The 3 Stages of Money Laundering & How to Fight Them Effectively

The stages of money laundering are often broken down into three simple phases: placement, layering, and integration. Despite the superficial simplicity of this setup, according to the United States of Sentencing Commission, the median loss for money laundering in the fiscal year 2023 was $554,353. And in 2023 alone, 1,132 individuals were sentenced to money laundering. 

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So, what can financial institutions (FIs) do to combat the three stages of money laundering and build a proper system for AML compliance? In this guide, we’ll break down the three stages of money laundering in detail:

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• What are the 3 Stages of Money Laundering?
• The 3 Money Laundering Stages Explained: Placement, Layering, & Integration
  • Stage 1. Placement: Money is Broken Down
  • Stage 2. Layering: Money is Moved Around to Disguise the Fund Source
  • Stage 3. Integration: Money Goes Back Into the Legitimate Economy
• Tracking the 3 Stages of Money Laundering: Challenges in the Modern AML Compliance Efforts
• How Unit 21 Can Help with AML Compliance to Combat the 3 Stages of Money Laundering
• FAQs About the 3 Stages of Money Laundering

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What are the 3 Stages of Money Laundering?

The three stages of money laundering in the order they occur are placement, layering, and integration. These three stages of money laundering 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. Various types of money laundering schemes may use different tactics at each stage, making it crucial for institutions to monitor and detect suspicious activities.

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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 stages of money laundering remain the same, as do the best ways to build a robust fraud detection system that can combat them. 

Each of the three stages of money laundering poses unique challenges for financial institutions, which in turn require them to develop specific AML policies and compliance measures to address these stages. Failure to properly address these stages of money laundering can result in severe AML penalties, fines, and sanctions, making it critical for institutions to develop comprehensive AML compliance strategies.

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The 3 Money Laundering Stages Explained: Placement, Layering, & Integration

The three stages of money laundering can be simplified, but understanding the key to combating them is much more complex. To analyze the three stages of money laundering, we’ve included examples from money laundering expert and former U.S. federal agent Robert Mazur, who previously infiltrated 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. According to the United Nations, trade-based money laundering (TBML) amounts to $240 billion to $600 billion annually laundered through international trade.

Here is how the three stages of money laundering are still possible and occurring in today’s economy.

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Stage 1. Placement: Money is Broken Down

To begin the three stages of the money laundering process, the placement stage is where the 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.

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The money can also be funneled into cash-based businesses, where it is very easy to disguise the original source of the funds, including businesses like casinos, restaurants, clubs, shops, and tourist attractions.

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There are a few methods utilized during placement, including:

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• Disguised deposits - Large sums are broken into smaller sums and temporarily deposited irregularly in many accounts over a longer period of time 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 ‘dirty money’ to make it more confusing to distinguish between them.
• Using financial services - Products like checks, money orders, postal orders, or other financial services are purchased with 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.

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Example of the placement stage 

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.

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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. This was part of the initial stage in the three stages of money laundering, where illicit funds are first introduced into the financial system.

‍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, advancing through the three stages of money laundering and continuing to complicate the money laundering process.

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Stage 2. Layering: Money is Moved Around to Disguise the Fund Source

The money may be in the system, but the hard part is not over. One step of the money laundering process is not enough to fully disguise illicit funds from many financial institutions, which creates the need for the layering phase.

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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 the following:

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• Electronic transfers - Amounts of money are simply transferred (not spent) from account to account, which makes it very confusing to trace the original source.
• Business transactions - Businesses owned by 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 they are ideal for this kind of confusing money movement necessary at this stage.

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Example of the layering stage 

Mazur’s mortgage company owned a check-cashing business. This arrangement enabled him to receive the mulled non-depository checks, endorse the blank payee form with a stamp from his business, and deposit the money into the business’s bank account. Mazur kept his laundering fee and wired the remaining cartel funds to his mortgage business. 

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Mazur then wired cartel funds to his trade-finance business bank account from his brokerage. These transactions were disguised as loans from outside investors. This process represented the layering phase of the money laundering stages, where the funds are moved and disguised to obscure their illicit origins. With the bulk cash drops, Mazur routed funds to an offshore business bank account that had a relationship with a U.S.-based branch. This maneuver was another tactic in the money laundering process, further complicating the flow of funds.

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,  completing the layering step in the three stages of money laundering.

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Stage 3. Integration: Money Goes Back Into the Legitimate Economy

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The last of the three stages of money laundering is the final integration stage, wherein the now cycled, confusing, and spread-out money is sent to the criminal’s registered bank accounts. In this stage, the money can now be spent as ‘legitimate’ or ‘clean’ money.

