Money Laundering is the process of taking ‘dirty’ funds and converting it into ‘clean’ funds.
‘Dirty funds’ are criminally-derived proceeds which are then converted into other assets so that they can be reintroduced into legitimate commerce in order to conceal their true origin or ownership – ‘clean funds’
There are three stages in money laundering:
Placement is the first stage in money laundering where the cash proceeds of criminal activity enter into the financial system.
This is most critical stage for any money launderer as the criminal can effectively mask his ‘dirty’ funds by commingling his ‘clean’ funds and create an aura of legitimacy.
Examples of Placement include:
- Depositing into bank accounts via tellers, ATMs, or night deposits
- Changing currency to cashiers checks, bankers drafts or other negotiable instruments
- Exchanging small notes/bills for large notes/bills
- Smuggling or shipping cash outside the county
Layering is the second stage in money laundering where attempts are made to distance the money from its illegal source through layers of financial transactions.
Examples of Layering include:
- Sending funds to different onshore and offshore bank accounts
- Creating complex financial transactions
- Loans and borrowing against financial and non-financial assets
- Letters of credit, Bank Guarantees, Financial instruments, etc.
- Investments and investment schemes
- Insurance products
Integration is the third stage of money laundering. This stage involves the re-introduction of the illegal proceeds into legitimate commerce by providing a legitimate-appearing explanation for the funds.
Examples of Integration include:
- Buying businesses
- Investing in luxury goods
- Buying commercial property
- Buying residential property
As you can see in the graphic above, banking institutions are required by money launderers to conceal their illegal funds and that is why it is important that Know-Your-Customer (KYC) checks are done on customers. In certain cases there may be a need for Enhanced Due Diligence (EDD) on clients.
Money laundering can’t happen without banks being involved somewhere within the three stages. Since they are our first line of defense against criminals, by having robust controls and access to accurate KYC data, banks will prevent many money laundering attempts. At the same time other KYC covered entities are required to check their clients against warning lists issued by governments and regulators.
In a future article I will go over Bank Risk Areas, Suspicious Signs to look for in Banks and High Risk Countries as ways to lower the risk of money launderers targeting your financial institution.
About Paul Renner – Author
Paul Renner is CEO of KYCMap.com and the Co-Founder of C6 Intelligence, a leading provider of global intelligence information on both individuals and companies through the C6 Database and bespoke research projects. C6 Intelligence provides Enhanced Due Diligence (EDD), Know Your Customer (KYC), and Anti-Money Laundering (AML) checks and solutions for companies worldwide, and has a presence in the Americas, EMEA and APAC regions.
Paul Renner is also the co-author of the 2002, ICC (International Chamber of Commerce) publication, “Preventing Financial Instrument Fraud – The Money Launder’s Tool“. The fraud models described within the publication have been referenced by the UK City of London Police and prosecution services, to support their cases and secure convictions against fraudsters.