Each day our world appears to become faster and more and more complex. Each day, the methods used by money launderers and the three stages of money laundering become more sophisticated and the financial transactions more complicated.
There is no specific or single methodology of money laundering. As in many other subject areas, a schematic model was built to cover as many money laundering methodologies as possible conceptually.
The Three Stages Of Money Laundering
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 primary stages of which this model comprises.
These steps can be taken simultaneously in the course of a single transaction. Still, they can also appear in well separable forms one by one. These three stages are placement, integration, and layering.
Stage 1: Placement
The first stage of money laundering is known as “placement”, whereby “dirty” money is placed into the legal, financial systems. After getting hold of illegally acquired funds through theft, bribery, and corruption, financial criminals move the cash from its source. This is where the criminal money is “washed” and disguised by being placed into a legitimate financial system, such as in offshore accounts.
But how is the placement money laundering stage achieved? There are several ways the “dirty” money can be entered into the financial system. There are six common examples of crime associated with the placement stage in the laundering money process.
- Blending of funds: The first example is the so-called blending of funds. Hereby, businesses blend illegal funds with legitimate takings. This is typically done through cash businesses such as tanning salons, car washes, casinos, and strip clubs, as they have little or no variable costs. Historically, this was also done through washing salons and laundromats.
- Invoice fraud: The second example involves a technique called invoice fraud. Invoice fraud is the most common technique used for transferring dirty money. Primary techniques include over-invoicing or under-invoicing, falsely described goods or services, and phantom shipping (where no items have been shipped and the fraudulent documentation was produced to justify the payment abroad).
- Smurfing: The third exemplary method is called smurfing, which breaks a large sum into smaller and less-suspicious transactions below the reporting threshold. The illegal funds are often deposited into one or multiple bank accounts by either multiple people, known as smurfs, or by a single person over a long period.
- Offshore Accounts: In addition, laundered money is often placed through offshore accounts. This process easily hides the real beneficial owners’ identity and is a way to evade paying taxes.
- Carrying Small Sums of Cash Abroad: As the fifth example, money can also be placed by carrying small sums of cash abroad below the customs declaration threshold. Then, this cash is paid into foreign bank accounts before sending it back home.
- Through Aborted Transactions: The last example involves aborted transactions. With this, the money is transferred to a lawyer or accountant to hold until a proposed transaction is completed. The transaction is then canceled, and the funds are repaid to the criminal from an unassailable source.
Stage 2: Layering
The second stage is the layering stage. The layering stage is separating the proceeds of criminal activity from their origin through many different techniques to layer the funds. Disguising the illegal source is one of the two critical components of money laundering. This generally takes place in the layering stage.
Layering usually involves a complex system of transactions designed to hide the source and ownership of the funds. Layering activities can 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. These transactions are designed to disguise the so-called paper trail or audit trail and anonymize the criminals’ identity.
Once cash has been successfully placed into the financial system, launderers can engage in an infinite number of transactions. Often, criminals define a complex web of transactions to move money into the financial system, usually via offshore techniques. Once the funds have been placed into the financial system, the criminals make it difficult for authorities to detect laundering activity. They do this by obscuring the audit trail through the strategic layering of financial transactions and fraudulent bookkeeping.
Layering is a significantly intricate element of the money laundering process. Its purpose is to create multiple financial transactions to conceal the illegal funds’ source and ownership.
These transactions are designed to disguise the audit trail and the property’s source and provide anonymity. One of the primary objectives of the layering stage is to confuse any criminal investigation. The intention is to place distance between the source of the ill-gotten gains and their present appearance.
Stage 3: Integration
The third and final stage of the money laundering process is called the integration stage. During the integration stage, the money is returned to the criminal from what seems to be legitimate sources. Having been placed initially as cash and layered through several financial transactions, the criminal proceeds are now fully integrated into the financial system and used for any purpose.
The “dirty” money is now absorbed into the economy, for instance, via real estate. Once the “dirty” money has been placed and layered, the funds will be integrated back into the legitimate financial system as “legal” tender. Integration is done very carefully from legitimate sources to create a plausible explanation for where the money has come from.
This money is then reunited with the criminal with what appears to be a legitimate source. At this stage, it is very difficult to distinguish between legal and illegal wealth. The launderer can use the money without getting caught. It is extremely challenging to catch the criminal if there is no documentation to use as evidence from the previous stages.
There are many different ways in which the laundered money can be integrated back with the criminal. The primary objective 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 luxury goods such as upper-class property, artwork, jewelry, or high-end automobiles are common ways for the launderer to enjoy their illegal profits without necessarily drawing attention to themselves.
The money laundering process is extremely complex and can involve multiple individuals involved in organized crime. It is important to note that, in reality, there is often an overlap in these three stages of money laundering. As in some financial crimes, there is no requirement for the illegal funds to be “placed”.
It should be noted that this model may differ in real-life situations. Money laundering may not involve all three stages, or some of them may be combined or repeated multiple times.
There are numerous methods for laundering money, ranging from the simple to the extremely complex. One of the most common methods is for a criminal organization to own a legitimate, cash-based business. If the organization owns a restaurant, for example, it may inflate daily cash receipts in order to funnel illegal cash through the restaurant and into the restaurant’s bank account. The funds can then be withdrawn as needed. These establishments are commonly referred to as “fronts.”