Layering In Money Laundering: How to Identify And Prevent It

Layering is a critical phase in the complex process of disguising illicit funds. This sophisticated technique involves creating a maze of financial transactions to obscure the origin of dirty money, making it challenging for authorities to trace its source. As financial crimes continue to evolve, understanding and identifying layering has become essential for businesses, financial institutions, and regulatory bodies to combat money laundering effectively.

To tackle this issue, organizations must implement robust anti-money laundering (AML) measures and conduct thorough Know Your Customer (KYC) checks.

Understanding the Layering Stage of Money Laundering

Layering is a crucial phase in the money laundering process, designed to make illicitly obtained funds difficult to track. This stage involves moving assets around or changing their nature to create a complex web of financial transactions^[1]. The primary goal is to distance criminal proceeds from their source and reinforce the appearance of legitimacy.

Layering in money laundering refers to the process of conducting a series of complex transactions to obscure the origin of illegal funds. It’s often considered the most intricate component of money laundering because it deliberately incorporates multiple financial instruments and transactions to confuse anti-money laundering (AML) controls^[2]. Each layer represents a degree of legal participation in the financial system that increasingly obscures the illegal origin of the funds.

Common layering techniques

Criminals use various methods to layer money, all aiming to complicate the money trail and conceal the identities of those involved. Some common techniques include:

• Offshore accounts and shell companies: These are perfect for obscuring funds and hiding the true identity of owners, making it challenging to trace money accurately.
• International electronic transactions: Criminals move funds across multiple jurisdictions through complex networks of international money transfers.
• Asset investments: Buying and selling expensive assets, such as high-value art or real estate, helps confuse the money trail by introducing multiple owners.
• Cryptocurrency transactions: Pseudonymity and ease of cross-border transfers make cryptocurrencies attractive for layering. Techniques like tumbling or mixing involve rapidly moving funds through a complex web of wallet addresses.
• Cash-intensive businesses: Launderers may use legitimate businesses as fronts to blend illegal funds with legal income^[3].

Red flags of layering activity

To detect layering as part of a money laundering process, financial institutions and law enforcement agencies should be aware of several red flags:

• Frequent transactions involving precise, rounded-off amounts
• High-speed turnover of funds being deposited and withdrawn from accounts
• Multiple transfers between accounts within a single bank or across different institutions
• Funds transfers to or from high-risk countries or between high-risk accounts
• Transactions misaligned with a customer’s profile or stated investment goals
• Use of multiple bank accounts or financial institutions without a clear economic purpose
• Rapid conversion between different cryptocurrencies or use of mixing services

How Criminals Use Layering to Conceal Illicit Funds

Criminals employ various sophisticated methods to layer money and obscure its illicit origins. This process, known as layering in money laundering, involves creating a complex web of transactions to distance the funds from their criminal source. Let’s explore some common techniques used in this crucial phase of money laundering.

1. Electronic fund transfers

One of the most prevalent methods of layering is through electronic fund transfers. Criminals exploit the sheer volume of legitimate transfers occurring daily to hide their suspicious activities. With approximately 700,000 wire transfers processed each day, it becomes challenging for authorities to identify the estimated 0.05 to 0.1 percent that represents money laundering^[5].

Criminals often use multiple banks and jurisdictions to conduct a series of rapid transfers, making it difficult to trace the money trail. They may also utilize alternative financial systems like Hawala, Hundi, or Hui K’uan, which predate modern banking and leave little to no paper trail.

2. Shell companies

Shell companies play a pivotal role in the layering process. These entities, often established in jurisdictions with weak anti-money laundering regulations, provide a facade of legitimacy for illicit transactions^[6]. Criminals use shell companies to:

• Create bogus invoices for non-existent goods or services
• Engage in intercompany loans with fabricated agreements
• Conduct manipulated stock trading to generate a web of transactions
• Mix legal and illegal funds, blending dirty money with legitimate earnings

3. Cryptocurrency mixing

Cryptocurrency has become an attractive tool for money launderers due to its pseudonymous nature. Crypto mixers, also known as tumblers, are services that mix cryptocurrency funds from multiple users to obscure their origin. This process makes financial transactions harder to trace.

