What are the three stages of money laundering?

When criminal organisations obtain money illegally they must go through three distinct phases to launder or ‘clean’ the money before it can be used. Knowing these 3 stages of money laundering can help organisations recognise when criminal activity may be present, particularly when they are carrying out their own anti-money laundering (AML) procedures. 

With SmartSearch you can streamline your AML obligations with an all-in-one platform that is perfectly optimised for your needs. Perform effortless Customer Due Diligence (CDD) checks and carry out ongoing monitoring of your clients using our platform in addition to multiple other solutions that make your compliance obligations simple.  

The 3 stages of money laundering explained

The process of money laundering can be broken down into three distinct phases that criminals use to ‘wash’ the financial origins of the illegally obtained funds. 

1. Placement: Criminally obtained funds are inserted into the legal financial system. 

2. Layering: The source of the funds is hidden by being passed through various transfers, invested in companies or moved to offshore accounts. 

3. Integration: Steadily the funds return to the individual(s) who began the process in a ‘clean’ state which means it is ‘safe’ to use legally. 

These processes are meticulously performed over the course of weeks and sometimes months to ensure that the funds are clean before use. The second stage of layering is often the most laborious, with the money often being split up and moved around to several different locations to make it harder to trace. 

1. Placement

At this first stage of money laundering, criminally obtained funds are moved away from their original source and into the legal financial system. Often this is achieved by dividing the large amount of money into a number of smaller sums, making its deposit in bank accounts far less suspicious. By using smaller cash sums, suspicion is not aroused by the banks who would otherwise report large deposits. This technique is commonly known as Smurfing. 

Money can also be covertly integrated into the financial system by blending funds in with legitimate businesses. Fake invoices can also be created for goods that don’t exist, hiding the ‘dirty’ cash within this seemingly legitimate payment. By disguising the beneficial owner of a business, ‘dirty’ cash can also be disguised, though, with SmartSearch, money laundering can be easily detected through this process.   

2. Layering 

Often the longest and most labour-intensive step in the process, when the ‘dirty’ money is layered it is disguised by being put through a series of transfers and transactions. This money is then often moved to countries with underdeveloped AML regulations where it can be easily disguised with other legitimate funds. Other organisations prefer to layer the money by investing in real estate or by trading in high-value material goods.  

The growing popularity of cryptocurrencies in recent years has also opened the door for criminals to take advantage of layering opportunities. Processes such as chain-hopping, in which the money is repeatedly converted from one cryptocurrency to another are also popular, along with other forms of cryptocurrency trading, such as ‘tumbling’ in which illicit transactions are blended across several cryptocurrency exchanges.

3. Integration/Extraction 

This final stage of the money laundering process concerns the integration of the money back into the legal system through techniques that won’t raise suspicion from the authorities. Popular methods in this process include the purchase of expensive material goods such as cars or pieces of art, as well as disguising the cash through complex business transactions, such as payments to non-existent employees. 

Once this process is successful, the money will be considered ‘clean’ and safe for public use. Due to the complex lengths that criminal organisations will go to disguise the origins of cash, once the final stage of the process has been completed it becomes very difficult for the authorities to trace the cash as there is rarely any documented evidence of its history. 

Common examples of money laundering

Money laundering is a complex process that can be difficult to identify and combat, but there are several common practices and trends that are essential to understand. Basic money laundering offences include any of the three stages outlined above but can also involve structuring which is the process of breaking down large transactions into smaller transactions that are less likely to arouse suspicion from financial authorities. 

By law, money laundering includes any of the following crimes, as defined by the Proceeds of Crime Act 2002, also known as POCA:  

• Bribery

• Corruption

• Drug Trafficking

• Fraud

• Human Trafficking

• Modern Slavery

• Smuggling Funds

• Tax Evasion

• Theft

The impact of money laundering 

Money laundering and the failure to fully combat its existence can have major impacts on the integrity of the national economy and the security of the UK. As laid out by the National Crime Agency, a large quantity of criminal money entering the economy could result in regulatory penalties and even the potential collapse of major financial institutions. 

Distorting markets, money laundering can upend economic stability and promote corruption, destroying the trust of the public and further upsetting financial order in the process. 

Perhaps most crucially, money laundering is often inextricably linked to other forms of criminal activity, including drug trafficking and terrorism. By preventing money laundering as early as possible, terrorist financing and other potentially serious, widespread crimes can be combated. 

The regulations that help prevent money laundering

Several regulations are in place to help prevent money laundering from occurring with many setting out a series of compliance requirements that businesses must follow. For any business taking on a new customer, Know Your Customer (KYC) checks are essential, with this process demonstrating your due diligence by creating a comprehensive profile of the individual. 

The recommendations set out by the Financial Action Task Force (FATF) are also essential for businesses to follow, as are the rules outlined by The Proceeds of Crime Act 2002. Yet, the main money laundering obligations are those set out by the 6AMLD, which provides a comprehensive list of recommendations that must be enforced by all relevant institutions.  

Money laundering prevention and detection with SmartSearch

Using our tools and solutions at SmartSearch you can detect and prevent money laundering from taking place. With robust tools and technologies like SmartDoc, which uses facial recognition technology to authenticate documents, and TripleCheck, a three-tiered verification system, you can enjoy our integrated AML platform with total peace of mind. 

Carry out customer due diligence checks, enhanced due diligence, and transaction monitoring with our intuitive platform, which makes your AML compliance truly effortless. Also providing employee training and awareness, we can help to integrate our platform with your existing procedures to optimise your business operations as quickly and efficiently as possible.

FAQ

What is money laundering? 

Having defined the 3 stages of money laundering in this blog, let’s strip back the process to its basics, what actually is money laundering? Put simply, money laundering is the process by which criminally obtained funds are disguised so that they cannot be recognised by their initial origin. The 3 stages of money laundering as outlined above is the process by which this money is made legitimate.