Approximately 1% of the European Union’s annual GDP has been detected as being involved in suspect financial activity. United Nations Office on Drugs and Crime estimates indicate that between 2% and 5% of global GDP is laundered each year.
Faced with so vast a problem, it is no wonder the European Commission says the fight against money laundering is vital for financial stability and security – a fight that starts with understanding the three stages of money laundering, and implementing measures to stop them.
Money laundering’s 3 stages
Washing the proceeds of crime through the financial system is a three-stage process, each of which can occur simultaneously, separately or overlap.
Placement is where ‘dirty’ money from criminal activity enters the financial system. The most common methods are:
- Blending of funds – Illegal funds are blended with legitimate takings, typically of cash businesses such as car parks, car washes, casinos, tanning studios and strip clubs.
- False invoicing – Dummy invoices are raised to match the cash lodged, to make it look like a true payment has been made.
- ‘Smurfing’ – Small amounts of money below the anti-money laundering (AML) reporting threshold are deposited into bank accounts.
- Offshore accounts – Laundered money is hidden in offshore accounts to conceal the identity of the real beneficial owners and evade paying tax.
- Foreign bank accounts – Small sums of cash below the customs declaration threshold are carried abroad, paid into foreign bank accounts, then sent back home.
- Aborted transactions – Funds are transferred to a lawyer or accountant to hold until a proposed transaction is completed. The transaction is subsequently aborted, with the funds that are repaid to the client seeming to come from an unimpeachable source.
Layering aims to distance the illicit money from its source by adding layers of financial transactions, often involving international movements of the funds, to obscure the audit trail and make tracing the source and ownership of the funds as hard as possible. Layering transaction techniques include converting cash into travellers’ checks, money orders, wire transfers, letters of credit, stocks or bonds, or purchasing assets such as art and jewellery.
The now-laundered and apparently legitimate money is reintroduced into the economy as ‘legal’ tender and reunited with the criminal during the integration stage. Techniques include investing in luxury items such as art, jewellery or expensive cars, and buying businesses or real estate.
AML best practices
Each of the three money laundering stages can be extremely complex, posing huge challenges for financial institutions as they work to spot and stop incidents.
Training is one crucial component in firms’ anti-money laundering defences – ensuring staff know what red flags to watch for, and that they follow sensible, robust processes.
Another is a sophisticated, multi-jurisdictional AML infrastructure that delivers automated, real-time visibility and control at every stage of the customer lifecycle.
Effective AML programmes start with client onboarding. Using automated risk profiling helps firms build up a risk-based picture of prospective clients. Advanced beneficial owner screening that can handle complex, multi-level ownership structures is essential to determine and verify customer and beneficial ownership identities. Source of funds/wealth checks add another layer of screening protection.
But AML doesn’t stop with onboarding; ongoing client due diligence is just as important. Periodic checks of client profiles and documentation, along with continued screening and risk profiling are vital. Real-time suspicious activity monitoring can help spot AML risks, create automated alerts of suspicious activity/behaviours, and block accounts or transactions when suspicious events occur.
Money laundering is a growing, multinational blight, one that employs increasingly sophisticated tactics to achieve its goals. Financial institutions need matching preventative capabilities if they are to fulfil their responsibilities as front-line guardians of the international financial system. That requires AML systems and processes that are truly up to the job.
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