Stages of Money Laundering Exposed
Money laundering is a criminal activity linked to organized crime and terrorism. It’s a process designed to disguise the origin of illegal funds, typically involving three stages: placement, layering, and integration.
Placement
The first stage, placement, involves the physical disposal of initial proceeds derived from illegal activities. This can include:
- Cash deposits into bank accounts or other financial institutions
Layering
The second stage, layering, involves separating illicit proceeds from their source by creating complex layers of financial transactions designed to disguise the audit trail and provide anonymity.
Integration
The final stage, integration, is where the laundered proceeds are placed back into the economy in a way that makes them appear as legitimate business funds. This can include:
- Investments
- Real estate purchases
- Other financial activities
Experts warn that money laundering schemes can be sophisticated and may involve multiple transactions, making it difficult to detect. They also highlight vulnerabilities in the financial system, including cash deposits and electronic transfers, which can be exploited by criminals.
Vulnerability of Financial Sector Businesses
Historically, efforts to combat money laundering have focused on deposit-taking procedures of financial sector businesses. However, criminals have adapted by using alternative methods, such as:
- “Smart” cards
- Wire transfers
Financial institutions are warned that they may be vulnerable to being used in the layering and integration stages of money laundering, particularly when offering products and services with no face-to-face contact with customers.
FATF Standards
The Financial Action Task Force (FATF) is an international standard-setter for anti-money laundering efforts. The FATF has issued 40 recommendations aimed at strengthening global safeguards and protecting the integrity of the financial system.
Terrorist Financing
Terrorist financing is another major concern, as it requires financial support to carry out attacks. Experts warn that terrorist groups must develop:
- Sources of funding
- Means of laundering those funds
- Ways to ensure funds can be used to obtain material and logistical items needed for their activities
Financial institutions are advised to enhance their existing due diligence requirements to detect transactions that may involve terrorist funds. They should also review their practices regularly and consider the risks identified by the FATF in its Report “Emerging Terrorist Financing Risks”.
Sources of Terrorist Funds
Terrorist financing can be derived from two primary sources:
- Financial support provided by states or organizations with large enough infrastructures to collect funds
- Individuals with sufficient financial means
Other sources may include criminal activities, such as:
- Drug trafficking
- Extortion
As the global fight against money laundering and terrorist financing continues, experts warn that vigilance is key to preventing these illegal activities from spreading.