The money laundering process is a complicated one, and one of the questions we sometimes hear is ‘do you actually wash money in money laundering?’. In this article, we aim to provide clarity on the stages of money laundering. We’ll walk you through the common stages of money laundering and discuss how to report money laundering safely.
What is Money Laundering?
Money laundering generally involves money which is acquired and handled illegally. The money laundering process describes stages of money laundering by which ‘dirty’ money gained from criminal activity is disguised and reintegrated into the financial system for the criminal’s benefit. Anti-money laundering authorities are concerned with both the source of the funds and the destination of funds. This is because the money laundering process can be linked to terrorism financing.
What are the Stages of Money Laundering?
The methods of breaching money laundering regulations can be very simple or extremely complex.
The following three stages of money laundering are most typically followed by financial criminals:
Stage 1: Placement
One of the first stages of money laundering is known as ‘placement’. After getting hold of illegally acquired funds, financial criminals move the cash from its source by disguising it and then placing into the legitimate financial system. There are several ways the ‘dirty’ money can be entered into the financial system:
● Blending of funds – Through businesses by blending the illegal funds with the legitimate takings. This is typically done through cash businesses such as tanning salons, car washes, casinos, and strip clubs as they have little or no variable costs.
● Invoice fraud – This is the most common technique used for transferring dirty money. Primary techniques include; over-invoicing or under-invoicing, falsely described goods/services, and phantom shipping, where no items have been shipped and the fraudulent documentation was produced to justify the payment abroad.
● Through ‘smurfing’ – The act of breaking a large sum into smaller and less-suspicious transactions below the reporting threshold. The illegal funds are often deposited into one or multiple bank accounts by either multiple people (smurfs) or by a single person over a long period.
● Offshore Accounts – By investing money in trusts and offshore accounts which hide the identity of the real beneficial owners.
● Carrying Small Sums of Cash Abroad – By carrying small sums of cash abroad, below the customs declaration threshold. Then, by paying the cash into foreign bank accounts before sending it back home.
● Through Aborted Transactions –The money is transferred to a lawyer or accountant to hold until a proposed transaction is completed. The transaction is then cancelled, and the funds are repaid to the criminal from an unassailable source.
Stage 2: Layering
The second of the money laundering stages is referred to as ‘layering’. Once the funds have been placed into the financial system, the criminals make it difficult for authorities to detect laundering activity. They do this by obscuring the audit trail through the strategic layering of financial transactions and bookkeeping tricks.
Layering is a significantly intricate element of the money laundering process as its purpose is to create a complex web of financial transactions to conceal the source and ownership of the illegal funds.
Layering often involves the following:
● Moving money electronically between different countries using loopholes in legislation
● Converting money into financial instruments such as stocks
● Investing in real estate or ‘shell’ companies with a functional front
Stage 3: Integration
The third of the stages of money laundering is ‘integration’. Once the ‘dirty’ money has been placed and layered, the funds will be integrated back into the legitimate financial system. Integration is done very carefully from legitimate sources to create a plausible explanation for where the money has come from.
The money is then reunited with the criminal from what appears to be a legitimate source and is often invested in property, high-end cars, artwork, jewellery or other highly-priced commodities for the launderer to enjoy their illegal wealth. At this stage, it is very difficult to distinguish legal and illegal wealth.
At this point, the launderer is able to use the money without getting caught as it is extremely challenging to catch the criminal at this stage if there is no documentation to use as evidence from the previous stages.
However, it is important to note that, in reality, there is often an overlap in these stages. As in some cases of financial crimes, there is no requirement for the illegal funds to even be ‘placed’.
Preventing Money Laundering
As the UK is a global financial centre, it is viewed as an alluring location for launderers to invest the proceeds of their crimes. Fortunately, the UK and governments around the world have increased their efforts in the battle against money laundering by putting in place systems that will report suspicious activity.
The Money Laundering Regulations 2007 forces businesses to put in place policies and procedures to prevent money laundering. These regulations mean firms have to:
● Obtain records of all relevant customer interactions
● Provide training to all employees so that they are able to understand and recognise money laundering activity
● Complete identity checks on all potential customers
● Put in place company procedures so that employees are able to report activity if they witness anything suspicious
What’s more, in 1989, the G7 founded The Financial Action Task Force (FATF) to combat money laundering and terrorist finance on an international scale. The FATF consists of 34 member countries who meet regularly to review their progress and identify areas where improvement is needed.
How to Report Money Laundering
If you do suspect a company or individual to be involved in the money laundering process, it’s important to report this to HM Revenues & Customs (HMRC). You can share details with HMRC using their online form.
You may notice signs of money laundering within the business you work for. If the firm is regulated by the Money Laundering Regulations, you must inform the appointed ‘nominated officer’ about your suspicions.
For more information on how to report money laundering, have a read of our blog post.
Whether you have intentionally or unintentionally been implicated in a money laundering process, it’s important to seek legal advice from a money laundering lawyer as soon as possible to avoid facing penalties.