Money laundering is the process in which illegitimate money is pretended to be legitimate. Criminals use various methods to make the money look clean so that they can use it in the economy. The money often comes from corruption, tax evasion, drug trafficking, and fraud. It is a global issue that needs to be addressed promptly.
Besides, money laundering is important for protecting financial businesses, preventing crimes, safeguarding the economy, and fulfilling legal requirements. The companies caught laundering money have to face heavy sanctions and might lose their operating license. Thus, it will result in the bad reputation of the company.
What Are the Three Stages of Money Laundering
Three money laundering stages involve placement, layering, and integration. The main purpose behind these is to conceal the criminal identity of laundered money. The whole process is broken down into these three stages:
Placement
It is one of the stages of money laundering in which the launderer tries to hide the criminal background of the money. By doing this, the money can be brought into the legal financial system to be used in the economy. It is usually done by depositing a large amount into the banks, buying some assets to hide money, or using shell companies as the assets. All these actions help to make the money look authentic by merging it with the legal sources. However, this stage can raise suspicion because of the large amount of money entering into the financial system. This can be a red flag and the further activities of such individuals will be monitored regularly.
Layering
It is the second stage of money laundering which involves the layering of the laundered money. The criminal tries to hide the origin of money by shuffling the money from different accounts, and countries and by making several transactions. The complication is created to hide the word ‘criminal’ with the money. In this way, it becomes difficult to track money. The process often involves complex transactions by shifting the money to several accounts using other sources like loans and securities to show more involvement. The money is also transferred internationally using offshore accounts to divert the authorities.
Integration
The third stage of money laundering is integration. It is the process in which the laundered money is completely blended into the economy and appears to be coming from a legal source. It can be freely used in the economy without any suspicion. After passing the money from placement and layering, it is then successfully integrated into the legal financial systems without any criminal origin. It involves buying companies, and high-value assets that can make money hide its criminal origin or suspicion.
Common Red Flags Across All Stages
Money laundering involves several methods but some common red flags can indicate suspicious activity. The first red flag is the large cash deposits which can raise suspicion about the owner. It also includes frequent, small transactions to avoid reporting requirements such as the breakdown of large amounts into smaller ones. Also, the process involves making transactions from or to high-risk countries that are known to be involved in money laundering cases or are suspicious. It often involves unclear and complex transactions such as shuffling money from different accounts and through different countries to make the criminal activity be tracked.
Role of Financial Institutions in Detection and Legal Frameworks
Financial institutions like banks play a crucial role in preventing money laundering and other financial thefts. They have regulatory measures to keep a check on their customer’s activities at regular intervals. Financial institutions must implement KYC processes in the companies to make the new onboardings safe. The companies should timely report the fraud to the authorities through Suspicious Activity Reports (SARs). The government has introduced several organizations like Financial Action Task Force (FATF), and Bank Secrecy Act (BSA) to combat money laundering and thefts. These aim to prevent the criminals from hiding the illegitimate money in the financial systems.
Conclusion
As the technology evolves, the money launderers will find new ways to commit fraud. In this regard, financial systems must look into other ways of combating thefts like money laundering. Strong and strict regulations by the government will be helpful to detect suspicious patterns of crimes like money laundering.
