Money laundering is often broken down into three simple stages: placement, layering, and integration. Despite the superficial simplicity of this setup, criminal organizations and kleptocrats still manage to launder an estimated $5.8 trillion annually, according to John Cusack, the former co-chair of the non-government interbank association Wolfsberg Group. Yet far less than one percent of this filthy lucre is ever interdicted by global authorities.
So what can financial institutions (FIs) do to combat money laundering at each stage and build a proper system for AML compliance? In this guide to the stages of money laundering, we’ll break down in detail:
While there is an ongoing debate about which predicate criminal offense generates the highest volume of illicit funds, with the U.S. Treasury blaming fraud, other experts citing tax evasion, and others still pointing to international drug trafficking, the three fundamental stages of money laundering remain the same—as do the best ways to build a robust fraud detection system that can combat them.
Let’s start with the basics: what are the stages of money laundering and what do they mean?
The three stages of money laundering in the order they occur are placement, layering, and integration. These stages are the process that fraudsters go through to unlawfully take funds, conceal the original source of funds, and then ‘legitimately’ reintegrate the money into the system when laundering money.
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For stage one, bad actors must place illicit proceeds into the financial system. Completely untraceable, cash is optimal for this purpose, particularly in myriad small-denomination increments.
In stage two, after the funds are placed, launderers then muddle the trail of funds via a maze of payments and purchases to obfuscate the origin of the money.
And finally in stage three, after conspirators feel confident their funds have gone through enough transactional ‘hops’ to lawfully justify their custody of assets (cash or otherwise), they finally successfully integrate their funds into the legitimate financial system.
Each stage of money laundering poses its own unique challenges for financial institutions, and in turn, creates a stage of anti-money laundering that FIs must try to deal with. Here’s a detailed breakdown of each stage, and how financial institutions can stop fraud at each stage.
The stages of money laundering can be simplified, but understanding the key to combating them is much more complex. We’ve included examples of each stage of money laundering from money laundering expert and former U.S. federal agent Robert Mazur in our analysis of each stage, who previously infiltrated both the Medellin and Cali drug cartels as a long-term undercover money launderer.
In his recent book The Betrayal, Mazur recounts the stages of money laundering within the complex Cali cartel. Though these events occurred three decades ago, the former undercover has confirmed that this essentially undetectable mechanism for value transfer remains alive and well to this day. Washington DC-based think tank Global Financial Integrity concurs with Mazur, asserting that trillions of dollars are washed via trade-based money laundering (TBML) annually.
Here are the ways in which the three stages of money laundering are still possible and occurring in today’s economy.
To begin the money laundering process, in the placement stage, dirty money needs to be introduced into the financial system in a way that doesn’t set off any fraud alarms. This is most often achieved by dividing large quantities of money into smaller sums, and then placing them directly into a bank account.
The money can also be funneled into cash-based businesses where it is very easy to disguise the original source of the funds, which includes businesses like casinos, restaurants, clubs, shops, and tourist attractions.
There are a few methods utilized during placement, including:
- Disguised deposits - Large sums are broken into smaller sums and are temporarily deposited in many accounts over a longer period of time irregularly to avoid setting off fraud indicators.
- Purchasing of assets - Real estate, vehicles, or other high-value assets are bought with the money where it is under slightly less scrutiny than deposits at a bank would be.
- Foreign exchange - Foreign currency is purchased in countries with less strict AML policies.
- Blending funds - Legitimate money is mixed with the ‘dirty money’ to make it more confusing which is which.
- Using financial services - Products like checks, money orders, postal orders, or other financial services are purchased with the illegitimate money to add an additional layer to confusing the source of the funds.
- Cash smuggling - Cash mules physically move the money across borders and into foreign financial systems, then transfer it back to the domestic accounts.
Example of the placement stage of anti-money laundering
Over a period of two years, starting in 1992, Mazur infiltrated the upper ranks of the narco-money-laundering underworld, operating out of Sarasota (Florida), Panama City (Panama), and Bogota (Colombia).
For the operation, codenamed Pro-Mo (shorthand for professional money-launderers), Mazur assumed the identity of Robert Baldasare, an invented persona who controlled a mortgage brokerage, a trade-finance company, and other offshore businesses and legal entities, including a foundation in Liechtenstein.
These fronts were all part of the ruse to lure in various Cali cartel associates and laundry men to “wash” or assist him in legitimizing millions in drug money. Mazur’s laundromat hinged on two primary placement conduits.
First, the undercover largely received drug money that had already been placed into the financial system by low-level cartel couriers in bulk non-depository checks delivered to his covert partners in bulk.
Most of these Moneygrams, cashier’s checks, traveler’s checks, money orders, and similar instruments were structured under $3,000 and in odd amounts to evade money-service business (MSB) recordkeeping requirements.
Mazur also received and laundered duffle bags stuffed with cash in six-figure to low seven-figure drops. Once Mazur’s undercover laundering crew took possession of the cash and checks, he would place or further layer, respectively, the drug money through his business fronts.
The money may be in the system, but the hard part is not over. One step of this process is not enough to disguise money laundering from many financial institutions, which creates the need for the layering phase.
This stage is also sometimes called ‘structuring’ or ‘placement by structuring’, in which the funds that now seem legitimate are moved around constantly to build a history for the funds that make them seem more legitimate. This is often achieved by a combination of any of the methods in the placement stage, and any of:
- Electronic transfers - Amounts of money are simply transferred (not spent) from account to account to make it very confusing to trace the original source.
