The 3 Critical Money Laundering Stages  and How Anti-Money Laundering Laws Address Each Stage

Money laundering is a term used to describe the act of hiding what the true source of money was, and in most cases, it was made from illegal activities. One would want to conceal that so they can use the money without getting identified. It might have devastating effects on economies, and it serves to foster crime, for which reason it must be stopped

Anti-money laundering laws work by attacking 3 stages of money laundering to disallow the criminal from concealing his/her illicit money. They contain many rules and methods that bind banks and other financial institutions to participate in the exposing and stopping of money laundering as it happens.

Stage 1: Placement

Placement involves placing the money into the financial system from illegal ways. They may make small deposits of just under $10,000 at a time to avoid being traced. The UN has said that drug trafficking alone accounts for about $300 billion per year in the world.  

In the three stages of money laundering, placement aims at the discrete introduction of dirty money to circulation; hence, AML laws have customer due diligence and source of funds verification in the instance that cash exceeds $3,000. It is incumbent on banks to identify customers and access risks at the point of inception of business with any individual whose funds, at different money laundering stages, may set off some alarm.

AML Controls for Placement

To control the placement stage of money laundering, strong AML regulations must be in place for taking onboard customers and dealing with cash. Banks have to follow know-your-customer procedures to build profiles of clients based on their address, income sources, and expected activity. 

Any cash deposits or withdrawals that relate to a sum over $10,000 must be reported to regulators. Such large or complex deals, with little explanation, will indeed immediately set off investigations to establish that the sources of such money do not come from crimes. The placement stage controls form the first line of defense against illicit money entering the legitimate economy.

Stage 2: Layering

Layering is a more sophisticated stage—the second stage. At this point, there is a lot of assumed-to-be illegal money that has been shuffled in a manner that would hide the origin. One is able to transfer it into numerous accounts, buy expensive items, or invest in businesses. Criminals apply sophisticated methods, including wire transfers, stock purchases, money orders, and casino gambling, to disguise their money laundering offenses through layering. 

In the Layering stage, they try to create distance from dirty funds sources through dozens of transactions. To combat this, regulators require financial institutions to identify patterns, detect geographic oddities, and report suspicious transactions in an unusual flow of funds that have been created to layer dirty proceeds.

AML Controls for Layering

Financial regulators target AML controls in the Layering stage. This is done by targeting transactional activity as opposed to targeting customers alone. Compliance technologies have made it possible for the staff to monitor the atypical movement of funds across borders or in and out of accounts without a clear purpose. The licensed parties monitor all transactions of over $5,000 originating from high-risk countries for suspicious activity. 

The exchange of significant amounts into virtual currencies or third-party money transfers can further be identified as a possible layering offense. Transaction monitoring and cross-jurisdiction cooperation all disrupt the criminal’s scheme to obscure the sources of dirty money through deep-layering operations.

Step 3: Integration

At this stage, laundered money is reintroduced into the economy as legitimate funds. Criminals launder processed proceeds into forms like real estate, charities, or business ventures to hide their criminal history according to anti-money laundering protocols. According to estimates made by anti-corruption organizations, integration injects well over $800 billion into the economy each year through the conversion of ill-gotten money into usable assets. 

During integration, criminals enjoy proceeds of crime without suspicion of money laundering offenses. To stop this, regulators monitor accounts of high-risk professions and watch for sudden spikes in lifestyles beyond declared means.

AML Controls for Integration

To curb integration, financial watchdogs strengthen AML controls on business account activity and asset purchases. They flag transactions that do not align with customer risk profiles built from due diligence on politically exposed individuals as well as known money laundering hotspots. 

Banks check documentation for all property, luxury items, and securities deals worth over $50,000. They also analyze any sudden, large balances without reasonable explanation. Together, these final stage checks help authorities arrest integration and block laundered monies from entering the mainstream economy under the guise of legitimate wealth, thus completing the prevention of money laundering crimes.

Understand how financial crime networks operate so you can help shut them down. Stay up-to-date on the latest anti-money laundering regulations by signing up for our compliance alerts and training program. Protect your organization and the financial system by clicking here to learn more.

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