion. Some other common methods include:
Loan
Repayment
Repayment of loans or credit cards with illegal proceeds
Gambling Purchase of gambling chips or placing bets on sporting events
Currency Smuggling
The physical movement of illegal currency or monetary instruments over the border
Currency Exchanges
Purchasing foreign money with illegal funds through foreign currency exchanges
Blending Funds
Using a legitimate cash focused business to co- mingle dirty funds with the day's legitimate sales receipts
This environment has resulted in a situation where officials in these jurisdictions are either unwilling due to regulations, or refuse to cooperate in requests for assistance during international money laundering investigations.
To combat this and other international impediments to effective money laundering investigations, many like-minded countries have met to develop, coordinate, and share model legislation, multilateral agreements, trends &
intelligence, and other information. For example, such international watchdogs as the Financial Action Task Force (FATF) evolved out of these discussions.
Placement
The process of placing, through deposits or other means, unlawful cash proceeds into traditional financial institutions. At this stage cash derived from criminal activity is infused into the financial system. The placement makes the funds more liquid since by depositing cash into a bank account can be transfer and manipulated easier. When criminals are in physical possession
of cash that can directly link them to predicate criminal conduct, they are at their most vulnerable. Such criminals need to place the cash into the financial system, usually through the use of bank accounts, in order to commence the laundering process.
This is the first stage in the washing cycle. Money laundering is a “cash- intensive” business, generating vast amounts of cash from illegal activities (for example, street dealing of drugs where payment takes the form of cash in small denominations). The monies are placed into the financial system or retail economy or are smuggled out of the country. The aims of the launderer are to remove the cash from the location of acquisition so as to avoid detection from the authorities and to then transform it into other asset forms; for example: travellers cheques, postal orders, etc.
Placement
The first stage of money laundering is when the individual participating in criminal activity places cash proceeds into the financial system. This is done so that they can get rid of the cash that is derived from criminal sources. It can be unsafe for people to hold onto a large amount of cash at one time, so they may try to dump the cash somewhere that provides greater security.
This stage corresponds to the greatest degree of vulnerability for the criminal. Financial officials are on the lookout for suspicious transactions that are cash-based.
The Layering Stage
After placement comes the layering stage (sometimes referred to as structuring). The layering stage is the most complex and often entails the international movement of the funds. The primary purpose of this stage is to separate the illicit money from its source. This is done by the sophisticated layering of financial transactions that obscure the audit trail and sever the link with the original crime.
During this stage, for example, the money launderers may begin by moving funds electronically from one country to another, then divide them into investments placed in advanced financial options or overseas markets;
constantly moving them to elude detection; each time, exploiting loopholes or discrepancies in legislation and taking advantage of delays in judicial or police cooperation.
Layering
Layering is the process of separating the proceeds of criminal activity from their origin through the use of many different techniques to layer the funds.
These include using multiple banks and accounts, having professionals act as intermediaries and transacting through corporations and trusts, layers of complex financial transactions, such as converting cash into traveler’s checks, money orders, wire transfers, letters of credit, stocks, bonds, or purchasing valuable assets, such as art or jewelry. All these transactions are designed to disguise the audit trail and provide anonymity.
Layering usually involves a complex system of transactions designed to hide the source and ownership of the funds. Once cash has been successfully placed into the financial system, launderers can engage in an infinite number of complex transactions and transfers designed to disguise the audit trail and thus the source of the property and provide anonymity. One of the primary objectives of the layering stage is to confuse any criminal investigation and place as much distance as possible between the source of the ill-gotten gains and their present status and appearance.
Typically, layers are created by moving monies in and out of the offshore bank accounts of bearer share shell companies through electronic funds’
transfer (EFT). Given that there are over 500,000 wire transfers – representing in excess of $1 trillion – electronically circling the globe daily, most of which is legitimate, there isn’t enough information disclosed on any single wire transfer to know how clean or dirty the money is, therefore providing an excellent way for launderers to move their dirty money. Other forms used by launderers are complex dealings with stock, commodity and futures brokers. Given the sheer volume of daily transactions, and the high degree of anonymity available, the chances of transactions being traced is insignificant.
Layering
The next stage of money laundering attempts to separate the money from its original, illegal source. This part of the process is often complicated. By moving the money quickly and to different areas, the money may be transformed so that it is not detected through audits. During this stage, the money may be transferred between multiple countries. The money may take the form of various investments and move faster than t regulator can in response.
The Integration Stage
The final stage of the money laundering process is termed the integration stage. It is at the integration stage where the money is returned to the criminal from what seem to be legitimate sources. Having been placed initially as cash and layered through a number of financial transactions, the criminal proceeds are now fully integrated into the financial system and can be used for any purpose.
There are many different ways in which the laundered money can be integrated back with the criminal; however, the major objective at this stage is to reunite the money with the criminal in a manner that does not draw attention and appears to result from a legitimate source. For example, the purchases of property, art work, jewellery, or high-end automobiles are common ways for the launderer to enjoy their illegal profits without necessarily drawing attention to themselves.
Integration
This is the final stage of the money laundering process. This involves the process to get the funds back to the criminal from what seems to be a reputable source. After placing and layering the cash into the financial system, the funds become integrated. In this manner, the criminal can receive funds from their original illegal source in methods that do not draw attention to the situation. This may include receiving money from a business purchased by the funds, such as a restaurant, department store, car wash or laundry business. The business may carefully follow all other regulations in order to avoid detection, such as carefully paying all employee and business taxes and filing tax returns on a timely basis.
