Decoding the three stages of Money Laundering process: Placement, Layering and Integration

We understand that money laundering is a complex process or a networked structure involving multiple various stages. It is these stages through which the illegal money is passed to give it an appearance of legitimately obtained funds, concealing its true identity or association with criminal activities. Money laundering comprises of three steps or stages – the first is Placement, the second line is Layering, and the final one is Integration.

It is essential for the reporting entity’s AML Compliance Officer and the team to understand this process of money laundering and its stages to timely identify the transactions attempted to launder illegal funds. This identification and reporting of the money laundering activities is necessary for the reporting entity to comply with the Prevention of Money Laundering Act, 2002 (PMLA), and safeguard the business against exploitation.

In this article, let us explore these three stages of Money Laundering process, explicitly focusing on the layering stage of money laundering and how to detect the layering activities to curb financial crimes.

What are the three stages of the Money Laundering Process?

The following are the three core stages of the money laundering process:

1. Placement

Placement is the first stage of the money laundering process, where the criminals try to introduce their illegal money into the country’s financial system. Once the criminal proceeds are put into the economy, the money launderers start disguising their illegal funds and making them appear clean.

The launderers use various techniques to place the dirty money in the financial system. Some examples of the methods used during the placement stage are:

Structuring or Smurfing, wherein the large sum of cash is split into multiple smaller amounts, possibly below the PMLA reporting thresholds. These smaller amounts are deposited using various accounts to avoid inquiries from the financial institution or other reporting entity.
Further, for placing the illicit cash in the economy, money laundering may use other methods like casinos, purchasing real estate properties or other luxurious items, investing the money in the business to mingle the legitimate business proceeds with the illegal ones, etc.
One other preferred technique for placement is using “money mules” to physically move the illegal cash from one country to another, making it difficult for the country’s authorities where such criminal proceeds were generated to trace the origin or the owner.

2. Layering

The layering stage is the second stage of the money laundering process. It is a crucial stage of the entire process, where the money launderers do most of the disguising work. As the word suggests, in this process, the illegal money is routed through multiple transactions or accounts to distance the identity of the criminals and the source of the proceeds of crime. During the layering stage, the criminals aim to create a complex structure of transactions involving multiple persons, jurisdictions, accounts, etc., to make it difficult for the anti-money laundering authorities to locate the funds to their illegal origin.

Once the illicit money is placed into the system, the launderers use different methods for developing a complex web or layers of transactions, such as:

Using various bank accounts opened under different names and moving funds in between these accounts to complicate the audit trail.
Engaging in a series of financial transactions with parties across different jurisdictions without any business sense.
Creating fake business transactions, such as over-invoicing, under-shipment, etc., to mix illegal funds with legitimate business activities.
Creating shell companies in offshore jurisdictions with lax regulations to create a bogus layer of money transfers.
Using complicated financial instruments such as derivates to obfuscate the audit trail creates challenges for financial institutions to spot the source of illegal funds.
Using emerging technologies like anonymous wallets to transfer virtual assets across borders without adequately identifying the originator or beneficiaries.

3. Integration

Integration is the final stage of the money laundering process, where the illicit funds are put forth for final disposal. During the integration stage, the illegal funds are considered “clean”, allowing the launderers to use these proceeds as they wish without raising any suspicion or inquiries from the authorities.

Generally, once the funds are disguised as legal proceeds, the same are introduced in the legitimate business or used for the owners’ enjoyment, such as to buy luxurious properties or high-value antique items or precious metals or stones.

With the completion of the money laundering process, the money launderers use the proceeds of crime for personal benefits without drawing attention to the nature of its illegal source.

A clear understanding of the money laundering process is very pertinent to observe the unusual patterns or customer behaviour suggesting any of these three stages.

How to detect and prevent money laundering attempts?

To detect and prevent money laundering activities, the reporting entities must implement a robust Anti-Money Laundering Program, considering the entity’s risk exposure, business profile, resources & tools available, etc.

Here are a few best practices that the reporting entities must adopt to ensure the effectiveness of the money laundering detection and prevention measures:

A. Assessing the business exposure to financial crime and deploying a customized AML framework

The money laundering risk exposure of each reporting entity is different. To tailor-made the AML controls, the entity must identify and evaluate the possible money laundering exposure and its impact on the business. This will enable the entity to adopt the Risk-Based Approach and determine the required mitigation measures. This outcome of the Business Risk Assessment or the Enterprise-Wide Risk Assessment shall serve as a foundation for documenting the AML policies, procedures, and controls.

