What are the 3 Stages of Money Laundering
This blog sheds light on What are the 3 Stages of Money Laundering.
At this stage, illegal funds or assets are first brought into the financial system.
This ‘placement’ makes the funds more liquid.
For example, if cash is converted into a bank deposit, it becomes easier to transfer and manipulate.
Money launderers place illegal funds using a variety of techniques, which include depositing cash into bank accounts and using cash to purchase assets.
- smurfing and structuring
- alternative remittance
- electronic transfer
- asset conversion
- bulk movement
- insurance purchase.
Smurfing and structuring
- Smurfing is a common placement technique. Cash from illegal sources is divided between ‘deposit specialists’ or ‘smurfs’ who make multiple deposits into multiple accounts (often using various aliases) at any number of financial institutions. In this way, money enters the financial system and is then available for layering. Suspicion is often avoided as it is difficult to detect any connection between the smurfs, deposits and accounts.
- Structuring involves splitting transactions into separate amounts under US$10,000 to avoid the transaction reporting requirements of the AML Act. Many money launderers rely on this placement technique because numerous deposits can be made without triggering the cash reporting requirements. However, it can backfire if an attentive financial institution notices a pattern of deposits just under the reportable threshold. This can lead to reporting such activity to under the suspicious activity provisions of these instruments. Structuring is a criminal offence itself, as well as an indicator of other potentially illegal activity.
- ‘Alternative remittance’ refers to funds transfer services usually provided within ethnic community groups and known by names particular to each culture. Generally such services accept cash, cheques or monetary instruments in one location and pay an equivalent amount to a beneficiary in another location. In some communities this form of money transfer is commonly known as hawala, hundi, chuyen tien, yok song geum, or pera padala.
Alternative remittance is a common placement technique. For example:
- Onyancha brings a large sum of illegal cash to an alternative remittance provider. Larry specifies the identity and location of the recipient and the alternative remittance provider arranges for the funds to be sent overseas. Onyancha may or may not receive a receipt for the transaction.
- The recipient, Sukuma Wiki, goes to the counterpart of the alternative remittance provider in the overseas location. The counterpart provides the specified amount of cash (less any transfer charges) to Sukuma. Again, no documents may be involved.
- Electronic transfer is a common placement technique.
- Onyancha takes cash to an electronic funds transfer agency such as Western Union/M-Pesa/ZAP/YU-Cash etc and requests a transfer of funds to Sukuma Wiki in the Uganda.
- Sukuma Wiki goes to the Transfers branch in Uganda, presents her identification and collects the funds.
- In the money laundering context, this technique involves the transfer of money through electronic payment systems that do not require sending funds through formal bank accounts. This method is also known as wire transfer.
- Electronic transfers can be compared to alternative remittances in that both are person-to-person transfers that do not require sending funds through the formal banking system.
- Criminals make use of the electronic financial system because it enables the transfer of large denominations of money instantly locally or to offshore jurisdictions. This speedy disbursement of funds to and between foreign jurisdictions makes the transactions difficult to investigate and trace back to the source.
- Asset conversion is a common placement technique.
- Onyancha gives cash from his illegal operations to a trusted friend.
- The friend uses the cash to purchase diamonds from his friendly jeweller and hands these diamonds over to Onyancha.
- Asset conversion simply involves the purchase of goods. Illegal money is converted into other assets, such as real estate, diamonds, gold and vehicles, which can then be sold.
- Generally, money launderers prefer to purchase high-value items that are small and easy to sell or transport to another country. Often these assets will be purchased in the name of a friend to avert suspicion.
- Bulk movement is a common placement technique.
- Onyancha generates a large amount of cash from his illegal business in Kenya. He boxes a large stack of cash in Computer CPU’s.
- The cash and watermelons are transported across to the Tanzania as part of a larger export shipment of Computers.
- Bulk movement involves the physical transportation and smuggling of cash and monetary instruments, such as money orders and cheques.
- Often money launderers use their cash to purchase less bulky items such as jewellery and other expensive goods. The criterion is that the items must be of high value and small, making them physically easy to smuggle as well as relatively easy to reconvert into cash at the point of destination.