Integration
It is the stage at which laundered funds are reintroduced into the legitimate economy, appearing to have originated from a legitimate source. Integration is the final stage of the process, whereby criminally derived property that has been placed and layered is returned (integrated) to the legitimate economic and financial system and is assimilated with all other assets in the system.
Integration of the “cleaned” money into the economy is accomplished by the
launderer making it appear to have been legally earned. By this stage, it is exceedingly difficult to distinguish legal and illegal wealth.
Not all money laundering transactions go through this three-stage process.
The three basic stages may occur as separate and distinct phases or may occur simultaneously or, more commonly, they may overlap. Transactions designed to launder funds can for example be effected in one or two stages, depending on the money laundering technique being used. How the basic steps are used depends on the available laundering mechanisms and requirements of the criminal organisations.
Business that are ideal for laundering cash
Given the diverse channels, through which money laundering proceeds are moved, an effective approach to combating money laundering must involve all aspects of the financial system. It must cover money that has already been “placed” into the financial system and, of course must cover money derived from other forms of crimes that has never been in the form of cash. Certain businesses that have naturally occurring high levels of cash are ideal for laundering cash:
• Banks;
• Security houses;
• Financial intermediaries;
• Accountants;
• Solicitors;
• Surveyors and estate agents;
• International money transmitters;
• Company formation agents and management services companies;
• Casinos and bookmakers;
• Art, bullion and antique dealers;
• Car dealers;
• Restaurants;
• Hotels;
• Bars;
• Nightclubs;
• Dry cleaners;
• Video rental companies;
• Vending machines operators;
• Fairgrounds and attractions;
• Parking lots;
• Retail outlets;
• Others, dealing in high value commodities and luxury goods.
https://people.exeter.ac.uk/watupman/undergrad/ron/methods%20and%20stages.htm
Money Laundering in
the EU
Home
Methods and Stages
The explosion of money laundering
Macroeconomic Consequences
The Risks to Financial Institutions
The Risk to the Financial System
Money Laundering as Tax Evasion
Social and Political Costs
International Conventions
EU Directives on Money Laundering
The Achilles Heel
Bibliography and some useful links
Methods and Stages of Money Laundering
There are three stages involved in money laundering; placement, layering and integration.
Placement –This is the movement of cash from its source. On occasion the source can be easily disguised or misrepresented. This is followed by placing it into circulation through financial institutions, casinos, shops, bureau de change and other businesses, both local and abroad. The process of placement can be carried out through many processes including:
1. Currency Smuggling – This is the physical illegal movement of currency and monetary instruments out of a country.
The various methods of transport do not leave a discernible audit trail FATF 1996- 1997 Report on Money Laundering Typologies.
2. Bank Complicity – This is when a financial institution, such as banks, is owned or controlled by unscrupulous individuals suspected of conniving with drug dealers and other organised crime groups. This makes the process easy for launderers. The complete liberalisation of the financial sector without adequate checks also provides leeway for
laundering.
3. Currency Exchanges – In a number of transitional economies the liberalisation of foreign exchange markets provides room for currency movements and as such laundering schemes can benefit from such policies.
4. Securities Brokers – Brokers can facilitate the process of money laundering through structuring large deposits of cash in a way that disguises the original source of the funds.
5. Blending of Funds – The best place to hide cash is with a lot of other cash.
Therefore, financial institutions may be vehicles for laundering. The alternative is to use the money from illicit activities to set up front companies. This enables the funds from illicit activities to be obscured in legal transactions.
6. Asset Purchase – The purchase of assets with cash is a classic money laundering method. The major purpose is to change the form of the proceeds from
conspicuous bulk cash to some equally valuable but less conspicuous form.
Layering – The purpose of this stage is to make it more difficult to detect and uncover a laundering activity. It is meant to make the trailing of illegal proceeds difficult for the law enforcement agencies. The known methods are:
1. Cash converted into Monetary Instruments – Once the placement is successful within the financial system by way of a bank or financial institution, the proceeds can then be converted into monetary instruments. This involves the use of banker’s drafts and money orders.
2. Material assets bought with cash then sold – Assets that are bought through illicit funds can be resold locally or abroad and in such a case the assets become more difficult to trace and thus seize.
Integration – This is the movement of previously laundered money into the
economy mainly through the banking system and thus such monies appear to be normal business earnings. This is dissimilar to layering, for in the integration process detection and identification of laundered
funds is provided through informants. The known methods used are:
1. Property Dealing – The sale of property to integrate laundered money back into the economy is a common practice amongst criminals. For instance, many criminal groups use shell companies to buy property; hence proceeds from the sale would be considered legitimate.
2. Front Companies and False Loans – Front companies that are incorporated in countries with corporate secrecy laws, in which criminals lend themselves their own laundered proceeds in an apparently legitimate transaction.
3. Foreign Bank Complicity – Money laundering using known foreign banks represents a higher order of
sophistication and presents a very difficult target for law enforcement. The willing assistance of the foreign banks is frequently protected against law enforcement scrutiny. This is not only through criminals, but also by banking laws and regulations of other sovereign countries.
4. False Import/Export Invoices – The use of false invoices by import/export companies has proven to be a very effective way of integrating illicit proceeds back into the economy. This involves the overvaluation of entry documents to justify the funds later deposited in domestic banks and/or the value of funds received from exports.
