How Criminals Use Layering in Money Laundering

Understanding layering in money laundering is the first step banks can take to prevent it. Banks can better protect their customers and the financial system’s integrity with this knowledge.

This article looks at the three steps of money laundering. It focuses on layering and explains how it works for money launderers. We will also discuss how banks can prevent layering and detect money laundering activities. This includes transaction monitoring, customer due diligence, and suspicious activity reporting.

What is Layering in Money Laundering?

Layering in money laundering is a process used to disguise the origin, ownership, and destination of illicitly obtained funds. It involves moving money between bank accounts. It also includes investing in different financial options. Additionally, it covers transferring funds to other countries and regions.

Layering in money laundering creates a complex web of transactions. This arrangement makes it difficult for authorities to follow the money trail and identify the source of the funds. This is the gradual, calculated, and essential process criminals must execute to “wash” their money before spending it.

Similarly, this is a critical element that anti-money laundering (AML) teams must get right. If banks don’t report suspicious activity, they help criminals get rich while harming others. And it all happens right under their noses.

How Layering in Money Laundering Works

Here’s an example demonstrating how layering might work in a money laundering scheme:

The 3 Stages of Layering in Money Laundering

The anatomy of a money laundering scheme can be broken down into three main stages:

• Placement. Criminals introduce illicit funds into the financial system through bank deposits, cash purchases of assets, or other means.

• Layering. Transactions move funds through a series of steps to obscure their source and ownership. This can mean moving money between accounts or changing cash into other assets. Another option is using banks in other countries to send money.
• Integration. Criminals integrate the laundered funds back into the legitimate economy by purchasing assets or investments.

The 3 Stages of Layering in Money Laundering

But first, it’s essential to understand the anatomy of a money laundering scheme. This can be broken down into three main stages:

1. Placement. Illicit funds are introduced into the financial system through bank deposits, cash purchases of assets, or other means.
2. Layering. Funds are moved through a series of transactions to obscure their source and ownership. This can involve transferring funds between different accounts, converting cash into other assets, or moving funds to offshore banks.
3. Integration. The laundered funds are integrated back into the legitimate economy by purchasing assets or investments.

Step 1: Placement

Marty Money Launderer obtains $1 million in cash from illegal activities, such as drug trafficking. Marty deposits this cash into several different bank accounts in the names of separate shell companies he owns.

“Overall, layering in money laundering is an effective way for criminals to disguise the origin and ownership of illicit funds, which makes it difficult for authorities to trace them. However, financial institutions and regulatory authorities are constantly working to identify and prevent these types of activities through monitoring and analysis of financial transactions.”

Step 2: Layering

Marty then moves the funds around to obscure their origin and make it difficult for law enforcement to trace them. Marty might use a series of transactions, such as:

• Wire transfers. Money launderers might use wire transfers to transfer $100,000 from one shell company’s bank account to another. They might repeat this several times, transferring money between shell companies in other countries and jurisdictions.
• Purchasing assets. The money launderer might use some funds to buy high-value assets, such as real estate, vehicles, or artwork. They purchase assets in another shell company’s name, using different payment methods, such as cash, bank transfers, or money orders.
• Investment accounts. The money launderer might use some funds to open investment accounts, such as stocks, bonds, or mutual funds. They might use different brokers and investment firms to make it more difficult to trace the transactions.

Step 3: Integration

After the money goes through several transactions, the launderer puts it back into the legitimate economy. They do this by:

• Selling assets. The money launderer might sell some of the purchased assets using the laundered funds, such as real estate or luxury items like fancy watches, art, or antiques. They might also use legitimate channels like real estate brokers or auto dealerships.
• Liquidating investments. The money launderer might liquidate some of their accounts to avoid detection, converting the assets into cash. They might do this through different brokers and investment firms.
• Re-depositing funds. The money launderer might re-deposit some of the funds back into their bank account or other shell companies’ bank accounts. The funds are now integrated into the legitimate economy and are difficult to trace back to their illegal origin.