Criminals use crypto mixers to:

• Convert illicit cash into cryptocurrencies
• Transfer funds through multiple wallets and exchanges
• Use mixing services to combine transactions and further obfuscate the trail
• Convert digital currencies back into fiat currency with a hidden transaction history

4. Real estate transactions

Real estate has long been a popular avenue for money laundering. According to the Organization for Economic Co-operation and Development (OECD), it is one of the oldest known methods to move and hide illicit funds. Criminals exploit the real estate sector by:

• Purchasing properties using shell companies or front companies
• Utilizing cash or non-transparent financing schemes
• Selling properties to co-conspirators at inflated prices
• Using opaque trusts or third parties as legal owners

These techniques allow criminals to integrate large amounts of illicit funds into the legitimate financial system while also providing a relatively safe investment opportunity^[7].

Detecting Layering Through Transaction Monitoring

Detecting layering in money laundering poses significant challenges due to the complexity of financial transactions and the increasing use of digital platforms^[8]. However, effective transaction monitoring remains crucial in identifying and preventing this sophisticated stage of money laundering. Financial institutions and regulatory bodies must employ advanced techniques to uncover suspicious activities and protect the integrity of the financial system.

1. Key indicators to monitor

To detect layering effectively, organizations should be aware of several red flags that may suggest illicit activities:

• High volumes of transactions involving precise, rounded-off amounts
• Rapid turnover of funds being deposited and withdrawn from accounts
• Multiple transfers between accounts within a single bank or across different institutions
• Funds transfers to or from high-risk countries or between high-risk accounts
• Transactions misaligned with a customer’s profile or stated investment goals
• Use of multiple bank accounts or financial institutions without clear economic purpose
• Sudden increases in transaction volume or changes in transaction types

These indicators can help identify potential layering activities and trigger further investigation.

2. Transaction pattern analysis

Analyzing transaction patterns has a crucial role in detecting layering. This process involves examining the flow of funds, frequency of transactions, and relationships between different accounts or entities. Some key aspects of transaction pattern analysis include:

• Identifying unusual transaction sequences or cycles
• Detecting rapid movement of funds between multiple accounts
• Recognizing patterns of transactions just below reporting thresholds
• Spotting frequent currency exchanges or conversions
• Identifying transactions with no apparent economic purpose

3. Using AI and machine learning

Artificial Intelligence (AI) and machine learning have emerged as powerful tools in combating financial crime, including layering. These technologies enable banks to identify complex patterns, unusual transactions, and connections between seemingly unrelated accounts or entities. Some benefits of using AI and machine learning in transaction monitoring include:

• Analyzing vast amounts of data quickly and efficiently
• Identifying suspicious activities that would be difficult for humans to detect
• Minimizing false positives, which can drain resources
• Adapting and learning from new patterns of money laundering
• Improving the accuracy and efficiency of detection over time

AI-powered AML solutions can process huge loads of data in a short time frame, providing deeper insights into money laundering risks^[10]. These digital tools can spot connections that human investigators might miss, making them invaluable in the fight against financial crime.

By leveraging these advanced techniques and technologies, financial institutions can enhance their ability to detect and prevent layering in money laundering. This multi-faceted approach combines human expertise with cutting-edge technology to create a robust defense against increasingly sophisticated financial crimes.

Best Practices for Preventing Layering

To effectively combat layering tactics, financial institutions and businesses must implement robust anti-money laundering (AML) measures. These practices help detect and prevent sophisticated attempts to disguise illicit funds through complex financial transactions^[11]. Here are some key strategies to enhance AML compliance and mitigate the risks associated with layering:

1. Enhanced due diligence

Financial institutions should conduct thorough Know Your Customer (KYC) checks and implement enhanced due diligence (EDD) procedures for high-risk customers. This process involves gathering detailed information about a customer’s business activities, ownership structure, and sources of funds.

2. Ongoing monitoring

Continuous monitoring is essential to detect suspicious activities and changes in customer behavior. This process involves regularly examining customer transactions, updating risk profiles, and assessing any potential risks that may have emerged since the initial onboarding.

Financial institutions should implement sophisticated transaction monitoring systems that can identify unusual patterns, such as frequent small deposits or withdrawals, large cash transactions, or funds moving between multiple accounts. By leveraging advanced technologies like artificial intelligence and machine learning, organizations can analyze vast amounts of data and identify complex money laundering schemes more effectively^[13].

3. Staff training

Employees play a crucial role in preventing layering and other forms of money laundering^[14]. Regular training sessions should be conducted to ensure staff members understand the latest AML regulations, recognize red flags associated with layering techniques, and are aware of their reporting obligations.

