3 Stages of Money Laundering and 5 Ways to Combat It

August 2020
Money laundering is a term used to describe the process of taking funds generated from illegal activities and making legitimate and clean. In this article, we are going to explore three general stages of money laundering and ways to combat money laundering crimes.

Money laundering typically includes three stages: placement, layering and integration stage.

Placement Stage

Placement is the first step of money laundering which is the process of moving the money into the legitimate source via financial institutions, casinos, financial instruments etc. and at the same time, hiding its source. There are many ways of money laundering which are explained in the articles linked at the end of this post. This is the most vulnerable stage of money laundering as criminals are holding on to a bulk of funds and placing it into the financial system, which may attract the attention of law enforcement agencies. 

Layering Stage

The second stage is “layering”, sometimes it’s also referred to as “structuring stage”. It breaks the funds into small transactions and makes it difficult to detect and find out about the laundering activity. It usually entails international money movement, so the law enforcement agencies won’t be able to track the financial gains from illegal proceedings so easily.

In this stage, money will be moving around the globe electronically, trading in overseas markets. Criminals usually convert the cash into monetary instruments once the funds are placed in the financial system without detection. The proceeds can either be banker’s drafts or money orders. In the modern world, the funds can also be used for trading in different stocks or currencies across different markets. 

Another common way that criminals use to cover the trail is buying assets with the cash and selling them. Assets can be re-sold locally or abroad and hence makes it harder to trace and thus seize. 

Integration Stage

Integration stage is the final stage of money laundering, in which the money is now returned to the criminals legitimately after it has been placed in the financial system, often breaking it into different multiple smaller financial transactions. Criminals can now retrieve their illicit funds in a legal way after fully integrating them into a legitimate source, and are able to use them for any purpose. Most of the redemptions are usually through buying luxurious assets like properties, jewellery etc. - items that require a large amount of money and will not draw as much attention.

How to combat money laundering?

According to an article published in Thomson Reuters, five ways are suggested to combat money laundering activities. They are: 

  1. Improve searches with technology
    With the advancement of technology, such as Artificial Intelligence (AI), detect false positives and conduct searches 24/7 to lessen the burden of the anti-money laundering (AML) regulators to weed out false positives and expand searches.

  2. Regular-cross communication
    Constant communication among different parties, including law enforcement agencies, governments and regulators etc. Communication can keep all parties  up-to-date, verify any suspicions, identify possible networks, and enhance the public-private partnership, ultimately creating a united front against money launderers.

  3. Leverage data analytics to detect patterns
    As there is more data available nowadays, regulators can identify and detect patterns  through past data information and develop a client model to trace any suspicions.

  4. System standardization
    With the different anti-fraud measures in different regulatory institutions, some issues may arise from different jurisdictions using a network of legacy computer systems. Without standardization, it makes it harder to communicate and process data in a collective way with other parties and hence can hinder fraud detection.

  5. Training
    Having the right personnel is very important when it comes to detecting fraud. Training is essential and companies may consider people to train employees, make stakeholders aware of any suspicious activity and take relevant action when there is any hint of fraud. It’s also important to have someone in charge to stay on top of news and technological developments, and to oversee the fraud detection process. 

Money laundering is getting harder to detect and trace due to the changing technology and integration of economies among markets. It is important for us to understand the origin of the source of funds by having a swift, reliable identification verification system to stop offenders in the beginning stages of money laundering. With a reliable digital ID system, it is easier to track bad actors who are trying to conduct illegal money laundering activities.

Blockpass provides a solution which is ideal for customer due diligence. With fast and secure KYC and AML compliance, and the ability to flexibly, quickly and easily manage identities, it ensures regulatory compliance without the hassle traditionally associated with KYC. The Blockpass model would also be ideal for a number of industries, including online businesses, financial institutions and the cryptocurrency industry, which can all see a large number of users who need identity. Aiming for the highest standards in regulatory compliance, Blockpass' reusable KYC solution can help combat money laundering without causing a lot of financial burdens to companies.