The Three Stages of the Money Laundering Process

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With increasingly stringent compliance regulations, criminals and organised crime groups have become creative and more sophisticated in the ways of concealing their illegitimately earned money from regulatory authorities. This has resulted in multiple stages of money laundering. Money laundering commonly anyway consists of multiple complex procedures to move money through a series of channels until it is untraceable. Money launderers take advantage of vulnerabilities in the AML systems across financial institutions such as a lack of knowledge on KYC/AML, screening measures or the absence of an AML system altogether. The complex crime of money laundering requires an equally sophisticated solution to defend against it. 

What is Money Laundering?

Money laundering is the process in which illegally earned funds through criminal activities such as drugs, trafficking or terrorist activity is made to appear as legitimate money through a series of putting it through multiple channels to make it hard to trace and appear as essentially “clean” money rather than “dirty” money. This is done by passing it through a series of banks or companies.

What are the three stages of Money Laundering?

There are three main stages that money launderers undergo to “wash” their dirty or illicitly earned money into being “clean” or legitimate appearing money. For your understanding, we’ve broken down each stage in detail so you can keep your business protected and away from financial penalties.

Stage 1: Placement in Money Laundering

This stage has to do with the introduction of illegally earned money into the legal financial system and is achieved by moving it into a legitimate source of funds. The motive behind this is to disguise the source of funds by putting it back into the legal system, hence filtering it essentially. Often this is achieved by making larger transactions into smaller ones, making them harder to detect. The money is added to a bank account and used to purchase securities e.g. checks. The money earned through illegal activities might also be placed into industries such as real estate and casinos, where it’s pretty simple to hide the source of funds.

‍Strategies used in the placement stage may include:

  • Disguised deposits
  • Blending of funds
  • Smuggling of cash
  • Foreign exchange
  • Using financial instruments

Stage 2: Layering in Money Laundering 

Moving onto the second and middle stages, this is where the funds are transferred into multiple accounts by the criminals to hide their origination. The goal here is to manipulate the true source of the funds and to make it increasingly difficult for the regulatory authorities or banks to trace or determine the authenticity of the money. This phase provides a history of black money, making it appear as white or lawful money. Multiple transactions and purchases are made, along with the transfer of assets to achieve layering. This is done by investing in financial instruments, purchasing financial products, buying online assets and then turning them into money once again in accounts.

Stage 3: Integration in Money Laundering

Once the first two stages are complete and the illegitimate money has been passed through various banks, and has a fake history attached to it, it is then deemed as white money and has been faked into appearing as legitimate. This money is then finally transferred back into the accounts of the criminals who earned it in the first place. Now the money launderers are free to spend it however they please from their local bank accounts, without gaining suspicion. Most often the criminals choose to invest that money into buying real estate, exotic cars or other luxury items. It is to be noted that in most cases of turning laundered money into appearing as legitimate, these criminals incur a slight loss on the original value due to the cost of cleaning the dirty money by placing it into the legal system in the first stage.‍

How to detect and prevent money laundering ?

A strong anti-money laundering program needs to be in place to guard against any money laundering threats. Money laundering attacks can land companies in hot water with hefty penalties for compliance not to mention reputation loss. Therefore, to avoid this from occurring companies must make it a priority to have a robust AML system in place and take note that it should incorporate Customer Due Diligence as well to gather relevant information on customers before developing a relationship with them or before onboarding them and allowing for them to make transactions. CDD checks allow for information to be gathered for effective identity verification.

Idenfo Direct – A seamless solution for Money Laundering

We’ve recognised that in the constantly changing world of money laundering, a robust AML framework is a necessity. Even when following all the recommended procedures to prevent money laundering, businesses can still succumb to financial crimes. That’s where Idenfo Direct comes in. Idenfo Direct is your best bet against all money laundering activities. Our technologically advanced solution can be seamlessly integrated by companies. At Idenfo Direct our identity verification and name screening procedures make for effective due diligence and screen your customers to make sure you avoid any involvement in suspicious financial activity. 

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