Anti-Money Laundering (AML): Stages & Sequence

Three Stages of Money Laundering

The intricate process of money laundering typically involves three distinct stages, each meticulously designed to conceal the illicit origins of funds and integrate them into the legitimate financial system. These stages are known as placement, layering, and integration. ^[6]

Placement: Introducing Illicit Funds

The placement stage marks the initial entry point of illicit funds into the financial system. Criminals employ various tactics to introduce ill-gotten gains, often by breaking down large sums into smaller, less conspicuous amounts for deposit into bank accounts or purchasing monetary instruments like cashier’s checks or money orders. ^[1]

Common placement methods include:

• Smurfing: Dividing large cash amounts into smaller, less noticeable sums and depositing them into multiple accounts or financial institutions.
• Cash-intensive businesses: Commingling illicit cash with legitimate revenue streams from businesses like restaurants, retail stores, or casinos.
• Trade-based money laundering: Misrepresenting the value of goods or services in trade transactions to move funds across borders.

Layering: Obscuring the Trail

Once the illicit funds have been introduced into the financial system, the layering stage commences. This intricate phase involves a series of complex transactions designed to obscure the trail and distance the funds from their criminal origins.

Layering tactics may include:

• Shell companies: Transferring funds through a network of shell companies or fictitious entities to create a convoluted paper trail. ^[2]
• Currency exchanges: Converting funds into different currencies and moving them across jurisdictions to complicate the audit trail.
• Asset purchases: Acquiring assets like real estate, precious metals, or artwork to conceal the source of funds.

Integration: Legitimizing the Funds

The final stage, integration, aims to reintroduce the laundered funds into the legitimate economy, making them appear as though they originated from legal sources. This phase often involves investing the funds into legitimate businesses, real estate ventures, or high-value assets. ^[5]

Integration methods may include:

• Business investments: Injecting laundered funds into legitimate businesses or startups, disguising the illicit origins as profits or investments.
• Real estate transactions: Purchasing properties or engaging in real estate development projects to legitimize the funds.
• Luxury purchases: Acquiring high-end items like vehicles, jewelry, or artwork to justify the expenditure of illicit funds.

AML Stages of Money Laundering

Anti-money laundering (AML) measures are designed to counter the three stages of money laundering: placement, layering, and integration. Each stage requires specific AML strategies and protocols to effectively detect and prevent illicit activities.

Countering the Placement Stage

To combat the placement stage, financial institutions and businesses must implement robust Know Your Customer (KYC) and Customer Due Diligence (CDD) procedures. These measures involve:

• Verifying customer identities and beneficial ownership information.
• Conducting risk assessments based on factors like geographic location, industry, and transaction patterns.
• Monitoring for suspicious cash transactions or structured deposits below reporting thresholds (smurfing).
• Implementing transaction limits or enhanced scrutiny for high-risk clients or activities.

Addressing the Layering Stage

Detecting and disrupting the layering stage requires advanced transaction monitoring capabilities and a deep understanding of typologies. AML strategies may include:

• Analyzing transaction patterns for signs of layering, such as rapid fund movements or complex structures involving shell companies.
• Employing data analytics and machine learning to identify anomalies and suspicious activity patterns.
• Conducting enhanced due diligence on high-risk clients, transactions, or jurisdictions.
• Collaborating with other financial institutions and regulatory bodies to share information and typologies. ^[7]

Tackling the Integration Stage

The integration stage often involves the reintroduction of laundered funds into the legitimate economy. AML measures to address this stage may involve:

• Monitoring for unusual investment patterns, large asset purchases, or sudden wealth accumulation.
• Conducting source of funds and source of wealth checks for high-value transactions or clients.
• Implementing trade-based money laundering (TBML) controls and monitoring for over/under-invoicing or misrepresentation of trade data.
• Collaborating with law enforcement agencies and regulatory bodies to identify and seize illicit assets.

By implementing robust AML measures tailored to each stage of the money laundering process, financial institutions and businesses can enhance their ability to detect and prevent these complex schemes, protecting their operations and reputation. ^[8]

Correct Sequence of Stages of Money Laundering

While the three primary stages of money laundering (placement, layering, and integration) are widely recognized, it is crucial to understand that these stages may not always occur in a strict linear sequence. The correct sequence of stages can vary depending on the specific circumstances and tactics employed by money launderers. ^[9]

Here are some common sequences observed in money laundering operations:

1. Placement → Layering → Integration: This is the traditional sequence, where illicit funds are first introduced into the financial system (placement), followed by a series of transactions to obscure the trail (layering), and finally, the laundered funds are integrated into the legitimate economy.
2. Layering → Placement → Integration: In this sequence, the layering stage precedes the placement stage. This can occur when criminals first transfer funds through complex networks or shell companies before introducing them into the financial system, making the trail more difficult to trace.
3. Placement → Integration: In some instances, the layering stage may be skipped entirely, and the illicit funds are directly integrated into the legitimate economy after being placed into the financial system. This approach is often used when the amounts involved are relatively small or when the laundering process needs to be expedited.
4. Layering → Integration → Placement: In this less common sequence, the layering and integration stages occur before the placement stage. This can happen when criminals first obscure the trail of funds and then integrate them into legitimate businesses or assets before introducing them into the financial system. ^[10]

It is essential for financial institutions, law enforcement agencies, and regulatory bodies to recognize these varying sequences and remain vigilant in detecting and disrupting money laundering activities at any stage of the process. ^[4]

References

1. utica – Fraud and Financial Crime Investigation | Utica University. https://www.utica.edu/academic/institutes/ecii/conferences/Conducting%20a%20Money%20Laundering%20Investigation%20-%20C%20King.pptx
2. fbi – Combating Illicit Financing by Anonymous Shell Companies https://www.fbi.gov/news/testimony/combating-illicit-financing-by-anonymous-shell-companies
3. fincen – The Role of Domestic Shell Companies in Financial Crime and Money Laundering https://www.fincen.gov/sites/default/files/shared/LLCAssessment_FINAL.pdf
4. link – Sequence matching for suspicious activity detection in Anti-Money laundering. In Lecture notes in computer science (pp. 50–61). https://link.springer.com/chapter/10.1007/978-3-540-69304-8_6
5. gov – Register or update your money laundering supervision with HMRC. GOV.UK.https://www.gov.uk/guidance/register-or-renew-your-money-laundering-supervision-with-hmrc
6. fincen – What is money laundering? https://www.fincen.gov/what-money-laundering
7. legislation – The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 https://www.legislation.gov.uk/id/uksi/2017/692
8. gov – Ministry of Finance. Anti-money laundering – Province of British Columbia. https://www2.gov.bc.ca/gov/content/justice/anti-money-laundering
9. assets -Anti-money laundering and counter-terrorist financing https://assets.publishing.service.gov.uk/media/6630f2b4120ab0e20c4b9bdb/Final_annual_supervision_report_2022-23.pdf
10. lawcom – Government responds to anti-money laundering recommendations
    https://lawcom.gov.uk/government-responds-to-anti-money-laundering-recommendations/