- Bulk shipments of illegally obtained funds (or goods acquired with the funds) are smuggled across borders concealed in private vehicles, commercial trucks and air and maritime cargo. They may also be carried by couriers travelling on commercial airlines, trains and buses. Further, they can also be sent through parcel delivery and express mail services.
- Gambling is a common placement technique.
- Fraudulent Onyancha and friends make periodic visits to a local club where they insert illegal money into gaming machines.
- After spending an evening enjoying the local band and night life, they cash out their money. This money can now be justified as ‘winnings’ from the local club.
- Gambling is used to launder money by inserting illegal money into gaming machines and cashed out as proceeds from gambling. Funds that appear to be winnings can easily be used to justify unusual spikes in income.
Other types of gambling techniques include:
- claiming gaming machine prizes/payouts whilst not being the legitimate prize-winner (that is, not the player who has accumulated the subject credits or turnover)
- exchanging cash for or purchased gaming prizes/payouts from legitimate prize winners
- exchanging cash for prize-winning cheques. This may be coordinated by ‘spotters’ who look for winners. They target problem gamblers who may want their winnings straight away and are willing to receive 95% of the face value of the ticket
Other types of gambling techniques include:
- exchanging cash for prize-winning gaming machine tickets.
- negotiating cash loans to other members/patrons for the purposes of gambling.
- engaging in activity that may otherwise be considered illegal or contrary to responsible gambling activities. For example, some machines pay a 98% return. Patrons may work in groups on networked machines, cover as many betting options as possible and win as a group.
- Insurance purchase is a common placement technique.
- Maembe Life Insurance sells life insurance products through a large number of independent agents including Twisted Spoon Insurance Brokers. Onyancha buys life insurance policies from Twisted Spoon Insurance Brokers.
- Onyancha later redeems these policies and requests that the funds be transferred to a bank account.
- Illegal money is used to buy insurance policies and instruments, which can be ‘cashed in’ at a later date. The end result is that the illegal funds have been legitimised by being ‘washed’ through a legitimate insurance business.
- ‘Single premium’ insurance products can be particularly vulnerable. They involve a single payment ‘up-front’ and the ability to immediately purchase a fully paid instrument. To a money launderer, these products are attractive because they:
- involve a one-time payment
- have a cash surrender value
- may be transferable
- Insurance is sold through many channels. Any of these channels may be tapped by money launderers to place illegal funds.
Other Unique Placement techniques
- School fees deposited in school bank account for relatives;
- ‘Chama’ contributions;
- Financing small businesses such as butcheries, kiosks business;
- Proceeds of corruption;
- Proceeds of violent crime.
What is Layering stage in Money Laundering
To conceal the illegal origin of the placed funds and thereby make them more useful, the funds must be moved, dispersed and disguised i.e. Layering.
At this stage, money launderers use many different techniques to layer the funds. These include using multiple banks and accounts, having professionals act as intermediaries and transacting through corporations and trusts. Funds may be shuttled through a web of many accounts, companies and countries in order to disguise their origins.
Funds can be hidden in the financial system through a web of complicated transactions using different techniques of layering including:
- electronic funds transfers
- offshore banks
- shell corporations
- walking accounts
Electronic Funds Transfers
- Typically, layers are created by moving money through electronic funds transfers into and out of domestic and offshore bank accounts of fictitious individuals and shell companies.
- Given the large number of electronic funds transfers daily and the sometimes limited information disclosed about each transfer, it is often difficult for authorities to distinguish between clean and dirty money.
- Offshore banks are banks that allow for the establishment of accounts from non-resident individuals and corporations. A number of countries have well-developed offshore banking sectors. In some cases, these banking sectors follow loose anti-money laundering regulations.
- Offshore banks are popular with money launderers (for layering funds), tax evaders and corrupt officials. Money launderers also like to keep funds in offshore banks because their fixed term deposit accounts provide interest income.
- Some offshore centres combine loose anti-money laundering procedures with strict bank secrecy rules. Criminals can easily maintain and transfer funds from banks in these centres because details of client activities are generally denied to third parties, including most law enforcement agencies.
- Using shell corporations is a common layering technique.
- Onyancha sets up Mama Mboga Trading Co. under the laws of Kenya.
