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The Ins And Outs Of Money Laundering: A Comprehensive Guide To The Stages Involved

Money launderers cheat the system using three stages to turn their illegal money into legal investments. They buy properties in markets where the laws are more relaxed and use this opportunity to clean up their cash. In doing so, they can avoid suspicion and make it look like their money is coming from a legitimate source.

This article will explore money laundering, its three money laundering stages, and how artificial intelligence can help prevent it. 

What is Money Laundering? 

Money laundering is making money from illegal activities look like it came from a legal or legitimate source. Drug trafficking, terrorist funding, and arms sales are common sources of money laundering.

Money laundering is a serious financial crime committed by white-collar and street-level criminals. The process of money laundering typically consists of three money laundering stages: placement, layering, and integration.

In the first stage, ‘dirty’ money is placed or introduced into the legitimate financial system. In the second stage, the money is layered or moved around through a series of transactions to distance it from the source. The money is integrated or transferred into legitimate assets or accounts in the third and final stage.

Money Laundering Stages

Money laundering includes complex bank transfers and transactions, making it a big challenge for government officials to track the origins of illegal income. 

Using various steps and multi-layered strategies, both small and large groups of terrorists utilize their illicit funds. They do not face any detection from law enforcement agencies. Then, they perform various unlawful acts/terrorist attacks.

They use 3 key money laundering stages, which criminals use to transform their illegal money into legal form. The three money laundering stages are as below:

  1. Placement Stage. 
  2. Layering Stage. 
  3. Integration Stage. 

1. Placement Stage 

Placement is the first stage, where illegal money is placed into the legal, financial system. It is a very vulnerable stage because, in this stage, money launderers inject large amounts of money into the financial system. This activity might be detected by law enforcement. 

Criminals perform multiple transactions in different Banks on the same day, less than the verge amount of $10,000. Due to this, the bank and law enforcement cannot detect their illicit activities. The deposited amount is transferred to a third party to protect a security firm or safekeeping.

2. Layering 

The second stage is “Layering,” where the funds are hidden from entering the complex bank transfers or around them in a series of financial transactions. The most common of the different techniques of conversion is subject to electronic transfer between various jurisdictions and through offshore accounts.  

Layering is also called the structuring stage, where the money gets divided into smaller transactions, making it difficult to detect and know about money being legalized. It also involves international activities of money, which prevent it from being detected. 

International activity circulates the currency and changes it in foreign markets. It converts the currency into a bank draft or a money order. In modern times, they use funds to trade stocks and currencies. They also buy property and assets to make their traceability complicated. 

3. Integration 

The last and third stage of money laundering is integration, where the authorities cannot ascertain the money. After being presented into the financial system and divided into multiple small financial transactions, criminals now lawfully receive money. 

Now criminals can legally obtain their illicit funds and use them for any purpose after they have become fully incorporated as their legitimate source. Method of integration includes investment in luxury assets such as real estate properties, expensive gifts, false import/export invoices, etc.

How to Prevent Money Laundering? 

Anti Money Laundering (AML) solutions can help financial organizations catch and prevent suspicious money laundering. It includes filtering, predictive analysis, and machine learning capabilities. 

Customer Due Diligence (CDD) is used to help and manage KYC and AML compliance. It is primarily used mainly in places where money laundering is conducted. Before pledging money, individuals must ensure that they are not engaged in illegal activities.

This process can also be considered KYC (Know Your Customer). An additional investigation known as Extended Due Diligence (EDD) can be carried out in countries with a high risk of money laundering. EDD commonly checks the source of funds and inspects whether the funding is clear. If the funding is clear, customers can proceed and spend their funds.

Conclusion 

In recent years, many money laundering cases have come to light. Therefore, financial institutions have adopted Anti-Money Laundering (AML) policies to detect and prevent it. Technology is supporting institutions to detect these activities. 

Various artificial intelligence platforms provide KYC, high accuracy of OCR (Optical Character Recognition), and face recognition support. Its face recognition system secures the third rank in the world for its accuracy. If you are an institution looking to ensure AML compliance, these platforms can give you the best services. 

FAQs 

At which of the three stages is money laundering easiest to detect?

It is easy to detect money launderers during the placement stage. Injecting large amounts of funds into the financial system lifts the doubts of officials. 

What are the main types of money laundering?

Smurfing, Money muling, Bulk Cash smuggling, Blending funds, Trade-based money laundering, etc., are the main types of money laundering. 

What is meant by AML?

The activity of monitoring and reporting suspicious actions in the financial system is known as anti-money laundering (AML).

Who manages the issue of money laundering in India?

Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), and Insurance Regulatory and Development Authority of India (IRDAI) are specialized regulators who deal with issues relating to money laundering across India.