The significant financial crime threat of money laundering affects businesses on a global scale, with all regulated companies facing the very real risk of criminals attempting to hide illegally gained funds via legitimate systems.
There are three stages of money laundering and having a good understanding of each gives businesses a better chance of spotting suspicious activity to strengthen their AML compliance.
The three stages are placement, layering, integration, and they go into the detail of how criminals attempt to breach financial systems. Knowing what to expect from each stage means compliance teams can see the warning signs straight away and apply the appropriate due diligence.
Money laundering is the process of hiding the fact that funds have been obtained through criminal activity, so that it appears legitimate.
It may be that the money has been gained via fraud, bribery, corruption, drug trafficking, or any other forms of organised crime. The criminals behind these activities attempt to invest the money so that it doesn’t start to attract any suspicion, usually via such means as, financial transactions, property purchases, business investments and transfers between different accounts or jurisdictions.
If a business becomes exposed to this, it can have significant ramifications, including regulatory penalties, financial losses and reputational damage, especially if the correct financial crime protocols haven’t been in place.
A good AML risk management process will mean fully understanding what money laundering is and how criminals will attempt to conceal their illegally obtained funds.
The money laundering process is commonly divided into three stages:
Having a framework like this can help to understand the money laundering process, however, criminal activity doesn’t always follow a straightforward pattern. Some attempts to mislead may involve overlapping stages, and some stages may be bypassed altogether.
If businesses have a clear understanding of the overall purpose of each stage then this will help to identify suspicious behaviour and identify where the appropriate AML controls being put in place may help to reduce financial crime exposure.
This is the introduction stage, where illegally obtained funds are placed into the financial system or separated from their original criminal source.
When criminals hold large amounts of cash, this stage can be particularly relevant. Placement may involve trying to disguise criminal proceeds as legitimate business income or via transactions, so that they appear more usual.
At this stage, opting for cash-intensive businesses can help to conceal the illicit funds, making it more difficult to distinguish what’s legitimate revenue.
The warning signs to look out for at this stage include:
Although these indicators may not necessarily mean money laundering is taking place, they are a good sign that further investigation may be needed.
Businesses can identify possible concerns by implementing effective identity verification, source of funds checks, and risk assessments to put a stop to any illicit funds moving further through the financial system.
The second stage is layering, which involves creating a distance between the criminal proceeds and how they were obtained.
Layering involves funds being moved through multiple accounts, across businesses, or via various financial products or jurisdictions, obscuring the transaction history and resulting in it being more difficult to uncover the money’s unlawful origins.
Funds may be able to pass through several companies or accounts, with complex ownership structures or international financial arrangements making it harder for businesses to identify who is controlling the money.
Potential warning signs include:
These risks really show why businesses need to be aware of both who their customers are and the purpose of the financial transactions.
Know Your Business (KYB) checks can help organisations to check and verify company information, identify beneficial owners, and the people behind the company, providing greater visibility into any suspicious financial activity.
The final stage is integration and this involves the reintroduction of illegal funds into the legitimate economy in such a way that makes them appear legal.
By this time, money has usually passed through several different transactions or financial arrangements, making the source difficult to identify.
Criminals usually try to claim these funds as legitimate business income, investment returns, or proceeds they’ve received from the sale of valuable assets.
This can be in the form of buying property or making business investments, meaning the subsequent transactions make the original money appear to come from genuine commercial activity.
Indicators at this stage businesses need to look out for are:
These warning signs are of particular relevance to businesses such as financial or legal firms, accountants or property businesses, all of which handle high-value transactions.
Conducting checks on the source of funds and having the appropriate level of customer due diligence can help with identifying potential inconsistencies, leading to investigating any higher-risk activity.
With criminal activity, no definitive structure is guaranteed, so placement, layering and integration can only act as a guide for what to look out for. Digital payment methods and financial services have opened up new ways for criminals to attempt to move and disguise funds.
An example of this is that if illegal funds have been generated by online fraud, they may already exist digitally; therefore, the cash placement stage is defunct.
In addition to this, cryptocurrency transactions, international payment systems, or very complex corporate arrangements can mean there is a need for different stages to overlap and appear different to the usual layout structure.
Businesses can’t rely on being able to identify a single stage or a particular transaction that seems suspicious when they are assessing the risk of money laundering.
Instead of this, having an effective AML workflow in place should factor in the entire customer relationship, including identity, ownership, transactions, where the money has come from and changes to risk-levels over time.
