The stages of money laundering include the processes by which illegal funds are integrated into the financial system. This money goes through many transactions and is somehow incorporated into the economy, and criminals bypass rules and systems. Criminals hide, wash, and launder money to generate more money.
There is no specific or single methodology of money laundering, and as in many other subject areas, a theoretical model was built to conceptually cover as many money laundering methodologies as possible. In the case of money laundering, this model was derived from money laundering methodologies that have been uncovered by law enforcement and government authorities. In practice, and despite the variety of methods employed, the laundering process is accomplished in three basic stages of this model comprises. 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. These three stages are placement, integration, and layering.
Money laundering works to point out the source of funds legally. For example, the money collected from crimes such as drugs, bribery, and human trafficking is first hidden by various transactions to be introduced into the economy and then re-included in the financial system by laundering. As a result, when it seems legitimate, this money is reused for other illegal activities to generate more illegal funds and the process repeats constantly.
Stages of Money Laundering and Terrorist Financing
Stages of Money Laundering
Stages of Money Laundering Money launderers engage in the following activities to launder funds:
Placement; is the first stage, where the illegal funds are placed in the financial system, either directly or indirectly. During the placement stage, illicit funds are placed into the legitimate financial system. The illicit funds may be present in two different forms. First of all, illicit funds can already exist in the form of currency, for example, if the criminal sells drugs and narcotics online and gets paid in cryptocurrencies right away.
Secondly, illicit cash can also exist in the form of digital currency, which is then used to purchase other digital assets such as cryptocurrencies. Either way, the placement stage establishes the circumstance that a criminal has funds and money.
Layering; is the second stage, where a series of accounts are used to transfer funds/assets from one account to another account. Very complex layers of transactions are created, to disguise the trail and origin of funds. The second stage of the money laundering stage is the layering or hiding stage. In this stage, the criminal facilitates transactions to disguise the illegal origin of the funds.
Having said this, money laundering, by its nature, is hard on the fact that transactions made may be pseudonymous. However, criminals oftentimes use additional means of anonymizing to even further disguise the funds’ illegal origin, breaking the links between different transactions.
Integration; is the third stage, where the illegal funds are utilized to purchase different assets or the funds are invested in a legitimate enterprise, to convert the black money into white. If the criminal feels confident enough that it is impossible to trace back the dirty currency to the criminal’s activity, he seeks to use the funds for legitimate purposes, such as buying luxury cars, real estate, or jewelry. However, despite the circumstance that the currency is no longer directly tied to a crime, criminals, and money launderers still need a way to explain how they came into possession of the currency.
Stages of Terrorist Financing
First Stage: The first stage, the collecting stage, refers to the generation of funds intended for a terrorist or terror organization. The most common sources of terrorist funding are state sponsorship, charitable or personal donations, illegal activities, and legal business activities. Illegal activities include drug trafficking and other smuggling, fraud, extortion, and petty crime. Legal activities include salaried employment, legitimate businesses, and personal or credit-based loans.
A terrorist group’s choice of the source varies greatly according to availability and group preferences and may evolve. The success of intelligence and law enforcement agencies in constraining the ability of terrorist groups to raise money can lead terrorist organizations to search for alternative fundraising methods, which in turn leads authorities to develop new countermeasures.
Terrorists may be supported in the receipt of funding through various means. For example, many supporters of terrorist organizations have not been donating as much to terrorist groups as they did in the past because of an increase in the legal and financial risks involved in doing so. Paying donations is a significant source of terrorist financing. Supporters might donate their money to transfer funds through broker intermediaries.
In addition, the sale of illegal goods and drug trafficking also may be critically assisted by funds. In the trafficking of goods especially drugs, terrorist groups are usually found involved.
Second Stage: The second stage involves that once funds are generated, terrorist organizations must store and manage the money. To understand this, put yourself in the shoes of a fundraiser of a terrorist organization for a moment. You have received some money from direct donations in amounts large and small, given by individuals, legal entities, non-profit organizations, or businesses, and, in some cases, foreign countries. What do you do with this? You bundle it to make it easier to handle and you store it somewhere.
The storing of funds can be accomplished through means such as Bank and other accounts, high-value commodities such as oil, art and antiquities, agricultural products, precious metals and gems, and even used vehicles. Large terrorist organizations oftentimes rely on relatively sophisticated financial infrastructure with multiple levels of management, reporting, accounting, and financial planning. Especially terrorist organizations under attack, like ISIS, must pay attention to the robustness of their financial systems to limit or prevent losses of personnel, sites, or records.
Third Stage: The third stage is moving the funds. When the terror group has as many funds as required and an operational need, they move funds from the store to somewhere else. If the money received is not yet under the direct control of the terrorist organization or if it cannot be transferred because of operational security concerns, they use money laundering and other transfer mechanisms.
Useful ways in which terrorist organizations transfer money, include cash couriers, informal transfer systems, money service businesses, formal banking, false trade invoicing, and high-value commodities.
Although all of these are important to terrorist organizations, transaction volume is particularly critical for them because most transactions occur within a few specific countries and are either internal fund transfers or settlements between known parties. Large transactions may therefore be difficult and noticeable.
Finally, terrorist groups use the funds they have collected. For our purposes, we can differentiate between operating costs and costs to produce violence. Both categories typically are funded by the same mechanisms.
Different terrorist groups will budget differently based on their needs and goals, and the operations to track and disrupt the activities of such groups will have different effects, depending on the choices made. It is difficult to separate licit operations and expenses, such as salaries and social services, from clearly illicit spending, such as terrorism recruitment and training. For example, operating costs, such as propaganda, recruitment, salaries, and social services, indirectly contribute to an organization’s ability to produce violence.
It is important to note that these stages are not always distinct and may occur simultaneously. The goal of money laundering and terrorist financing is to hide the illegal nature of the funds, and the methods used to achieve this goal can vary depending on the circumstances.