The AML program must provide for a detailed note on the following:

approach and methodology that the entity shall follow for customer onboarding (Customer Due Diligence, Customer Risk Assessment methodology, managing the high-risk customer with Enhanced Due Diligence),
Process for monitoring the business relationship and transactions on an ongoing basis,
Mechanism for detecting and reporting suspicious transactions internally and externally,
Process for complying with the sanctions regime,
Roles and responsibilities of the AML Principal Officer and senior management,
Details around AML Training requirements, etc.

With adequately crafted AML policies and procedures, the reporting entity shows a commitment to combat money laundering, complies with the regulatory landscape, and has dedicated measures to prevent the laundering, onboarding the entire team to play their part.

B. Implementing the right AML solution

Managing the AML measures manually with too voluminous data is practically difficult, giving a loophole to criminals to exploit the economy. Further, money launderers are using emerging technologies to launder the funds. This calls for deploying advanced technologies and data analytics tools to stay ahead of criminals and spot red flags and suspicious transactions.

Right AML tools support customer screening to determine whether the customer is sanctioned or a Politically Exposed Person (PEP) or has some negative media suggesting the person’s background or connection with organized crimes like money laundering or terrorism financing. This screening outcome and the customer’s identification-related details can help the entity create a risk profile for the customer and maintain it as the business relationship progresses. This will enable the entity to stay aware of the changes in the customer’s risk profile and take timely action to mitigate the same without impacting the business.

With appropriate technology, the vast data analysis becomes quick, reducing false alerts and generating alerts for inconsistencies and unusual trends. Real-time transaction monitoring allows the reporting entity to stay on top of the business and spot suspicions immediately before it can impact the business, rather than investigating the already executed money laundering activity.

By leveraging the tools and technology, the reporting entity can timely detect the red flags, maintain the customer risk profile up-to-date, and effectively manage the money laundering risk.

C. Adequate AML Governance and Oversight

The reporting entities must appoint an AML Principal Officer or the AML Compliance Officer to ensure the effective implementation of the designed AML Program. Further, the oversight and involvement of the entity’s senior management is also essential to set the right tone at the top and seek their input and feedback to improve the AML efforts.

To manage the quality and relevance of the AML measures, an independent AML audit must be periodically conducted. This will help seek an unbiased opinion on the entity’s AML program and identify the areas that need to be enhanced for better compliance and risk mitigation.

D. Imparting AML training

AML Principal Officer cannot solely manage the entire AML show – staying regulatory compliant and protecting the business against money laundering exploitation. Thus, the contribution and support from all the organization’s employees is required. The front-line employees play a significant part in detecting potential suspicion as they deal closely with the customer executing the transactions.

The entity must develop a comprehensive AML training program for the team, including senior management, to create appropriate awareness around AML, imparting knowledge about the implemented internal AML policies and procedures and making the team aware of their roles and responsibilities.

Only with a systematic and comprehensive approach can the reporting entity detect and prevent potential money laundering transactions from being conducted through the business. Further, with the joint strength of the AML compliance officer, senior management, technology, and employee support, the reporting entity creates a strong shield against money laundering.

Why is detection and prevention of money laundering necessary?

Money laundering puts the business at a greater risk – associated with business operations, reputational damage, regulatory fines, and proceedings. Failure to detect, report, or prevent money laundering attempts will lead to heavy non-compliance penalties for the business. Further, when a business is exposed to money launderers, it is subject to frequent investigations by the authorities, adversely impacting its reputation in the market. This results in a loss of trust and confidence of the customers and other stakeholders in the business.

To avoid such non-compliance and potential exploitation by the criminals, the reporting entities must develop and maintain a comprehensive AML framework, covering the Customer Due Diligence process, identifying red flags and reporting the same with the FIU, implementing robust technology to support the AML policies, etc.

Let AML India help to identify and mitigate the money laundering risk!

Understanding the intricacies of the process is very important for the reporting entities to identify and report suspicious activities involving money laundering. Here comes AML India for your assistance. With our team of experienced PMLA Consultants in India, we impart comprehensive training on the concepts of money laundering, its stages, red flags suggesting attempted money laundering activities, measures to report and prevent the same, etc.

Additionally, with a systematic assessment of the money laundering risk, AML India helps the reporting entities in India, including the IFSC-regulated entities, customize the AML Program to stay PMLA compliant and protect the business against financial crime vulnerabilities.

Let’s join hands to combat the global vice of money laundering.

About the Author

Jyoti Maheshwari

CAMS, ACA

Jyoti is a Chartered Accountant and Certified Anti-Money Laundering Specialist (CAMS) with over 7 years of experience in regulatory compliance, policymaking, risk management, RegTech solution consultancy, and implementation. With an understanding of the different jurisdictional AML regulations, including PMLA, 2002 and IFSCA (AML, CFT, and KYC) Guidelines, has been closely working with clients to implement Anti-Money Laundering measures, including conducting Enterprise-Wide Risk Assessments, imparting AML training, etc.