Training programs should cover various aspects of money laundering, including the identification of suspicious transaction patterns, the importance of KYC and EDD procedures, and the proper protocols for documenting and reporting potential instances of financial crime. By empowering employees with the necessary knowledge and skills, financial institutions can create a strong first line of defense against layering attempts.

4. Reporting suspicious activity

Prompt and accurate reporting of suspicious activities has a crucial role in combating layering. Financial institutions must have clear procedures in place for employees to report any unusual or potentially illicit transactions. When suspicious activity is detected, a thorough investigation should be conducted to determine if it warrants filing a Suspicious Activity Report (SAR) with the relevant authorities. SARs provide valuable information to law enforcement agencies, enabling them to uncover and prosecute significant money laundering schemes and other illegal endeavors^[15].

By implementing these best practices, financial institutions and businesses can strengthen their defenses against layering and maintain compliance with AML regulations. A multi-faceted approach combining enhanced due diligence, ongoing monitoring, staff training, and prompt reporting of suspicious activities creates a robust framework to detect and prevent sophisticated layering attempts.

How Can You Stay Ahead of Layering in Money Laundering?

Layering remains a significant challenge in the financial world, requiring constant vigilance and innovative approaches to combat. The complex web of transactions used to obscure the origins of illicit funds calls for a multi-faceted strategy involving enhanced due diligence, ongoing monitoring, and the use of cutting-edge technologies. By implementing robust anti-money laundering measures and fostering a culture of compliance, financial institutions can strengthen their defenses against sophisticated layering attempts.

The fight against money laundering is an ongoing process that needs collaboration between financial institutions, regulatory bodies, and law enforcement agencies. As criminals continue to develop new methods to layer funds, organizations must stay ahead of the curve by investing in staff training, improving transaction monitoring systems, and promptly reporting suspicious activities. By doing so, we can work together to maintain the integrity of the global financial system and make it harder for criminals to profit from their illegal activities.

References

[1] – Fincen – History Of Anti Money Laundering Laws. https://www.fincen.gov/history-anti-money-laundering-laws

[2] – AMLCFT – What Is Money Laundering? https://amlcft.bnm.gov.my/what-is-money-laundering

[3] – CPS – Money Laundering Offences. https://www.cps.gov.uk/legal-guidance/money-laundering-offences

[4] – OCC – Money Laundering Bankers Guide. https://www.occ.gov/publications-and-resources/publications/banker-education/files/pub-money-laundering-bankers-guide-avoiding-probs.pdf

[5] – Princeton – Electronic Money Laundering. https://www.princeton.edu/~ota/disk1/1995/9529/952903.PDF

[6] -Investopedia – Detail on Anti Money Laundering. https://www.investopedia.com/terms/a/aml.asp

[7] – FATF – SECP AML CFT Guidelines. https://fatf.gov.pk/WebsiteContent/Guidelines%20and%20SOPs/SECP-AML-CFT-Guidelines-Jan-2021.pdf

[8] – UNODC – Money Laundering. https://www.unodc.org/e4j/en/organized-crime/module-4/key-issues/money-laundering.html

[9] – FBI – Money Laundering and Other Forms of Illicit Finance. https://www.fbi.gov/news/testimony/combating-money-laundering-and-other-forms-of-illicit-finance

[10] – BolgnaLawReview – An Overview of Money Laundering. https://bolognalawreview.unibo.it/article/download/7816/7543/23835

[11] – IJBEL – MONEY LAUNDERING: ANALYSIS ON THE PLACEMENT. https://ijbel.com/wp-content/uploads/2017/03/IJBEL-50.pdf

[12] – FSMONTSERRAT – Guidance for High-Value Dealer Sector. https://www.fscmontserrat.org/wp-content/uploads/2024/05/MNI-FSC-AML-CFT-CPF-Guidance-for-the-High-Value-Dealer-Sector-2024-1.pdf

[13] – FATF – Professional Money Laundering. https://www.fatf-gafi.org/content/dam/fatf-gafi/reports/Professional-Money-Laundering.pdf

[14] – IDNOW – Red Flags In Money Laundering. https://www.idnow.io/blog/red-flags-money-laundering/

[15] – LawSociety – Money Laundering Warning Signs. https://www.lawsociety.org.uk/en/topics/anti-money-laundering/money-laundering-warning-signs