Overall, layering in money laundering is an effective way for criminals to disguise the origin and ownership of illicit funds, which makes it difficult for authorities to trace them. However, financial institutions and regulatory authorities are constantly working to identify and prevent these types of activities through monitoring and analysis of financial transactions.

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How Banks Can Detect Layering in Money Laundering

From an AML program perspective, banks can take several steps to detect layering in money laundering. These include:

• Perpetual Know Your Customer (pKYC) procedures. Implement pKYC strategies and technology to repeatedly risk score their customers and assess the risk associated with their occupation, location of residence, and likely source of their funds. This helps banks quantify the risk and likelihood of introducing illicit funds into their banking system.
• Transaction monitoring. Monitor customer transactions closely to detect suspicious activity. Use software that monitors each customer’s payment patterns and accurately detects anomalies that indicate suspicious activity. Compare this information to the information collected during CDD to ensure activity aligns with the account’s original stated use. This includes large and frequent transfers or transactions to or from high-risk countries.
• Customer Due Diligence (CDD). Regularly conduct due diligence on their customer base, especially high-risk customers. This involves checking against global risk-related watchlists, adverse media, politically exposed persons (PEPs), or customers in high-risk industries to quantify the level of risk they may pose to your bank.
• Risk strategy assessment. Assess your bank’s overall exposure to money laundering and implement appropriate measures to mitigate those risks. This might include regular employee training, periodic risk assessments, and updating internal policies and procedures.
• Suspicious Activity Reports (SARs). Implement a system to report suspicious activity to the relevant authorities. Equally important, this system should have an auditable trail of evidence of suspicious activity and explainable decisions made by investigators. This can help law enforcement agencies investigate suspected money laundering activities, including layering.

Each aspect of an AML program is designed to identify and report suspicious activities that may indicate money laundering or other financial crimes.

Top 5 Money Laundering Methods

1. 49%: Shell companies
2. 41%: Structuring or smurfing
3. 37%: Use of professional launderers & criminal organizations
4. 35%: Trade-based money laundering
5. 32%: Crypto, crypto-wallets, cryptocurrency ATMs & non-compliant exchanges

Source: The State of AML Compliance 2023 (Feedzai)

Common Money Laundering Red Flags That AML Programs Alert for:

• Large or frequent cash transactions. Transactions inconsistent with a customer’s known financial profile or business activities may indicate money laundering activity.
• Unusual transactions. Transactions that are unusual for a particular customer, such as transactions outside of their normal business activities or transactions with unknown parties, may be a red flag.
• Suspicious activity patterns. AML programs may identify suspicious activity patterns, such as multiple transactions just below the reporting threshold, that may indicate an attempt to avoid reporting requirements.
• Politically exposed persons (PEPs). PEPs, such as government officials or their family members, may be at a higher risk for money laundering. Transactions involving PEPs may be subject to greater scrutiny as a result.
• High-risk countries or industries. Transactions involving high-risk countries or industries, such as those with weak AML regulations or high levels of corruption, may be flagged as suspicious.
• Inconsistent customer information. AML programs may flag inconsistencies in customer information, such as mismatched names or addresses, as potential money laundering indicators.
• Unexplained wealth. A sudden increase in a customer’s wealth, such as an inheritance or business success, may be a red flag for money laundering.
• Complex or layered transactions. Transactions involving complex or layered structures, such as multiple shell companies or offshore accounts, may be flagged as potential money laundering indicators.

By monitoring these red flags and other suspicious activities, AML programs can help detect and prevent money laundering and other financial crimes. These steps can help banks protect their customers and their reputations.

• Article: Enhancing Anti-money Laundering Systems Architecture
• Resource: Transforming Compliance: A Step-by-Step Guide to Perpetual KYC
• Solution Guide: Inbound Payment Fraud Detection & Mule Risk Modeling
• Solution: AML Transaction Monitoring