The Three Stages of Money Laundering: Money Laundering Lifecycle Explained
The Three Stages of Money Laundering: Money Laundering Lifecycle Explained
Money laundering is a process that involves disguising illicitly gained funds, usually referred to as “dirty money” due to its illegal origin, to make it appear “clean” or legitimate. This allows criminals to use such illegitimate funds in the formal economy. The money being laundered may be generated from crimes such as drug trafficking, corruption, fraud, insider trading, smuggling, etc. Therefore, money laundering aids and encourages the underlying criminal activities and poses a significant threat to the society and economy of a country.
Therefore, it is essential to understand the stages involved in money laundering to prevent and combat the risks attached with it.
In general, the process of money laundering can be understood in three stages: placement, layering and integration. These stages are explained below.
1. Placement
In the placement stage, the aim of money launderers is to move the funds away from their criminal origins and introduce them into the legitimate financial system. This can be done through many methods. Some common methods are dividing large sums of funds and placing or introducing them into several bank accounts, in small denominations to avoid suspicion (structuring/smurfing), or buying financial instruments such as shares or bonds for cash, or buying assets from cash-intensive businesses such as art galleries.
2. Layering
During the layering stage, the objective of the money launderer is to create a web of layers to hide the underlying illicit activity. The layering process involves creating a sophisticated web of transactions using methods, such as multiple bank transfers, buying and selling of financial instruments, over or under-invoicing, fake invoicing, creating a series of inter-se dummy transactions, to name a few.
3. Integration
The final stage of the money laundering process is the integration stage. In this stage, the laundered money is made available for its intended use. The original proceeds of crime now seem to have a legitimate source. This is the ultimate aim of the entire placement and layering process. The money launderer can now use the funds for any activity they want, such as loaning or investing the laundered funds, buying assets like real estate, art pieces and precious gems.
A Practical Example of the entire process of money laundering
The lifecycle of money laundering can be understood through the following real-life example:
- A drug cartel wants to launder proceeds from its criminal activity of selling drugs. For this, it first divides the funds into many small amounts and deposits them into multiple bank accounts. This is the placement stage.
- This money is then transferred through various internal transactions, including international banks and companies. The transfers may seem to be for buying financial assets, paying fake loans, salaries, etc. This is the layering stage.
- These funds are then pooled into an overseas shell company under the ultimate control of the drug cartel. This company loans the funds to a legitimate business run by the drug cartel. Such front companies may include businesses such as a chain of laundromats, restaurants, or any cash-intensive business. Thus, the money is now available to the drug cartel through profits of the legitimate business or salaries to the owners of the company, etc. This is the integration stage.
Preventing Money Laundering at these stages
Money laundering can be prevented at any of the three stages explained above. Efficient anti-money laundering (AML) measures target the entry points of these stages as choke points.
For example, a money launderer will not be able to place the proceeds of crime into the financial system if businesses and service providers implement rigorous customer due diligence practices and measures designed to detect, deter, and report such transactions.
Therefore, an effective AML program needs to take into consideration, the three stages through which money laundering takes place, to effectively mitigate money laundering risks.
