What are the Three Main Money Laundering Stages?

Money laundering is a common type of financial crime that is prevalent in the global economy. It allows criminals to offer their illegally obtained wealth a new identity to be circulated back into the economic system.

Every year, illegal money worth between $800 billion and $2 trillion gets swept away. This encourages greater criminality and damages the reputation of financial institutions.

Everybody who works with money has to understand how money laundering works. It demonstrates the harm that money laundering does to the economy and the necessity of using AML to stop it.

The process of AML stages unfolds in three stages including placement, layering, and integration, which are the key processes of the model.

All the mentioned stages are crucial in the process of ‘cleaning’ the so-called ‘dirty’ money and turning it into money of a legitimate appearance. This article will explain the three Money Laundering Stages with their importance.

Table of Contents

Stage 1: Placement

One of the three steps of money laundering is referred to as the placement stage. This is the point when illegitimate funds are incorporated into legitimate financial channels.

Because enormous quantities of money are transferred at this phase, placement is the riskiest. The authorities are likely to notice this movement.

More than 90% of money laundering instances across the world, in FATF’s estimation, comprise cash transactions as part of the placement phase.

Smurfing

To avoid the attention of authorities, criminals disperse huge amounts of money in small quantities. This tactic is called smurfing, in which small funds are channeled into different accounts in a bid to avoid detection.

Blending Illicit Funds

The second very frequent approach is the mixing of illegal funds with revenues generated from other lawful activities. It is difficult to track the proceeds of crime. It is common to use such concepts as restaurants or casino businesses, which heavily rely on the use of cash.

Purchasing Financial Instruments

Others are buying other financial instruments, such as money orders or cashier checks then cash in the account later.

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Stage 2: Layering

The second stage in the money laundering life cycle is layering. At this level, the money is channeled through several transactions. It is due to an effort to conceal its roots in criminal activities.

There is a level of sophistication in the way the services are rendered through layering with a view of concealing the source of the money.

The UNODC estimate shows that such money amounted to $US 800 billion to $US 2 trillion of illicit money every year, and layering procedures occupied an essential place at this point.

Complex Financial Transactions

Such financial operations linked to strategic management are frequently needed at this stage. It is possible to move money across bank accounts.

Sometimes even in different currencies of the world. It may be employed to acquire such fixed assets as real estate, paintings, or expensive cars. These assets can later on be sold to make the money look clean.

The Role of Cryptocurrencies

Cryptocurrencies have been used in layering because they can be used to make several transactions. Even criminals can swap from one cryptocurrency to another.

They transfer finances from one blockchain to another. This process is called “chain-hopping” and it complicates the task of law enforcement agencies to follow the money.

Stage 3: Integration

The integration phase is the final step in the 3 stages of money laundering. This money now finds its way back into the “legal” economy.

It is hard to discern from money earned legally. It is very effective once integrated, one can use the funds as he/she wishes without alerting the security system.

Common Integration Methods

Various forms of integration can be observed. This can be direct investment in businesses, buying assets such as cars and jewelry, or even financing other criminal activities.

The funds may be utilized to purchase property and the property may be sold. The source of the funds may be also further legitimized.

Criminals might also decide to purchase stock or other similar securities whereby the said proceeds might be presented as legal income earned from activities of investments.

Importance of AML Stages in Combating Money Laundering

The identification of the signs of each stage enables organizations to take the right measures to combat money laundering via Anti Money Laundering (AML).

The placement stage enables businesses to look for large amounts of cash deposits or numbers of small transactions, both of which are indicative of smurfing.
During the layering stage, there are some particular forms of transactions. These are the transactions that go beyond the creation of an account and involve several accounts at the same time.
In the integration stage, businesses must approach such transactions with caution. The transaction involves any form of investment or financial activity that is outside a customer’s common trait.