It’s still important for businesses to recognise the money laundering stages as it can help regulated businesses to have a better understanding of how and where financial crime risks may arise, and, in those situations, what the appropriate controls would be.
Within a business, different sectors may come across different warning signs, which can vary depending on the nature of their customers, transactions and services.
Some popular industries with money laundering examples are:
Being equipped to understand the risks means you will have a more consistent approach to onboarding customers, as well as to the due diligence process and any ongoing compliance.
It can also mean that businesses are better able to recognise when additional checks are necessary, instead of simply relying on the initial identity verification procedure that was carried out.
To help prevent money laundering, it takes more than being able to spot suspicious behaviour. There needs to be a strong AML framework with appropriate processes in place that regulated businesses can use for verifying customers, assessing risks and monitoring customer relationships.
Being sure of customer identities is the foundation of an effective AML compliance framework.
Know Your Customer (KYC) checks help businesses to be sure their customers are who they say they are by verifying identities.
When dealing with corporate clients, KYB (Know Your Business) checks give you more information about company ownership, directors, and ultimate beneficial owners.
These checks help to surface any inconsistencies in details provided, as well as reducing the risk of false identities being used by criminals or any opaque corporate structures.
Customer due diligence (CDD) creates a full picture for businesses of the purpose of a relationship, it assesses any financial crime risks picked up on and determines if any additional checks are required.
A risk-based approach is best for CDD to allow compliance teams to establish if any controls need to be put in place. This decision can rely on factors such as customer activity, the sources of the funds, the structure of a business, and geography.
For relationships deemed of a higher risk, they may require enhanced due diligence, which will include additional verification methods, closer monitoring and, potentially, a deeper investigation into the circumstances.
This is of particular importance when specific transactions or customer circumstances lead to the indication of money laundering.
Financial crime screening means businesses can see if a customer or a connected party may be showing additional risk factors.
This may involve checking customers or companies against sanctions or PEP (Politically Exposed Person) lists, as well as seeing if they’re mentioned in adverse media sources. If these checks do highlight this information, then further investigations may be necessary.
SmartSearch's sanctions and PEP screening solution helps businesses to identify whether an additional investigation is necessary, as well as to incorporate screening into their wider AML processes.
It’s important to remember that if a screening match does occur, it shouldn’t be seen as proof of criminal activity and a proper assessment should take place before any decisions are made.
It is possible to complete a successful customer onboarding process, where no issues are found, only for that customer to appear within sanctions lists or a PEP database further down the line.
This is why ongoing monitoring is so essential, as it helps businesses to identify any new changes and to conduct further investigation when a customer’s risk level evolves.
SmartSearch's ongoing monitoring solution supports ongoing monitoring of sanctions, PEP, and other customer risk screening, meaning compliance teams are equipped to identify changes that require their attention.
Where appropriate, businesses should also use transaction monitoring processes. These help to identify any unusual financial activity which may be an indication of money laundering red flags.
For effective AML controls to be in place, clear records of all customer checks, risk assessments and compliance decisions need to be maintained.
When requested, all regulated businesses need to be able to demonstrate that they have carried out the appropriate due diligence and that any suspicious activity has been reviewed efficiently and escalated where necessary.
When choosing an AML reporting solution, make sure it can provide accessible records of all verification checks, screening outcomes, investigations and ongoing monitoring activity that can all be easily accessed by the team when required to do so, making timely reviews and decisions possible.
In the event of money laundering being suspected, firms should first follow their internal escalation procedures and the applicable Suspicious Activity Report (SAR) obligations.
Having clear audit trails in place can help demonstrate the business has a consistent, risk-based approach that is able to support compliance reviews and regulatory enquiries.
Understanding the three stages of money laundering (placement, layering and integration) will be helpful for businesses to recognise how criminal proceeds may enter the financial system, move through complex transactions and reappear as seemingly legitimate funds. However, criminal methods won’t always follow a strict pattern and will adapt for every situation, for example proceeds already within a digital system.
This means a comprehensive approach is needed by businesses that can bring together the following for a more cohesive process:
SmartSearch can help regulated businesses strengthen their existing AML processes via KYC and KYB verification checks, screening against sanctions and PEP databases, enhanced due diligence, ongoing monitoring, and quality, audit-ready reporting.
Having all of these capabilities within a connected compliance workflow gives organisations the ability to identify potential risks earlier, have greater visibility of customer journeys, and reduce any existing manual administration.
Explore SmartSearch's anti-money laundering solutions and find out how your business can streamline existing compliance processes and strengthen financial crime prevention.