- Mama Mboga Trading Co. opens bank accounts with various banks.
- Smurfs working for Onyancha transfer illegal funds to the Mama Mboga Trading Co. accounts.
- Mama Mboga Trading Co. transfers these funds to other accounts or invests them in securities.
- A shell corporation is a company that is formally established under applicable corporate laws but does not actually conduct a business. Instead, it is used to engage in fictitious transactions or hold accounts and assets to disguise the actual ownership of these accounts and assets.
- Sophisticated money launderers use a complex maze of shell corporations in different countries. Most money transfers take place through these shell corporations. At times, money is transferred through numbered accounts rather than through named accounts.
- To further avoid unwanted attention, money launderers build the transaction history of the shell corporation so that it looks as if it has been in business for a long time.
- In many countries (particularly offshore banking centres), the reporting and record-keeping requirements for corporations are quite minimal, which makes it easy to disguise ownership of the corporation.
- In a number of countries, ownership in corporations can be represented by ‘bearer shares’. In these corporations, the holder of the bearer share certificate is regarded as the owner of the shares. This makes it easy to disguise and transfer ownership.
- Using trusts is a common layering technique.
- Onyancha establishes a business trust by appointing a corporate trustee and drawing a deed of trust, which names Mwenyeji Trading Co. as a beneficiary.
- Onyancha transfers funds to the corporate trustee and under the deed of trust, Mwenyeji Trading Co. is empowered to directly use and invest the funds.
- Trusts are legal arrangements for holding funds or assets for a specified purpose. These funds or assets are managed by a trustee for the benefit of a specified beneficiary or beneficiaries.
- Trusts can act as layering tools because they enable the creation of false paper trails and transactions. Trusts are principally governed by a deed of trust drawn up by the person who establishes the trust. Trusts are more complex to use than corporations, but they are less regulated.
- The private nature of trusts makes them attractive to money launderers. Secrecy and anonymity rules help conceal the identity of the true owner or beneficiary of trust assets. Also, the presence of a corporate trustee provides an appearance of legitimacy.
- In addition, offshore trusts may contain a ‘flee clause’. This clause allows the trustee to shift the controlling jurisdiction of the trust if it is in danger because of war, civil unrest or, more likely, the activities of law enforcement officers or litigious investors and consumers.
- Using walking accounts is a common layering technique.
- Using shell corporations, Onyancha sets up three accounts with three different banks. He provides instructions to transfer all funds immediately on receipt to one or more of the other accounts.
- Smurfs deposit cash into the first account. Without the need for further action, the funds are ‘layered’ by being transferred to the third account.
- A walking account is an account for which the account holder has provided standing instructions that all funds be transferred immediately on receipt to one or more other accounts. By setting up a series of walking accounts, criminals can automatically create several layers as soon as any funds transfer occurs.
- The use of intermediaries is a common layering technique.
- Onyancha transfers funds to a special account for client funds maintained by the law firm called Shady Deals & Co. Advocates.
- Shady Deals & Co. Advocates establishes a shell corporation, Mwenyeji Trading Co. , which opens various bank accounts. Shady Deals & Co. Advocates now transfers Onyancha’s funds into these accounts.
- Lawyers, accountants and other professionals may be used as intermediaries between the illegal funds and the criminal. Professionals engage in transactions on behalf of a criminal client who remains anonymous. These transactions may include the use of shell corporations, fictitious records and complex paper trails.
- Many countries have realised that criminals are increasingly using non-financial professionals as intermediaries. To counter these activities, many countries have included non-financial professionals in new anti-money laundering legislation.
Integration stage in Money Laundering
- Laundered funds are made available for activities such as investment in legitimate or illegitimate businesses, or spent to promote the criminal’s lifestyle. At this stage, the illegal money has achieved the appearance of legitimacy.
- It should be noted that not all money laundering transactions go through this three-stage process. Transactions designed to launder funds can also be effected in one or two stages, depending on the money laundering technique being used.
Integration is the third stage of the money laundering process, in which the illegal funds or assets are successfully cleansed and appear legitimate in the financial system, making them available for investment, saving or expenditure.
