Money laundering has many layers

Money laundering, a practise that can be traced back to ancient China almost 2000 years ago, involves attempts to obfuscate the origins of assets obtained from the proceeds of crime or illegal activities which are introduced into the financial system as “clean” or “washed” money without being detected by authorities. The United Nations Office on Drugs and Crime (UNODC) indicated that the estimated global amount of money laundering, in a single year, can be in the region of $800 billion to $2 trillion. Equally shocking are the statistics from the National Crime Agency (NCA) which indicate that money laundering costs the UK more than $136 billion a year; a country with strict anti-money laundering (AML) regulations. It is however difficult to determine the exact amount of money that is being laundered due to the concealed nature of the act itself. Money laundering is also closely linked to the financing of terrorism with substantial consequences from a compliance perspective.

The UN points out that since terrorists rely heavily on money to execute their terrorist acts, their source of money could originate from a wide pool, of both legitimate and illegitimate sources. As the money laundering chain usually circles back to the person who generated the funds, the financing process of terrorism is mainly a linear process. Taking a closer look Although the process of money laundering can vary in complexity, there are three generic stages of money laundering which are placement, layering and integration. The placement stage consists of the process whereby the launderer attempts to introduce the illegal proceeds into the financial system. One of the most common methods used during the placement stage is scaling. Scaling is the division of a large sum of money into smaller amounts in a bid to avoid detection. During the placement stage launderers are exposed or at risk whilst attempting to place large amounts of money into the financial system.

This may be achieved by depositing the illegal funds into bank accounts, purchasing cash-based businesses such as restaurants and laundromats or other legal financial products including money orders and cheques which are then deposited at different locations to obscure any search or investigation. Another placement tactic is to transfer the money to various offshore accounts in an attempt to push the “dirty money” as far away as possible from the illegal source. Layering, the second stage of money laundering and considered the most complex stage, often involves grouping the illegal funds into smaller transactional amounts which fall under the anti-money laundering thresholds to avoid detection.   The main objective of this stage is to blend illegally obtained funds with legitimate funds. Various methods of layering are used including placing the cash in stock markets and channelling the money through various financial products. Other instruments often used are gambling through the buying and cashing out of coins. To add to the complexity of this stage of money laundering, funds might be wired through various accounts at different banks, across borders thus reducing the risk of detection, especially in countries that do not comply with anti-money laundering regulations. The layering stage can prove to be a challenge, even for firms with effective transaction monitoring and Know Your Client (KYC) controls in place. The integration is the final stage of money laundering where the illegal proceeds of funds enter the legitimate economy as so called “clean money”. Once a purchase takes place, often of luxury goods or assets including real estate, investments in businesses etc., the integration of illegal proceeds is complete.

However, this is a vicious cycle because integrated cash or “clean money” can be used again to enable future money laundering activities. Breaking the cycle From a reputational point of view and to avoid hefty fines, it is imperative that organisations are in compliance with the financial crime regulations and have implemented robust policies, standards and training to mitigate the risks. Lysis understands that customer, payment and transaction screening and monitoring against domestic and international sanction lists, embargoes, and Politically Exposed Persons (PEP) lists, can be very time consuming and a costly function. If your organisation is looking for a cost-effective way to manage their screening and monitoring requirements, then look no further. Lysis Group provides analysts with vast experience and a thorough understanding of AML and financial crime controls within the financial services industry and other regulated industries such as the cryptoasset industry.

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