What is Layering in Money Laundering?

Digitisation has transformed the business landscape, bringing opportunities and benefits for many. It has, however, precipitated a rise in money laundering and financial crime. Companies were quick to implement digital payment systems during COVID-19; but criminals adapted also, using cutting-edge technology to exploit this new “normal”.

Incidence of money laundering is continuing to rise, with sophisticated layering strategies. Fines imposed on the financial system have shared this upward trend: with more enforcement to fight money laundering.

In fact, combating money laundering has become a governmental priority. Dirty money funds terrorism, arms trading, wildlife and human trafficking. It also destabilises institutions and impacts inflation. Here’s how to prevent layering with an anti money laundering program.

What is Money Laundering?

Money laundering is the process of concealing or disguising the origins of money obtained through criminal activity. Dirty money is put through the money laundering process in order to make it appear as though from a legitimate source.

To increase your chances of detecting and preventing money laundering, it is helpful to understand its inner workings in more detail. While there are various money laundering methods, processes usually follow the three-stage model below.

What are the Three Stages of Money Laundering?

Stage 1: Placement

The first stage of money laundering is the pre-layering stage. The illegal funds are introduced into a legitimate financial system, via the following methods:

• Cash-driven businesses like car washes, tanning salons, restaurants and laundromats.
• Fake invoices paid to criminal associates, for goods or services that weren’t provided.
• Smuggling funds into offshore bank accounts in small amounts, before transferring back to the country of origin.
• Smurfing, which involves multiple small deposits over a prolonged period. This is designed to avoid triggering reporting thresholds for larger sums.
• Casino schemes occur when cash is exchanged for casino chips to be used in games, before being converted back into cash form.

The placement stage is the easiest to detect, of all the stages in the money laundering process. Large amounts of cash are inherently more likely to alert suspicion and instigate due diligence action from institutions.

Stage 2: Layering

Layering is typically the second stage: where funds are further distanced from their source. The money launderer moves the illegal funds between bank accounts, often using offshore accounts and international transfers to create a complex audit trail to avoid detection.

Examples of layering for laundered money include:

• Shell companies—these are businesses that exist to divert profits from laundered money. They provide neither goods nor services, and are used to store illegal money or to conceal the money launderer’s identity.
• International banking systems have different regulations regarding limits on financial transactions. Money laundering involves seeking loopholes in legislation to go undetected.
• Electronic bank transfers take place between individuals with fictional identities.
• Property transactions are subject to much less scrutiny: making it a common method for money laundering to fund criminal activity. Buyers may conceal financial crimes by purchasing real estate for a sum higher than its true market value.
• Changing the assets by purchasing prepaid cards, wire transfers, bonds and gold. Those who launder money will also invest in stocks, cryptocurrency and shares—concealing cash origins with virtual assets.
• Artworks and high end goods present an attractive market for launderers, who can purchase artistic works and artefacts anonymously. The prices usually increase over time, and the items themselves are easy to hide and can be sold anytime without leaving a paper trail.

Stage 3: Integration

Once the money has been distanced from its originating financial crimes, the final stage - known as integration - occurs. The timing of this stage is vital: enough time has passed to evade attention, and the criminal proceeds are well-established in a legitimate financial services industry.

As the final part of the money laundering stages, integration relies on large legal transactions generally involving banks. Because this process uses the banking system directly, there are more opportunities for anti money laundering actions. This can be achieved with a program that complies with the Financial Action Task Force, as well as AML and KYC checks.

How Have Money Laundering Trends Changed in the Digital Era?

Developments in fintech and open banking systems have attracted a new wave of money laundering crimes and threats. The following section explores the money laundering strategies you could encounter.

E-Commerce

The rise in E-Commerce has facilitated the creation of more online businesses and websites, enabling criminals to conceal illegal activities behind digital shop fronts. The term for this layering activity is transaction laundering. Transaction launderers can easily connect to illicit websites and infiltrate payment systems.

Online Banking

Identity verification is less rigorously controlled online, meaning criminals can access their accounts 24/7. Instant payments and e-wallets have made access to financial institutions easier to do business with, while making transactions more difficult to track.

Work From Home Schemes

With more people working from home and seeking online jobs, there has been a rise in money launderers advertising work-from-home opportunities. While the options initially appear legitimate,  launderers use recruits to deposit and withdraw money without attracting attention—in a complex network of transactions. Jobs are often advertised on social media and attract young people to work as ‘money mules’.

Online Gambling and Gaming

While online casinos and sports betting shops are strictly regulated, some unregistered sites evade scrutiny. This leniency has enabled further layering through chip transfer and deliberate game rigging between associates. Video games which are not carefully monitored enable launderers to purchase in-game inventory and sell it on in apparently legitimate transactions.

Peer to Peer Transactions

Peer-to-peer marketplaces have surged in popularity in recent years. Although they offer value and convenience, the lack of consumer screening in place means they present ideal opportunities for money layering. AirBnB is one example that launderers may use.

Making Anti Money Laundering Simple for Organisations

More than ever, it’s important for companies to keep up with advances in technology. To combat money laundering and criminal activity as a whole, businesses should have stringent compliance and due diligence measures in place.

Recent Trends in AML Solutions

Artificial Intelligence (AI)

AI is now essential for institutions looking to combat financial crime. As a matter of standard practice, institutions implement AML software and digital measures to detect irregularities and accelerate the screening process.

Global Screening Systems

Enhanced systems like Nexis Diligence+™ are automated to screen clients against international crime databases and watchlists: to help eliminate money laundering at the source. Accurate identity verification can be done in seconds.

Cryptocurrency Regulation

The decentralised aspect of crypto has attracted the attention of financial criminals. While money laundering through fiat currencies is most common, there has been an increase in the transfer of illicit funds in Bitcoin, for example. Because the average modern consumer now owns crypto, AML and KYC screening has become mandatory in most countries.

Tips to Prevent Money Laundering in 2022

By keeping up to date with money layering and laundering trends, you can minimise involvement with money launderers. Implementing an efficient AML compliance scheme within companies is critical, as is vigilance to spot any financial irregularities. Consider the below advice, to help your business in staying compliant with anti money laundering regulations.

Risk Assessment

Detect and assess money laundering risks that may threaten your institution, and prioritise these areas. Use rigorous KYC checks with new clients.

Have a AML Compliance Specialist or Money Laundering Reporting Officer (MLRO)

If possible, allocate the management of AML processes to one person or a team within your company. If one person or team is responsible for staying up-to-date with the latest AML regulations and due diligence policies, it helps protect the company from reputational and financial damage.

Train Staff Regularly

Regularly update staff on AML procedures and ensure they understand policies and protocols within the organisation.

Clear Reporting Protocol

Ensure that staff know exactly how to report and document incidences of financial crime. Records should be kept for five years and due diligence procedures documented and made accessible on demand.

Nexis Diligence+™ provides single solution systems that enhance your company’s KYC and due diligence checks. Stringent processes and thorough auditing systems boost watchlist searches and screening processes to mitigate risks and protect your company. Nexis ensures compliance with AML regulations, allowing your business to streamline checks and make confident, ethical decisions.