Whilst many people may believe that money laundering is a white-collar crime that is victimless, it is oftentimes woven into a larger criminal operation that damages the wider society, sometimes to devastating effect.
Table of Content:
Money laundering is a process by which criminals take ‘dirty’ money/ill-gotten gains and then transform it to make it into ‘clean’ or legitimate monetary funds. Sadly, it is often used by crime syndicates in order to proliferate drug sales, human trafficking, extortion, theft or other illegal transactions or activities.
- Money laundering follows a three-step process: Placement, Layering and then Integration.
- Layering is the process by which multiple transactions are carried out in order to obscure the source of the money.
- Offshore techniques are often implemented in order to further extract the illegitimate funds from the source.
- Beneficiaries remain undetected through the exploitation of loopholes and differences in international jurisdictions, leading to trouble in implementing law enforcement and accordingly, justice.
Step 1 and 2 of Money Laundering: Placement and Layering
Pre-placement and placement is carried out when ‘dirty’ money is put into a range of different places from cash-heavy legitimate businesses to foreign bank accounts in order to assimilate funds into legitimate financial systems without triggering AML procedure. Many countries do not have the same level of AML controls as the USA, making them into a hotbed for money laundering and, in particular, the placement stage.
There is also a process called ‘smurfing’ by which smaller amounts of money – that don’t trigger AML reporting thresholds – are placed into bank accounts and/or credit cards, which are then used to pay off other systems already in place. A further tactic is to use shell companies and create false invoicing in order to match, and account for, illegal transactions. Gambling can also be used as a way to launder money through moving illegal money into casino chips and then back into money.
Although placement embeds money into legitimate financial institutions and systems, money is still traceable back to its source at this stage. In order for funds to be money laundered, the next stage must take place: layering.
Layering: How It Works
Layering is the process by which complex movements of funds allow them to no longer be traceable back to their original source. Investments can be made into advanced financial options and moved frequently in order to successfully evade – and avoid – AML detection.
Some of the ways that layering is carried out is through:
- Putting money that has been put money laundered through casinos into investments such as real estate. Many countries do not have money protections around layering or ‘structuring’ being implemented when criminals use false fronts, such as strangers, to purchase real estate when they are in fact the beneficiary.
- Obscuring beneficial ownership via shell companies (mattress/bed companies were famously used in the USA).
- Reselling high value items such as cars or artwork.
- Changing cash money into financial instruments such as traveller’s checks, money orders, stocks, shares, bonds, NFTs, cryptocurrency and so on.
- Making multiple transactions across a number of banks as well as finance institutions in order to obscure the paper trail.
- Creating fake employees of sometimes otherwise legitimate businesses in order to get money back out of businesses.
- Paying dividends to shareholders of companies that are in fact run by criminals.
It is very possible that the criminal organisation involved will use multiple strategies in tandem in order to clear large sums of illegally-gained funds.
Layering vs AML
Although there will be a very intricately strategized effort to subvert, duck and dodge AML controls, unfortunately for money laundering criminals there are a number of ways of still being able to detect layering techniques, largely due to the repetitive styles in which they are carried out. AML programs are therefore able to detect red flags that are created by known methods of layering, although this certainly doesn’t make anti-money laundering operations easy.
One of the main issues can come from overseas AML regulations either being vastly different from the country in which the criminal gang operates mainly, or there may be little to no regulations and laws regarding layering techniques. For example, British Columbia, Canada, has no concrete laws to circumvent individuals buying real estate through another person, allowing the housing crisis to increasing proliferate and money laundering to thrive.
Despite the difficulties, tell-tale signs can include:
- Deposits which are placed and then withdrawn at a rate that is unusual
- Multiple monetary transfers within the same financial institution
- Transferring funds into or out of countries that are listed as high-risk where money laundering is rife
A layering strategy that is frequently used is making relatively small cash withdrawals over a period of time which are then transferred to an overseas bank account where it can then be layered into no longer being traced, such as through purchasing an item such as a car or jewellery.
Layering: The Aftermath
Once the layering process is complete, a process called ‘extraction’ is then carried out in order to integrate funds back into legitimate financial institutions and to successfully be able to use the money to purchase any item. As money gets reintroduced back into legitimate financial institutions at this stage, AML measures are once again able to be implemented in order to detect and trace money laundering. This can be done through procedures such as Know Your Customer (KYC) checks and enhanced due diligence (EDD).
With new advancements in Artificial Intelligence (AI), financial institutions are now able to use automated AML checks are an effective way of implementing robust AML strategy whilst also increasing the volume of checks. Another effective way of tackling the issue is through cohesive systems of integration and communication across law enforcement, governments, regulatory bodies and financial institutions in order to create effective cross-party anti-money laundering tactics. A final tactic is to implement training across various institutions in order to raise awareness of money laundering and the common red flags associated with it.