To conceal funds obtained via illicit means, criminals launder or ‘wash’ money through the financial system to disguise its origin. This is known as money laundering.
International and local anti-money laundering regulations require businesses to take necessary steps to prevent the illegal use and laundering of funds.
To help combat money laundering, businesses need to understand the different stages. There are three stages of money laundering – keep reading to learn what they are and how AML processes can help stop them.
Understanding anti-money laundering stages
Anti-money laundering (AML) is a collection of laws, regulations and processes that aim to prevent criminals from laundering money and disguising the origin of illegal funds. According to the UN, criminals launder the equivalent of between 2% and 5% of global GDP — which is around $2 trillion — every year.
Businesses have a legal responsibility to assess money laundering risks and report any suspicious transactions to authorities. If businesses fail to do this they can face large AML fines, penalties or even jail time.
Three stages of money laundering
Broadly speaking, money laundering involves three steps:
- Placement (depositing): Getting illegal funds into the legitimate financial system;
- Layering: Using transactions to conceal the illicit origin of funds;
- Integrating: Making laundered funds available for spending by reinvesting them.
The first step of money laundering involves criminals moving illegal funds to disguise them as a legitimate source of income. Some tactics that criminals use during this stage include:
- False invoices: Criminals create fake invoices to match cash amounts, to make it look like the cash was used to settle a transaction.
- Foreign bank accounts: Criminals take small amounts of cash abroad and deposit it in a foreign bank before sending it back to the country of origin.
- Offshore companies: Businesses registered or established outside the country of origin provide another way for criminals to hide illicit funds.
- Cash-based businesses: Criminals add cash to legitimate businesses. Such cash-based businesses include car parks, casinos, car washes and launderettes.
- Micro-laundering: Individuals or groups of people deposit small amounts of illegal funds – that fall below AML reporting thresholds – into bank accounts.
At this stage, anti-money laundering procedures should focus on trying to identify the illegal source of the funds.
Once the funds have been placed into the financial system, layering (or as it’s sometimes known, structuring) hides the illicit origin. Often criminals will divide large bulks of funds into smaller transactions to fall under the threshold of AML regulations. The aim is to obscure the audit trail, so it becomes virtually impossible to identify the original source of the funds.
Layering often takes place across different geographies to make it harder to detect. Tactics include: trading in international markets, trading in foreign countries, and purchasing and selling luxury goods.
This is the final stage of money laundering. Criminals integrate the funds back into their legitimate accounts, so they can use them without attracting the attention of authorities. They will typically do this through a series of smaller transactions.
They might integrate the funds by purchasing a luxury asset or property, creating fake employees and adding them to company payrolls, paying out loans to directors of a shell company, or paying dividends to shareholders of criminally-controlled companies.
Anti-money laundering process
Businesses have a responsibility to conduct AML processes and comply with AML regulations. The inter-governmental Financial Action Task Force (FATF) sets out international standards which has a global impact. Every major financial institution must comply with FATF regulations and follow its guidance on AML measures, as well as AML requirements in local jurisdictions.
Learn more specifically about geo-specific regulations in our blog anti-money laundering regulations.
Know your customer (KYC) is also an important part of the AML process, aiming to stop money laundering in its early stage. KYC regulations require a business to identify their customers and assess their risk profile during the account creation process.
Anti-money laundering policies and procedures
AML policies and procedures require financial institutions to monitor customer transactions and deposits, and to flag any suspicious activities. Undertaking the following steps will help businesses to remain compliant with AML regulations.
- Implement know your customer (KYC) measures. KYC regulations require financial institutions to verify the identities of customers as part of the AML process.
- Conduct customer due diligence (CDD) in line with FATF recommendations. Find out more about conducting customer due diligence in our blog CDD versus EDD.
- Keep up-to-date records of any high-risk clients.
- Conduct ongoing transaction monitoring and flag any suspicious activity to local authorities.
Onfido helps over 900 businesses globally meet their KYC and AML compliance and regulatory requirements with a comprehensive library of award-winning document and biometric verifications, trusted data sources, and passive fraud detection signals.
We help hundreds of global businesses meet a diverse regulatory landscape with our Real Identity Platform. It features award-winning document and biometric verification, trusted data sources, fraud detection signals, and can be orchestrated in Onfido Studio — no-code required.