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Money laundering refers to the illegal process of making large amounts of money generated through criminal activity like drug trafficking or financing terrorism, which appears to have come from a lawful source. The money derived from these criminal activities is deemed “dirty,” and the laundering process is employed to render them seemingly legitimate and clean. Placement, layering, and integration are the 3 stages of money laundering. This article will explore the 3 stages of money laundering process and ways to combat money laundering criminals.
It is one of the 3 stages of money laundering, which involves transferring funds to a legitimate source through financial institutions, casinos, financial instruments, etc. while hiding its head. There are several ways of money laundering explained in the related articles at the end of this article. This is the most vulnerable stage of money laundering, as criminals hold large sums of money and inject it into the financial system, which can attract the attention of law enforcement.
The second stage in money laundering is layering, which is sometimes called the “structuring phase.” It divides the money into small transactions and makes it difficult to detect and learn about money laundering. This often involves the international movement of money, so that law enforcement is unable to easily track financial returns from illegal procedures.
At this point, the currency circulates the world, being exchanged in foreign markets. Criminals often convert currency into monetary instruments when it enters the financial system undetected. The product can be a bank draft or money order. In the modern world, funds can also trade different stocks or currencies in different markets.
Another popular way for criminals to track is to buy properties for cash and sell them. Assets can be sold domestically or abroad, which further complicates their traceability and thus their seizure.
The extraction phase is the final stage of money laundering. Money is now legally returned to criminals after being introduced into the financial system, often broken down into multiple smaller financial transactions. Criminals can now legally recover their illicit funds after fully integrating them into a legitimate source and can use them for any purposes. Most acquisitions are usually made through the purchase of luxury assets like property, jewelry, etc.
Anti-money laundering (AML) is the financial function of organizations dealing with public money, which encompasses laws, regulations, and procedures designed to prevent criminals from exchanging money obtained through illegal activities. Read more about anti-money laundering in this article. According to an article published in Thomson Reuters, five methods are recommended to fight against the 3 stages of money laundering. They are:
With the advancement of technology, such as artificial intelligence (AI), detecting false positives and conducting research 24/7 to lighten the burden of anti-money laundering regulators (AMLs) eliminates active wrongdoing and expands research.
Regular communication between different parties, including law enforcement, government, and regulatory bodies, etc. is extremely important. Communication can keep all parties informed, verify suspicions, identify possible networks, and strengthen public-private partnerships, ultimately creating a united front against money launderers.
As more data becomes available today, regulators can identify and detect patterns through past data information and pattern development.
With different anti-fraud measures in different regulatory bodies, some problems may arise from different jurisdictions using a network of old computer systems. Without standardization, it would be difficult to communicate and process data collected with other parties, thereby hindering fraud detection.
Having the right staff is essential to detect fraud. Training is needed, and companies can consider training employees, educating stakeholders about any suspicious activities, and taking appropriate action if there is a sign of fraud. It is also essential to have someone in charge of monitoring news and technology developments and overseeing fraud detection.
Several national and international laws define the scope of money laundering offenses within the legal framework. For instance, the Proceeds of Crime Act of 2002 in the U.K. identifies three distinct categories of money laundering offenses:
Engaging in any of these activities, whether the person is aware or simply suspects that the funds or property are derived from criminal activities, can lead to charges of committing a money laundering offense. To gain a deeper understanding of the laws applicable in your country and industry, seeking guidance from specialized legal counsel is advisable.
Money laundering is increasingly challenging to detect and track due to the development of technology and the integration of the economy between markets. We must understand the source of the money by having a fast and reliable identity verification system in place to stop criminals from laundering money. It becomes easier to track down criminals trying to carry out illegal money laundering activities with a reliable digital ID system.
Learn more – AML compliance checklist