Integration techniques include:
- credit and debit cards
- corporate financing
- asset sales and purchases
- business recycling
- import/export transactions.
Credit and debit cards
- Credit and debit cards are efficient ways for money launderers to integrate illegal money into the financial system. By maintaining an account in an offshore jurisdiction through which payments are made, the criminals limit the financial trail that leads to their country of residence.
- In recent years, authorities have grown more attuned to the use of offshore credit cards as a money laundering technique. As a result, certain offshore jurisdictions now enable regulators to obtain from banks all records of transactions made by their credit card clients.
- Consultancy arrangements can cover a wide range of non-quantifiable services and are often used to integrate illegal funds into the legitimate financial system.
- The consultant might not even exist. For example, the criminal could actually be the consultant and the money is declared as income from services performed and can be used as legitimate funds.
- In many cases, the criminal will employ an actual consultant (e.g. accountant, lawyer or investment manager) to do some legitimate work. This could involve purchasing assets. Often, the criminal transfers funds to the consultant’s client account from where the consultant makes payments on behalf of the criminal.
- Corporate financing offers a flexible way to transfer money between companies. This technique is often used in sophisticated money laundering schemes.
- Onyancha sets up a shell corporation and a related bank account in an offshore jurisdiction. He also sets up a legitimate business in his country of residence.
- Using illegal money in the offshore account, the shell corporation makes a business loan to, or equity investment in, the legitimate business.
- Corporate financing is typically combined with a number of other techniques, including the use of offshore banks, consultants, complex financial arrangements, electronic funds transfers, shell corporations and actual businesses. This allows money launderers to integrate very large amounts of money into the legitimate financial system.
- Money launderers may also take a tax deduction on interest payments made by them in corporate financings!
- From appearances alone, such transactions are identical to legitimate corporate finance transactions. Financial service professionals serving legitimate businesses need to look closely to find peculiarities in their dealings, such as:
- large loans by unknown entities
- financing that appears inconsistent with the underlying business
- unexplained write-offs of debts.
Asset Sales and Purchases
- To integrate illegal funds into a legitimate financial system, money launderers often resort to actual or fictitious sales and purchases of assets.
- Onyancha sets up a shell corporation and a related bank account in an offshore jurisdiction. He also owns or controls a legitimate business or real estate asset in his country of residence.
- The shell corporation purchases the business or real estate at an inflated price. The earnings from this transaction are treated as legitimate profits.
- This technique can be used directly by the criminal or in combination with shell corporations, corporate financing and other sophisticated methods. The end result is that the criminal can treat the earnings from the transaction as legitimate profits from the sale of the assets.
- Business recycling is a common integration technique in which illegal funds are mixed with cash flow from a seemingly legitimate business.
- Onyancha owns or controls a legitimate, cash-intensive car wash business.
- Onyancha deposits illegal funds into the business. These funds are treated as revenue from the legitimate business.
- Legitimate businesses that also serve as conduits for money laundering are referred to as ‘front businesses’. Cash-intensive retail businesses are some of the most traditional methods of laundering money. This technique combines the different stages of the money laundering process.
- The principal requirement when using businesses as fronts is that they have high cash sales and/or high turnover. This way it becomes easy for criminals to merge illegal funds and difficult for the authorities to spot the scheme.
- An important indicator of front businesses is the relation between the size and nature of the business and the amount of revenue it generates. For example, if a newspaper stand starts making deposits into its bank account at $1 million a month, this should alert the bank to the possibility of illegal activity.
- Import/export transactions are a common integration technique used by money launderers, especially in order to move illegal funds between countries.
- Onyancha sets up an import company in a foreign country as well as an export company in his country of residence.
- The export company exports goods to the foreign import company. The import company remits illegal funds to pay for the goods on an over-invoiced basis.
- To bring ‘legal’ money into the criminal’s country of residence, the domestic trading company will export goods to the foreign trading company on an over-invoiced basis. The illegal funds are remitted and reported as export earnings. The transaction can work in the reverse direction as well.
- In many cases, there is no actual export of goods or only the export of fake goods. In such cases, the trading companies may also exist only on paper. Bankers may be able to spot these transactions if the underlying trade documentation is inadequate or the underlying pricing is incorrect.