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The Three Stages of Money Laundering

Author: Niall Hearty  12 October 2023
5 min read

What is Money Laundering?

Money laundering is how the proceeds of crime are disguised so that they cannot be recognised as having been obtained through criminal activity. This “cleaning’’ - or laundering - of the money can be done by someone with their own proceeds of crime or by someone doing it with somebody else’s criminal proceeds.

There are many money laundering schemes. Such schemes can involve differing numbers of individuals, companies or countries and can vary in their complexity. They may involve laundering money from a range of criminal activities, such as drug trafficking, bribery or fraud. But they are all intended to make it difficult to prove that the wealth that is being laundered was obtained through crime.

In the UK, money laundering allegations that relate to after 24 February 2003 are covered by the Proceeds of Crime Act 2002 (POCA);  sections 327-329.

 

The Three Main Offences Created by the Proceeds of Crime Act

There are three main offences created by POCA, which carry penalties of up to 14 years imprisonment. These are:

Section 327

Concealing, disguising, converting or transferring criminal property or removing it from the jurisdiction. This is the section that prosecutors favour when they are seeking a conviction of an individual for laundering their own proceeds of crime.

Section 328

Entering into, or becoming concerned in, an arrangement to facilitate the acquisition, retention, use or control by or on behalf of another person of criminal property knowing or suspecting that the property is criminal property. This is likely to be used where the alleged money launderer is laundering somebody else’s proceeds of crime.

Section 329

Acquiring, using or having possession of criminal property. This will often be used to prosecute the person who buys a major item, such as a car or house, from someone who had bought it using the proceeds of crime.

Other countries have their own money laundering legislation and the penalties for committing it can be severe.

 

The Three Stages Involved in Money Laundering

There are three recognised stages of the money laundering process:

  1. Stage 1 - Placement.
  2. Stage 2 - Layering.
  3. Stage 3 - Integration or Extraction.

three stages of money laundering



Stage 1 - Placement

Placement is the way that the funds that have been gained from criminal activity are placed into the legitimate financial system.

This can often involve dividing a large amount of money into smaller amounts, which can then be placed in one or more bank accounts. This is done because depositing one large amount of money into an account could lead to the bank having to alert the authorities, as many countries place obligations on banks to report cash deposits above a certain size if they have any suspicions about them.

Breaking up the money into smaller amounts means that the banks do not have to report what is being paid into an account as it may not trigger their reporting threshold. This is a technique known as smurfing.

Other methods of placement include:

  • False invoicing - where fake invoices are created for non-existent goods or services or a genuine invoice is made much bigger than it should be to ensure that money is sent to someone without arousing suspicion.
  • Blending illegal money with legitimate money, such as placing it into a legitimate business to try to make it appear to have a legitimate source.
  • Buying foreign currency, sometimes using foreign bank accounts.
  • Buying securities or insurance with cash.
  • Gambling and betting on sports events.
  • Hiding the beneficial owner of a business through trusts and offshore companies, sometimes referred to as shell companies.

The placement techniques may vary, but they are all used to move the “dirty’’ criminal money into financial activities so it can appear “clean’’.

Stage 2 - Layering

After placement has put the proceeds of crime into the financial system (financial crime), layering is the technique used to hide the source of these funds by moving the money through various financial transactions.

This can involve using the money in the purchase and sale of investments or transferring it through a number of bank accounts in different countries, often disguised as loans or payments for goods and services. It will often be the case that such money will be moved to countries that have few or no anti-money laundering (AML) regulations and/or will not cooperate with AML investigations carried out by another country.

Some of the most common examples of layering are:

  • Investing in real estate.
  • Reselling high-value goods.
  • Transferring funds between countries.

There is also a range of layering techniques involving cryptocurrencies. These are:

  • Chain hopping - converting one cryptocurrency to another and moving cryptocurrency from one blockchain to another.
  • Mixing or tumbling – the blending of transactions across a number of crypto exchanges to make the transactions hard to trace to any one exchange, account or owner.
  • Cycling – making deposits of standard currency (such as the US dollar or UK pound) into one bank, buying and selling cryptocurrency and then putting the proceeds into a different bank account.

Stage 3 - Integration or Extraction

After the first two stages have been completed, the final stage of money laundering begins. Those who are controlling the criminal proceeds will be looking to return that money to themselves in a way that does not arouse suspicion. This stage is known as integration or extraction.

If this is completed successfully, the money will now be part of the legitimate financial system and can be used without attracting any attention from the financial sector or law enforcement agencies.

Integration can involve, for example, the purchasing of high-value items, such as property or art, or investment in business ventures. Business tactics such as the paying of non-existent employees, so-called loans to directors or shareholders (that will never be repaid) and dividends paid to shareholders of companies controlled by those involved in crime are all common in integration.

Integration can make it extremely difficult to identify both the criminal and their proceeds of crime; especially if there is no documentary evidence from the previous two stages that the authorities can use.

The Scale of Money Laundering

Money laundering can pose a threat to a country’s prosperity and undermine its financial system, especially when it is being done on a large scale. It also poses major security dangers when it is used by those involved in financing terrorism and proliferation financing, which is the providing of funds for the acquisition and supply of weapons.

The United Nations Office on Drugs and Crime states that the estimated amount of money laundered globally in one year is between 2 and 5% of global gross domestic product (GDP).[1] That amounts to between 800 billion and 2 trillion US dollars. Although the secretive nature of money laundering makes it hard to put a precise figure on how much is laundered each year.

The scale of money laundering was shown in the case involving Danske Bank’s branch in Estonia. This scandal arose in 2017-2018, when it became known that around €200 billion of suspicious transactions had passed through the branch between 2007 and 2015. It has been called Europe’s biggest money laundering scandal.

After the money laundering was discovered, ten of the branch’s former employees were arrested, Danske Bank was told by the Estonian government to close the branch and Danske Banke’s CEO Thomas Borgen resigned. Danish authorities later charged him with neglecting his responsibilities and the bank’s former finance director Henrik Ramlau-Hansen with failing to prevent the suspicious transactions. These charges, however, were dropped in 2021 and Borgen was also acquitted in a civil lawsuit relating to the scandal.

In December 2022, Danske Bank pleaded guilty and agreed to a $2 billion fine in a case brought by the United States Department of Justice regarding the Estonian money laundering.[2] Hours later, the bank was also fined €470 million by the Danish financial watchdog. In April 2023, Estonian authorities charged six former Danske Bank officials over their alleged role in the scandal.

Sources:

  1. https://www.unodc.org/unodc/en/money-laundering/overview.html
  2. https://www.reuters.com/legal/danske-bank-pleads-guilty-resolve-long-running-estonia-money-laundering-probe-2022-12-13/

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Niall has a wealth of corporate crime expertise and an ability to coordinate global bribery and corruption cases. His achievements in such investigations have made him a logical choice for corporate clients.

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