Money laundering typically unfolds in three distinct stages: placement, layering, and integration. Each phase represents a critical step used by criminals to mask the origins of illicit funds, transforming them into seemingly legitimate assets. In this article, we will provide an overview of each stage,  and outline real-world examples of the types of businesses most susceptible to exploitation at every phase.

Placement

Placement is the first stage in the money laundering process. It involves introducing illegal proceeds into the financial system. Criminals face the highest risk of detection during this phase, as placing large sums of cash directly into a bank account can raise suspicions. To mitigate this risk, launderers employ various methods to deposit their funds without attracting attention. These methods include:

• Smurfing: Breaking down large amounts of money into smaller, less suspicious amounts that are then deposited into one or multiple bank accounts.
• Cash-Intensive Businesses: Using businesses that typically handle a high volume of cash (e.g., laundromats, car washes) to commingle illicit funds with legitimate earnings.
• Currency Exchanges: Exchanging the money for other currencies or financial instruments to obscure its origin.
• Gambling: Using casinos to place bets with illicit funds and then cashing out with "clean" money.
• Purchasing of Valuable Items: Buying high-value items like art, jewellery, or cars with cash, which can later be sold.

The most vulnerable businesses in this stage are:

• Financial Institutions: Especially smaller banks and credit unions or those in jurisdictions with weaker anti-money laundering (AML) regulations.
• Cash Businesses: Restaurants, retail stores, and other businesses that handle significant cash transactions daily.
• Bullion and Precious Metal Dealers: In the placement stage, the bullion industry becomes particularly vulnerable when illicit funds are used to purchase bullion with cash, leveraging the industry's high-value transactions to seamlessly introduce illegal proceeds into the system and buy an asset that relatively holds and even appreciates in value. 
• Currency Exchange Services & Remitters: Businesses that exchange currency can be used to mix illicit funds with legitimate transactions.

Layering

Once the money is in the financial system, the layering stage commences. This phase is all about creating confusion and severing the link between the money and its criminal origin. The goal here is to make tracing the funds as difficult as possible for authorities. Techniques used in this stage include:

• Complex Financial Transactions: Moving money through a series of bank transfers, wire transfers, and transactions across different accounts and countries.
• Shell Companies: Utilising businesses that exist only on paper to disguise ownership and financial activities.
• Offshore Accounts: Depositing funds in foreign banks or tax havens where banking secrecy laws protect account holder identities.
• Intercompany Loans: Creating fictitious loans between companies (often shell companies) to move money without actual service delivery or product movement.
• Trade-Based Money Laundering: Over or under-invoicing on trade transactions to move money across borders.

Layering involves a sophisticated understanding of financial systems and requires the launderer to stay ahead of regulatory and law enforcement agencies.

The most vulnerable businesses in this stage are:

• International Trade Businesses: Companies involved in import/export can be exploited for trade-based laundering.
• Financial Services: Investment firms and companies offering financial products may be used for complex layering schemes.
• Legal and Accounting Firms: Professionals may be unwittingly or wittingly drawn into schemes that create complex legal structures or financial transactions.

Integration

The final stage, integration, is where the laundered money is reintroduced into the economy as legitimate funds. At this point, the money has been sufficiently distanced from its original source, making it difficult to trace back to any illegal activity. Common methods of integration include:

• Property Investment: Purchasing real estate with laundered money. Once sold, the money from the transaction is considered clean.
• Business Investments: Investing in legitimate businesses and using them to commingle dirty money with clean revenues.
• Loans and Mortgages: Taking out loans against property bought with laundered money or repaying loans with illicit funds, thereby legitimising the wealth.
• Luxury Assets: Buying luxury cars, yachts, or high-end art, which can later be sold or used as collateral for loans.

By the integration stage, it's often extremely challenging for authorities to distinguish between legal and laundered assets, making the process of money laundering complete.

The most vulnerable businesses in this stage are:

• Real Estate: The sector is particularly susceptible due to the high-value transactions and potential for price manipulation.
• High-End Retailers: Sellers of luxury goods, art dealers, and antique shops can be used to purchase valuable items that retain value and can be resold.
• Bullion and Precious Metal Dealers: During the integration stage, the bullion industry and precious metal dealers are susceptible as it allows launderers to reinvest the proceeds from sold bullion into the economy, masking them as legitimate earnings from seemingly lawful transactions.

Understanding the stages of money laundering is crucial in the fight against this illicit activity. This knowledge will help you during the risk assessment process, enabling you to identify the most vulnerable aspects of your business to money laundering. Recognising these vulnerabilities is the first step in addressing them by establishing adequate procedures and controls within your AML/CTF Program. 

If you require assistance with your ML/TF Risk Assessment, your AML/CTF Program or need help with an independent review of your AML/CTF procedures, please book a free consultation with one of our advisers. This opportunity provides you with expert guidance tailored to ensure your business is protected against the risks of money laundering and terrorist financing, reinforcing the integrity and compliance of your operations.