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Similar to the placement stage, this will require a few more minor transactions, but it is essentially done in ways that are unlikely to attract attention from authorities, governing bodies, or AML institutions. It can include any of the following:

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• 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 comes from entirely legitimate sources (like someone buying your vehicle).

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Example of the integration stage 

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.

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Corrupt Colombian bankers in the pockets of the Cali Cartel assisted Mazur in this process. They helped enhance the legitimacy of the transfers by providing official-looking exportation documents. These documents ensured that two types of valid export transactions justified the repatriation of cartel funds in Colombia.

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The first cover story stated 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 based 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.

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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.

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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.

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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, completing the three stages of money laundering.

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Tracking the 3 Stages of Money Laundering: Challenges in the Modern AML Compliance Efforts

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.

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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.

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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.

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In this environment, Mazur says that AML investigators should focus on tracking all the hop's “payment chains” and drill down on all the people, entities, and ownership structures underlying those transactions. Sharp bank AML investigators are essential to this mission. However, frontline financial investigations units (FIUs) are overwhelmed by the explosion of high-dimensional big data (HDBD), making it even more challenging to combat the three stages of money laundering.

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How Unit21 Can Help with AML Compliance to Combat the 3 Stages of Money Laundering

The financial data ecosystem has become particularly complex in the age of mobile banking and ‘instant’ non-bank online payment platforms. To help address these challenges, Unit21 provides a holistic trio of advanced solutions to empower investigators with leading-edge, no-code tools for AML compliance. 

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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. Unit21’s Transaction Monitoring also identifies suspicious activity via anomaly detection in clients’ historical financial behavior and stated account purpose, addressing crucial steps in the three stages of money laundering.

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Additionally, Unit21 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. This is critical in navigating the money laundering process and effectively responding to emerging threats.

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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, offering a streamlined approach to addressing the three stages of money laundering.

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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 allow organizations to keep their systems, processes, and people effective in responding to the ever-growing demands and complexity of fraud challenges.

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Navigate AML Compliance with Unit21 Today!

Money laundering is a complex, multi-step process. With global regulations tightening, it’s more important than ever for organizations to have robust AML practices in place. Yet, many businesses struggle to navigate the three stages of money laundering.

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With Uni21, you can streamline your AML compliance efforts, reduce risk, and ensure that your organization meets regulatory standards and fosters a culture of integrity and accountability. Schedule a demo today to empower your AML compliance efforts and strengthen your defenses against financial crime!

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Frequently Asked Questions About the 3 Stages of Money Laundering

Understanding the complexities of the money laundering process is essential for both financial institutions and regulators. Below, we’ve compiled answers to some of the most common questions regarding the three stages of money laundering:

Can the three stages of money laundering be detected in real time?

Detecting the money laundering process in real time can be challenging, especially in complex layering stages involving multiple financial systems. However, advanced transaction monitoring systems, machine learning, and AI tools are being increasingly adopted to identify suspicious patterns as they occur.

What challenges do financial institutions face when building an effective AML compliance program?

Challenges include staying updated with evolving money laundering techniques and ensuring sufficient staff training. Balancing privacy with compliance and managing regulatory complexities also makes developing effective AML programs difficult. Continuous improvement and resource investment are key.

Can technology completely eliminate the risks associated with the three stages of money laundering?

While technology has drastically improved the ability to detect and prevent money laundering, it cannot completely eliminate the risk. The increasingly sophisticated methods used by criminals and the vast volume of transactions processed daily make it difficult to catch every illicit transaction. However, emerging technologies like blockchain analytics, machine learning, and artificial intelligence are helping to detect suspicious activities more effectively, reducing the overall risk.

What is trade-based money laundering (TBML), and how does it relate to the three stages of money laundering?

TBML involves using international trade transactions to move illicit funds. In this context, placement occurs through false invoicing, layering involves complex trade transactions, and integration returns illicit funds via trade or investment. Financial institutions and customs authorities must work together to detect TBML through more sophisticated risk-based approaches.

What are some common red flags that indicate the start of the three stages of the money laundering scheme?

Common red flags include large or unusual cash deposits, especially in multiple small amounts (structuring), transfers to or from high-risk jurisdictions, transactions with no apparent legitimate business purpose, or rapid movement of funds between accounts. Monitoring tools should be used to identify these behaviors and trigger further investigation by AML teams.

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