- Business transactions - Businesses owned by the criminals offer seemingly legitimate reasons to move money around, structuring large sums of money behind a business ‘front’, or structuring private loans.
- Cryptocurrency trading - Crypto trades offer an additional level of anonymity, so are ideal for this kind of confusing money movement necessary in this stage.
Example of the layering stage in anti-money laundering
Mazur’s mortgage company had a stake in a check cashing business. This setup enabled him to receive the muled non-depository checks, endorse the blank payee form with a stamp from his business, and deposit it into the business’ bank account. Mazur would keep his laundering fee and wire the remaining cartel funds to his mortgage business.
Mazur then wired cartel funds to his trade-finance business bank account from his brokerage. These transactions were disguised as loans from outside investors.
With the bulk cash drops, Mazur routed funds to an offshore business bank account that had a relationship with a U.S.-based branch. The undercover would then wire the money to another offshore bank account, where Mazur would pocket his laundering fee. Trafficker funds then flowed to Mazur’s trade-finance front.
All money laundering efforts culminate in the final integration stage, wherein the now cycled, confusing, and spread-out money is sent to the criminal’s registered bank accounts, where it can now be spent as ‘legitimate’ or ‘clean’ money.
Similar to the placement stage, this will require a few more minor transactions, but essentially is done in ways that are unlikely to attract attention from authorities, governing bodies, or AML institutions. It can include any of:
- Transfers back to bank accounts - The spread out, small sums of money in various places are transferred back to the criminal’s legitimate bank account.
- Payroll fraud - Fraudsters will create a fake payroll system with imaginary salaries for employees that don’t exist and ‘pay’ them, while just keeping that money.
- Selling of assets - From the layering stage when some assets may have been purchased, they will now be sold for cash, which come from entirely legitimate sources (like someone buying your vehicle).
Example of the integration stage of anti-money laundering
Mazur had cover letters and related trade documents created to prove to the bank and the traffickers’ launderers that the funds being remitted to Colombia were well-disguised to consummate the ‘last hop’ of the spin cycle.
Assisting Mazur in this process were corrupt Colombian bankers in the pockets of the Cali Cartel who helped enhance the legitimacy of the transfers with official-looking exportation documents. These documents ensured that two types of valid export transactions justified the repatriation of cartel funds in Colombia.
The first cover story was that Mazur’s trade finance entity collected these drug funds on behalf of the exporter to whom the wire was being sent. The alternative justification was that Mazur’s company was making an advance payment of export revenue, predicated on the exporter’s projected sales in the United States. Funds were generally wired through a payable-through account at a Colombian bank branch in Miami.
A payable-through account is similar to a correspondent banking relationship, where a local institution processes transactions on behalf of a foreign-based bank that lacks a presence in the country hosting the transfer. That is to say, the recipient of the laundered dollars, in Mazur’s case, a Colombian trade-finance company, didn’t have an account in the U.S., only an account back home denominated in pesos.
Through the eyes of a crooked bank compliance official, this type of international transaction was sufficiently justifiable to regulatory authorities because finance companies generally manage export revenue for export companies in Colombia.
Moreover, once the financing company received the funds, they wired money back to trafficker-controlled accounts, thus integrating drug money with all the appearances of legitimate repatriation of trade-related proceeds.
The three stages of money laundering may seem straightforward and intuitive enough, but Operation Pro-Mo illustrates the complex, winding, yet seemingly believable journey that drug money travels to reach cartel coffers in source countries.
While cybercrime, cryptocurrency, mobile payments, and eCommerce have altered the modern money laundering threat environment and created more channels for obfuscation, transnational criminal organizations still favor cash, precious metals, and real estate, according to Mazur.
On top of that, the lingering prevalence of secrecy-friendly offshore jurisdictions, global regulatory fragmentation, and an all-too-willing army of corrupt white-collar enablers ready to launder dirty money for the right price complicates detection for financial crime investigators.
In this environment, Mazur says that AML investigators should focus on tracking all the hops “payment chain” and drill down on all the people, entities, and ownership structures underlying those transactions. Sharp bank AML investigators are essential to this mission. But frontline financial investigations units (FIUs) are overwhelmed by the explosion of high-dimensional big data (HDBD).
How Unit21 Can Help with AML Compliance
The financial data ecosystem has become particularly complex in the age of mobile banking and ‘instant’ non-bank online payment platforms. In 2022, money moves faster than ever before in history. To help address these challenges, Unit21 provides a holistic trio of advanced solutions to empower investigators with leading-edge, no-code tools.
For onboarding orchestration, Unit21 offers an operating engine with custom workflows and automation to combine KYC/KYB data with other data sources to onboard users. And Unit21’s Data Monitoring identifies suspicious activity via anomaly detection in clients’ historical financial behavior and stated account purpose.
Unit21 also incorporates a dynamic rule models interface that allows AML compliance teams to create new suspicious activity triggers as the need arises, without having to exhaust cumbersome resources on engineering requests.
Lastly, Unit21’s Case Management system fuses Unit21’s platform together with a customizable and automated system for customer risk assessments and Financial Crimes Enforcement Network (FinCEN) regulatory reporting.
While Regtech should not be looked at as a panacea for stopping financial crime, flexible and responsive management, investments into adaptable technology, and a holistic approach to building a robust and successful AML compliance program allows organizations to keep the systems, processes, and people effective in responding to the ever-growing demands and complexity of fraud challenges.
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