Laundering Dirty Money – A Three-Stage Process

The process of illegally obtaining and “cleaning” large amounts of money through criminal activities (like human smuggling, terrorist funding, and drug trafficking) is known as the act of Money Laundering. This money obtained through illegal means is considered “dirty” until it is integrated into the system and made to appear clean. 

Here’s an example of Anti Money Laundering integration to make things easier to understand.

Suppose you are running a drug distribution ring that is illegal in nature. With funds from the drug business being too large in volume to hide from the IRS, you open a legitimate pizza parlor to eliminate becoming suspicious. Although the parlor may seem legitimate, it acts as a means of cleaning the dirty money by routing it from the drug distribution ring towards the pizza parlor. By listing this money on the restaurant’s balance sheet, illegal funds are allowed to mingle between the legitimate gains from the pizza business. This way, it becomes difficult to determine if the expense comes from legal or illegal funds. 

Money laundering is one of the major financial crimes committed by the likes of both, white-collar and street level criminals. To detect and prevent this process from happening within the business, many financial institutions make use of AML Screening Softwares on top of drafting and implementing Anti-Money Laundering policies. 

AML Compliance Checklist

FATF has been pushing the issue of digital identity verification for customer screening for quite some time. By complying with the recommendations put forward, risks of fraud like money laundering can be substantially reduced. The key components of AML compliance checklist are listed below:

  1. Mandatory electronic identity verification
  2. PEP (Politically Exposed Persons) Check, for filtering out high-risk individuals from the customer base
  3. Screening through Sanction Watchlist
  4. Drafting and implementing AML procedures and policies
  5. Mandatory training of company staff so that they are able to point out suspicious activity 
  6. Continuous monitoring of AML compliance, even after onboarding a customer

Breaking Down the Money Laundering Cycle

Although the cycle of money laundering is a single process, it can be broken down into 3 stages; Placement, Layering and Integration. Let’s take a deeper dive into these stages:

  1. Placement Stage

This first stage of money laundering includes the initial entry of illegally obtained funds, or dirty money, into the system. Most of the money launderers are caught during this stage, as placing large amounts of cash into a financial system may raise suspicion. Under the Bank Secrecy Act, it is mandatory for banks to report to the government any cash deposits or withdrawals made over an amount of $10,000 per day. To avoid such regulations, fraudsters often opt for making transactions using cryptocurrencies, which are not subject to such requirements. 

  1. Layering Stage

Also known as structuring, this stage is the most complex among the rest. Once the money is successfully deposited, the illegal funds are layered by making various transactions to create confusion. Some common tactics used to do this include:

  • Making service or property transfers with shell companies
  • Purchase of high-value tangible products such as a yacht or gold
  • Wire transfers in multiple banks in multiple countries 
  • Purchasing real-estate properties, such as luxury homes
  1. Integration Stage

The Anti-Money laundering integration stage is the final step for making laundered money seem legitimate. This is the least risky part of the entire process, although not immune to getting detected. The main aim of integration is to reunite the money with the launderer in such a way that it does not draw any attention. This can be done in various ways, such as through the sale or transfer of real estate properties, legitimate purchases of financial instruments, etc

Common Examples of AML Integration

  1. Foreign investment schemes

This commonly used technique involves delivering the dirty money to a foreign investor who returns the mount, making it appear as a foreign investment

  1. Cash business

Many companies manage their transactions only in the form of cash to allow illicit money into the system on purpose. This way, a large amount of money can be laundered with ease

  1. Casinos

By converting dirty cash into casino chips, launderers play with chips for a short time and then convert it back into legitimate funds in the form of a check 

  1. Smurfing

This technique involves making a series of small transactions in order to deposit dirty cash in increments, making it appear clean. These smaller transactions are usually made from various bank accounts and from multiple countries to get around regulatory requirements

Summing It Up

When left overlooked, illicit funds can easily be introduced into the system through Money Laundering Integration schemes, leading to a potentially devastating impact on the business. One way in which companies can mitigate the risk of such fraudulent activities from occurring is to opt for KYC and AML solution providers.

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