Money laundering is one of the most common forms of organised crime in the UK. To ensure you understand the stages of money laundering, let’s delve into the most frequently asked questions about what money laundering is, the three stages of money laundering and what to do if you have been accused of money laundering.
What is Money Laundering?
The definition of money laundering, according to HM Revenue and Customs, is quite simple. Yet, the act in itself is much more complex: “…Exchanging money or assets that were obtained criminally for money or other assets that are ‘clean’.”
Money laundering is a serious type of criminal fraud whereby illegal money is acquired and turned into legal tender. Three distinct money laundering stages are then followed for the ‘dirty’ illegal money to be reintegrated into the legal, financial system for the criminal’s benefit.
Due to the nature of the crime, the true extent of money laundering can be difficult to recognise, but the National Crime Agency (NCA) reports over £100 billion of laundered money affects the UK’s economy each year.
Anti-money laundering authorities, like the NCA, are concerned with both the source and destination of the funds as the money laundering process can be linked to terrorism financing and further serious organised crime. As a result, money laundering regulations are strict and regularly updated.
What Are the Three Stages of Money Laundering?
The money laundering process most commonly occurs in three key stages:
Each individual money laundering stage can be extremely complex due to the criminal activity involved.
The first stage of money laundering is known as ‘placement’, whereby ‘dirty’ money is placed into the legal, financial systems. After getting hold of illegally acquired funds through theft, bribery and corruption, financial criminals move the cash from its source. This is where the criminal money is ‘washed’ and disguised by being placed into a legitimate financial system, such as in offshore accounts.
The second stage in the money laundering process is referred to as ‘layering’. This is a complex web of transactions to move money into the financial system, usually via offshore techniques.
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 fraudulent bookkeeping.
Layering is a significantly intricate element of the money laundering process. Its purpose is to create multiple financial transactions to conceal the original source and ownership of the illegal funds.
The third of the stages of money laundering is ‘integration’. The ‘dirty’ money is now absorbed into the economy, for instance via real estate. Once the ‘dirty’ money has been placed and layered, the funds will be integrated back into the legitimate financial system as ‘legal’ tender. Integration is done very carefully from legitimate sources to create a plausible explanation for where the money has come from.
This money is then reunited with the criminal with what appears to be a legitimate source. At this stage, it is very difficult to distinguish between legal and illegal wealth. The launderer can use the money without getting caught. It is extremely challenging to catch the criminal if there is no documentation to use as evidence from the previous stages.
It is important to note that, in reality, there is often an overlap in these three stages of money laundering. As in some cases of financial crimes, there is no requirement for the illegal funds to even be ‘placed’.
Examples of the Money Laundering Stages
The money laundering process is extremely complex and can involve multiple individuals involved in organised crime. Now that you understand the meaning of money laundering, let’s discuss the three money laundering stages in more detail.
How Is the Placement Money Laundering Stage Achieved?
There are several ways the ‘dirty’ money can be entered into the financial system. The six most common examples of crime associated to the placement stage in the laundering money process are:
- Blending of funds:
This process is whereby businesses blend illegal funds with 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. Historically, this was done through laundrettes, hence the term ‘money laundering’.
- Invoice fraud:
Invoice fraud 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’
‘Smurfing’ is 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 (known as smurfs) or by a single person over a long period.
- Offshore Accounts
Laundered money is often hidden through offshore accounts as this process easily hides the identity of the real beneficial owners and is a way to evade paying tax to HMRC. Offshore accounts are bank accounts opened in a country outside of where an individual resides.
- Carrying Small Sums of Cash Abroad
Money can be laundered by carrying small sums of cash abroad below the customs declaration threshold. Then this cash is paid 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.
How is The Layering Stage of Money Laundering Achieved?
The second and most complex stage of layering often involves the following tactics:
- 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.
Remember, the layering stage is all about turning the dirty money into large sums of clean and untraceable funds.
How Is the Integration Money Laundering Stage Achieved?
Often ‘dirty’ money is ‘cleaned’ and integrated into financial systems through:
- Investments into the property market, high-end cars, artwork, jewellery or other highly-priced commodities.
- False invoices with the over-evaluation of the value of goods imported or exported into a country.
The launderer can now enjoy their illegal wealth, believing that the laundered money won’t be traced back to them.
Money Laundering Fraud Barristers
We hope you now understand how to define money laundering, what money laundering is and the three key stages of the money laundering process. Whether you have intentionally or unintentionally been implicated in a money laundering process, it’s important to seek legal advice from a fraud lawyer as soon as possible to avoid facing penalties.
If you or your client have been accused of laundering money, please don’t hesitate to get in touch with our experienced team of money laundering barristers who are recognised experts in financial fraud cases. If you suspect a business of laundering money, our blog post on how to spot and report money laundering is an insightful read.