Financial crimes like money laundering threaten economic stability and national security. Despite its complexity, money laundering is often misunderstood. One of the largest scandals involved the collapse of Credit and Commerce International, which went bankrupt due to drug sales fraud amounting to $32 million. This guide details the stages of money laundering to help you stay informed.

What is Money Laundering?

Money laundering is a complex phenomenon in which individuals use different identities and accounts to conceal illegally obtained funds initially to appear legitimately obtained. The goal is to conceal the source and illegal ownership of the funds. According to the United Nations Office on Drugs and Crime (UNODC), 2-5% of the GDP is laundered every year. There are 3 phases stages of money laundering:  placement, layering, and integration. The 3-steps of money laundering help process illicit funds, making them appear cleaner and harder for authorities to detect.

3 Stages of Money Laundering

Placement Stage

Suppose you run a successful coffee shop in a crowded city. One day, a customer comes in carrying a large bag of cash. They say they had a great week and want to pay for a party they are throwing at your store. The amount they give you is much larger than you normally handle. You are cautious but accept the money, thinking it is just luck. This initial transfer of illegal money into the legal financial system is the placement phase. This is probably the most vulnerable AML stage of money laundering since criminals must bring large sums of money into a legitimate financial system.

For Example,

• Invoice fraud
• Smurfing
• Cash smuggling
• Wire Transfer
• Blending funds

Layering Stage

A few weeks later, you decide to deposit this person’s money into your business bank account. To avoid suspicion, you divide the amount into smaller deposits and make several trips to different branches. You also start transferring money between different accounts and investing in different financial products. These transactions create a complex web of transactions that make it difficult to trace the origin of the money. This process of hiding the origin of the money is called layering.

The ultimate goal of layering is to create a wide range of financial transactions in which the source of the laundered money is hidden. Anti-money laundering strategies at this level of money laundering steps can help unravel the web of offshore bank accounts and complex transactions

For Example,

• Electronic transfers between countries.
• Laundering money into shell companies.
• Laundering money into the stock market or other, more obscure financial institutions.
• Transferring funds between several banks.
• Moving funds between multiple accounts within an institution.

Integration Stage

Months pass and your café is thriving. You decide to expand and use the profits, including the cash from that large payment to open a new location. You buy real estate, hire employees, and purchase new equipment all with funds that now appear clean and legitimate. The money is successfully absorbed into the business, making it nearly impossible to distinguish it from legitimate income. This final money laundering stage, where the laundered money enters the economy is called integration.

Now that it has re-entered the financial system, it is effectively legal tender for criminals to use as they wish. Integration must occur within a legitimate financial system: for example, in a real estate transaction to provide a credible explanation of the origin of the money. The money is then sent back to the criminal from a seemingly legitimate source, and at this point, it is difficult to distinguish between a person’s legitimate and illegitimate funds. If successful, the launderer can spend the “clean” money without fear of being caught. Furthermore, the work of money laundering authorities becomes even more difficult if there is no documentation or other physical evidence relating to the previous stage of handling and storage of the funds.

For Example

• Investments like artwork, jewelry, cars, and real estate.
• Fake invoices
• Transfers back to bank accounts 
• Payroll fraud
• Selling of assets

Common Money Laundering Techniques

1. Structuring (Smurfing):
   • Involves breaking down large sums of money into smaller, less suspicious amounts to avoid detection by financial authorities.
2. Trade-Based Laundering:
   • Involves under or over-invoicing of goods and services to move money across borders under the guise of legitimate trade.
3. Shell Companies and Trusts:
   • Using companies that exist only on paper and trusts to hide the true ownership and source of the funds.
4. Real Estate Transactions:
   • Purchasing real estate properties with illicit funds, which can later be sold to integrate the proceeds into the legitimate economy.
5. Casinos and Gambling:
   • Using casinos to place bets with illicit money and then cashing out winnings as seemingly legitimate funds.

Impact of Money Laundering

• Economic Impact:
  • Distorts markets and economic data, leading to inefficient allocation of resources and economic instability.
• Criminal Activity:
  • Facilitates organized crime and terrorism by providing the means to finance these activities.
• Reputation:
  • Damages the reputation of financial institutions and jurisdictions involved in laundering activities, potentially leading to loss of investor confidence and economic sanctions.
• Legal Consequences:
  • Governments impose heavy penalties and sanctions on individuals and institutions caught laundering money, including hefty fines and imprisonment.

Conclusion

Financial institutions must be aware of the stages of money laundering. Not only does it assist in spotting suspicious behavior, but it also aids in the development of efficient anti-money laundering (AML) strategies. Protecting your business from financial fraud and potential criminal charges necessitates staying up to date on the most recent laws and criminal tactics.