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 money laundering process. 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 money laundering stages are most typically followed by financial criminals:
Stage 1: Placement
The first step in the money laundering process 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:
- 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.
- By paying dummy invoices.
- Through ‘smurfing’ – the act of breaking a large sum into smaller transactions below the reporting threshold.
- By investing money in trusts and offshore accounts which hide the identity of the real beneficial owners.
- 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 often involves moving money electronically between different countries using loopholes in legislation and by investing in ‘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 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 often invested in property, high-end cars, or other highly-priced commodities.
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.