The Three Stages Of Money Laundering – Money Laundering – Cyprus

Through money laundering, criminals fund and profit from
illicit activity such as arms sales, narcotics, human trafficking,
contraband smuggling, embezzlement, insider trading, bribery, and
fraud schemes.

In addition to organized criminal groups, professional money
launderers perform money laundering services on behalf of others as
their core business.

The scale of money laundering globally is difficult to assess.
Still, a widely quoted figure from the United Nations Office on
Drugs and Crime (UNODC) estimates that money laundering schemes
cost 2-5% of the world’s total GDP – an estimated
$2 trillion.

There are typically three stages of the money laundering process
to release laundered funds into the legal financial system.

These three stages of money laundering are:

1. Placement: Dirty money is introduced into the
   financial system;




2. Layering: Illicit funds are moved around to
   disguise their origin;




3. Integration/extraction: Money re-enters the
   legitimate economy through “clean” investments.

Money Laundering Stage 1: Placement in the financial
system

Placement is when “dirty money” is introduced into the
financial system. This is often done by breaking up large amounts
of cash into less conspicuous smaller sums to deposit directly into
a bank account or by purchasing monetary instruments such as checks
or money orders that are collected and deposited into accounts at
other locations.

Other placement methods include:

• Adding illicit cash from a crime to the legitimate takings of a
  business, particularly those with little or no variable costs;




• False invoicing;




• Smurfing, where small amounts of money below the AML reporting
  threshold are inserted into bank accounts or credit cards and used
  to pay expenses, etc.;




• Hiding the beneficial owner’s identity through trusts and
  offshore companies;




• Taking small amounts of cash below the customs declaration
  threshold abroad and lodging it in foreign bank accounts before
  being re-sent.

Money Laundering Stage 2: Layering the funds

The layering stage is when the launderer moves the money through
a series of financial transactions with the goal of making it
difficult to trace the original source.

The funds could be channeled through the purchase and sales of
investments, a holding company, or simply moved through a series of
accounts at banks around the globe. Widely scattered accounts are
most likely to be found in jurisdictions that do not cooperate with
AML investigations. In some instances, the launderer could disguise
the transfers as payments for goods or services or as a private
loan to another company, giving them a legitimate appearance.

While the three stages of money laundering also apply to
cryptocurrencies, layering is the most common entry point for
crypto, as criminals use it alongside the traditional financial
system to disguise the origins of their funds.

Layering tactics to look out for:

• Chain-hopping: converting one cryptocurrency
  into another and moving from one blockchain to another;




• Mixing or tumbling: the blending of various
  transactions across several exchanges, making transactions harder
  to trace back to a specific exchange, account, or owner;




• Cycling: making deposits of fiat currency from
  one bank, purchasing and selling cryptocurrency, and then
  depositing the proceeds into a different bank or account.

Money Laundering Stage 3: Integration into the legitimate
financial system

The integration stage of money laundering is the final step in
the laundering process. This is when the launderer attempts to
integrate illicitly obtained funds into the legitimate financial
system.

To use the funds to buy goods and services without attracting
attention from law enforcement or the tax authorities, the criminal
may invest in real estate, luxury assets, or business ventures.

They are often content to use payroll and other taxes to make
the “washing” more legitimate, accepting a 50%
“shrinkage” in the wash as the cost of doing
business.

Common Integration tactics include:

• Fake employees – a way of getting the
  money back out, usually paid in cash and collected;




• Loans – to directors or shareholders,
  which will never be repaid;




• Dividends – paid to shareholders of
  companies controlled by criminals.

Three types of Mitigating Money Laundering Risks with Efficient
AML Solutions

• When you see a transaction of more than 15,000 EUR to alert
  further checks;




• When screening new or existing customers, firms should also
  screen for politically exposed persons (PEPs) and adverse media
  – negative news found across various sources that show an
  increased risk in conducting business with the person or entity at
  hand;




• To identify suspicious patterns in customer transactions, firms
  should utilize a transaction monitoring solution that can adapt to
  detect changes in customer and criminal behaviors. Risk indicators
  related to layering and integration methods should also be
  considered when implementing risk-based rule sets that align with a
  firm’s risk appetite.

While not all money laundering cases will use the three-stage
process – they could be combined, or stages repeated several
times – the rule of the three stages of money laundering
frames the thinking of many compliance teams.

A.G. Paphitis & Co. LLC

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.