3 Stages of money laundering – How AML screening guards your business

  • Richard Marley
  • July 10, 2019
  • 7 minutes read
  • 3824

The United Nations Office on Drugs and Crime found that 2 to 5% of global GDP is laundered every year. It is a global epidemic which starts with acquisition of illegal funds through criminal activities and conducted through banks and businesses. The ultimate adverse effects of money laundering impact banks, businesses, and country economies.

Money launderers are a very clever lot. They are constantly looking for loopholes to exploit. They can sneak into your business as well, which is why it is essential that you understand how they operate. Banks and financial institutes are their primary target but other businesses are on their hit list too. One effective method in this regard is to implement AML screening.

Money laundering is the illegal movement of black money through several transactions, conducted through financial infrastructure. It is conducted in three stages to manipulate the authorities.

3 Steps of Money Maundering

There are three stages of money laundering, each with a unique purpose. The first stage is placement, second is layering and third is integration.

1- Placement of Money

This is the first stage where the process starts with the physical placement of money in the financial infrastructure, for instance, in a bank, casino, local or international shop or (currency exchange). It is conducted by investment in financial and non-financial assets.

In this stage, the criminal entities enter the business ecosystem as a customer, investor or vendor. Placement is conducted through several methods, a few are mentioned below.

  • Smuggling Currency Physical movement of currency or financial instrument such as bonds across the border
  • An Accomplice BankA banker that knowingly accepts deposits from smugglers and criminals
  • Currency exchanges – Where there is liberalization of the foreign exchange market, there is room for laundering money
  • Securities broker – The securities brokers who would put investment into different tranches to divide it to thwart any suspicions
  • Blending funds – Criminals might open front companies to fool the authorities. Then, they start mixing the dirty money with the clean one. It’s akin to hiding cash within cash
  • Asset Purchases – The most obvious form of laundering money is to purchase big assets. Once the transaction takes place, tracing back the source of income can be a challenge

2- Layering of Money

The second stage of money laundering is layering.

Layering is conducted to conceal the original source of funds. Businesses and financial institutions are used in every layer of money laundering. Below are some common methods used for layering:

  • Converting dirty money into financial instruments. Banker’s drafts and money orders are readily used for this
  • Buy and sell. In this case, the criminal buys a large asset with illegal money then sells it, locally or internationally. After this buy-sell cycle, tracing the asset back to the criminal’s source of income becomes difficult.       
  • Buying and selling real-estate assets, financial assets, etc.

3- Integration of Money

This is the phase where laundered money is brought into the economy, usually through the banking system. It is different from layering because here usually an informant tells the law enforcement agencies about it;

  • Property Dealing – Buying property from illegal money is a common form of laundering money. Usually, this is done through a shell company.
  • Shell Companies and Fake Loans – The culprits create a fake company and then give a loan to themselves. This loan amount is the laundered money
  • Foreign Banks as Accomplices – If a foreign bank is an accomplice in laundering money it would be difficult for law enforcement to investigate and act since such banks are protected by international laws.
  • Bogus invoices from import/export – Money launderers also use import and export as a way to enter black money into the system. They would exaggerate a bill to justify the payment by creating fake invoices or inflating the value of funds received from exports.

Most common Businesses used for Money Laundering

It is a common belief that financial institutions, especially banks are used for money laundering. Criminal entities have found loopholes in every industry to perform layers of money laundering. Banks have a major risk because they’re used in all stages of money laundering. 

That is why banks and businesses are required to perform KYC/AML screening on their customers, and vendors as well. Global and domestic authorities are always in a bid to find any loopholes in the financial infrastructure that might be exploited by criminal entities. Commonly exploited businesses for money laundering are listed below:

Banks: Banks are exploited for placement, layering, and integration of money. Banks are used for transferring money and making sales and purchases of financial assets. 

Fintech businesses: Fintech has provided financial services to the unbanked people. Online payment solutions, cryptocurrencies, and digital exchanges are used for money laundering. Primary reasons are lack of regulatory obligations, weak security protocols, lack of customer screening practices, etc. 

Real-estate: Real-estate is used in layering of money. As this sector is still not regulated in many regions of the world, criminals find it easy to manipulate the proceeds of real-estate deals. 

E-commerce: Criminals use fake or stolen identities to onboard e-commerce platforms. It helps them to make purchases with illegal money, later they sell the goods, to make layers of transactions. Sometimes they pose as a vendor and use fake identity to sell goods to a legitimate merchant. Later they manipulate the business proceeds to incorporate black money within. 

Legal professionals: Law firms are exploited in the integration phase of money laundering. In this phase, they use the services of legal firms to integrate their money. They hide the original source of money and utilize the professional expertise of legal professionals to legitimize their black money.

How to Keep Your Business Safe

Compliance measures such as Know Your Customer (KYC) and Anti Money Laundering (AML) are extremely helpful in keeping your business safe. Since in the majority of money laundering cases, some form of banking service is involved, AML screening and KYC compliance are mandatory for banks and financial institutes.

Compliance is not that difficult especially when you are using professional AML screening solutions. When a bank gets defamed for helping in laundering money it is not necessarily the entire bank that is responsible. It could be just an individual acting in their individual capacity.

By integrating third-party services such as Shufti Pro, the banks can put in highly effective AML screening and KYC checks. This not only protects your business from money launderers but ensures compliance as well. Video KYC will help banks to eliminate cybercrime by screening their remote customers online through a live video call. It is the substitute for in-person verification and empowers banks to gain competitive edge by onboarding customers online from all over the world.