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Stages of Money Laundering: A Vulnerability in the Financial Sector
The Financial Action Task Force (FATF) has identified three stages in the money laundering process, which can be vulnerable to detection by financial institutions.
Placement: Disposal of Illegal Proceeds
The first stage, placement, involves the physical disposal of illegal proceeds into the financial system. This can be done through cash deposits or other means.
Layering: Complex Financial Transactions
In the second stage, layering, criminals create complex layers of financial transactions to disguise the audit trail and provide anonymity. This can include using shell companies, nominee accounts, and wire transfers.
Integration: Legitimizing Criminally Derived Wealth
The final stage, integration, involves providing apparent legitimacy to criminally derived wealth by placing it back into the economy in a way that makes it appear as normal business funds.
Vulnerabilities in the Financial Sector
Financial institutions are vulnerable to money laundering at several points, including:
- Entry of cash into the financial system
- Transfers within and from the financial system
Criminals have developed methods to evade detection, such as using “smart” cards and wire transfers. Financial institutions must consider the risks posed by their products and services, particularly where there is no face-to-face contact with customers.
FATF Recommendations
The FATF has issued 40 recommendations for combating money laundering, which have been revised several times to address changes in money laundering methods and trends.
Terrorist Financing
Terrorist financing is a serious threat to global security. Terrorists require financial support to achieve their goals, and financial institutions may unwittingly provide services that facilitate terrorist activities.
Enhancing Due Diligence Requirements
Financial institutions must enhance their existing due diligence requirements to detect transactions involving terrorist funds. This includes reviewing practices and procedures on money laundering and considering 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:
- States or organisations with large infrastructures
- Individuals with sufficient financial means
Financial institutions must be aware of these sources and take steps to prevent their funds from being used for terrorist activities.
The FATF has identified several emerging risks in terrorist financing, including the use of virtual currencies and e-commerce platforms. Financial institutions must consider these risks when reviewing their policies and procedures on money laundering and due diligence requirements.
Conclusion
Money laundering and terrorist financing are serious threats to global financial stability. Financial institutions must be aware of the vulnerabilities in the financial sector and take steps to prevent their services from being used for illegal activities.