What is Layering in Money Laundering? Layering is the second phase of money laundering. It is when criminals carry out a series of actions to move unjustly earned funds through numerous transactions to complicate the source of the funds. They may transfer money between accounts or banks, transfer it between jurisdictions, or change the form of the money. Layering affects the rapid processing of wires.
The investigators continue to trace through lengthy trails of transactions and various owners in order to identify the source of funds. Financial institutions are fundamental to it. Since they monitor for unusual behaviour, file reports, and often work across jurisdictions. Strict rules, effective audits, and international data exchange can all assist in the investigation of suspicious networks. Increased controls and investigations can decrease the likelihood that laundered money can re-enter the formal economy and be used to commit further criminal acts. Community awareness contributes to gathering early detection of suspicious behaviour and assists in addressing abuse.
Stages of Money Laundering
Money laundering takes place in three interconnected phases, which help suspects move wrongful money into the legitimate finance system. Every phase provides an additional layer of separation between the funds ‘ conduct and the originating illegal act. Suspects first take steps to place the wrongful money into the financial system, then proceed to complicate the illegal source with several transfers from one financial institution to another, and finally return the wrongful cash into the economy as if it came from legal activity. Understanding each of the phases allows law enforcement officials the opportunity to detect any unusual activity and intervene before the wrongful money can be blended with legitimate financing.
Placement
Placement refers to the time when illegal funds enter the financial system. To avoid detection, criminals typically break up larger amounts and deposit funds in multiple smaller amounts in financial institutions. Criminals may also engage in criminal smurfing, merging illegal funds with cash-intensive business proceeds, use fake invoices, or purchase financial instruments. The objective of these strategies is to structure the money so that it is removed from unlawful origins in a manner that will not raise suspicions.
Layering
Layering is the phase when culprits add complexity to confuse the actual source of the money. The funds are passed through different accounts, companies, and countries using wire transfers, investments, or negotiable instruments, for example. They may also convert cash into assets, crypto, or foreign dollars to confuse investigators even more. Each movement adds another puzzle to the illegal activity. Structuring and layering are often used mutually, as they accomplish the same end goal of masking financial trails.
Integration
The last phase is integration, when the cash is laundered and reintegrated into the legitimate economy. The money might be invested in ownership of property, luxury products, stocks, firms, or high-value items and may include the use of other tactics for legitimacy, such as fake employees, false loans, or paying out dividends. Once the cash is fully integrated, it will flow with ordinary financial transactions, allowing the criminal to use or reinvest without being detected or disturbing any barriers set up by authorities or financial institutions.
Layering Methods in Money Laundering
Layering includes a series of methods aimed at concealing the true origin of illegal funds by producing an impassable trail of transactions. Criminals will transfer funds, first through one bank account, then potentially purchase a car or a house, then transfer funds again to their accounts in different countries. Each method focuses on adding new layers, increasing complexity, or vaporizing any presumed connection with the source illegal act.
In-Bank Transfers
Those involved in criminal enterprise typically move funds around between personal and business accounts that they control. These electronic transfers never exit the institution but intensify complexity and introduce another layer to tracking the source of funds.
Asset Purchases and Investments
Illegal funds can also be used to acquire various items, such as vehicles, real estate, artwork, precious metals, or financial products like stocks and bonds. Suspects then either sell these items directly to others for legitimate cash or sell to a third party to receive some money and appear legitimate.
Cross-Border and Offshore Transfers
Illegal revenue is transferred to foreign institutions with less oversight through wire transfers or cash smuggling. Criminals may choose to exchange currencies or invest in a foreign product to increase the separation between the funds and their source.
Business Routes and Shell Companies
Illegitimate money is mixed into legitimate business profits or funneled through shell companies that complicate beneficial ownership. These structures help with misleading financial transactions as typical business activity.
Financial Instruments
Money orders, traveller’s checks, postal orders, and wire transfers add another layer to the transaction history. These instruments add additional steps that complicate the tracing effort.
Cryptocurrency Techniques
Criminals purchase, trade, or move funds using many wallets and exchanges. They may use mixing or tumbling services to break identity links, and tracking will be far more difficult in a digital ecosystem.
How does Anti Money Laundering handle it?
Money Laundering systems are monitoring the entire money laundering chain, placement, layering, and integration to prevent layering instead of monitoring just one stage. The aim is to detect the abnormal movements at an early stage and to prevent illegal money from being mixed into the legal economy. Financial institutions use several useful tools:
Strong KYC
Financial institutions make sure that the identity is being used by the real person and know the person who is the actual owner of the account. Also, they will verify the business’s real purpose.
Smart Transaction Monitoring
Machines monitor transactions for any unconventional behaviour like fast transfers or merging routes that might indicate layering.
Information Sharing
The banking sector, the regulators, and international organizations cooperate by sharing data for the purpose of tracing money that moves from one country to another.
Enhanced Checks for High Risk Clients
When it comes to risky customers, industries, or extra verification steps are undertaken.
Freezing and Reporting
In case of any suspicious activity, the authorities are informed, and the account is frozen to prevent any further transactions.
What are the steps to detect Layering in Money Laundering?
Layering is the second phase of the money laundering process, which aims to disguise illegal money by carrying it out through tricky financial activities. The identification of layering requires observing, recognizing patterns, and being alert to activities that are not in line with a customer’s usual behaviour. Financial entities, along with regulators, are constantly on the lookout for indications that money is voluntarily hidden to keep its source unknown.
Complex or Unusual Transactions
Money flowing across several accounts, banks, or nations without business jurisdictions may point towards efforts to conceal the origin of money.
Structuring or Smurfing
One often used strategy is splitting considerable sums into smaller amounts under reporting thresholds. Regular modest withdrawals or deposits might point to layering activity.
Frequent International Transfers
Unexpected transfers to offshore accounts or high-risk jurisdictions may indicate that funds are being transferred to hide their source.
Use of Shell Companies or Third Parties
A common layering technique involves the movement of funds through several corporate companies or third parties without a precise business aim.
Rapid Buying and Selling of Assets
Tracing the money becomes more challenging when real estate, cars, equities, or cryptocurrency are bought and sold quickly.
Layering through Financial Instruments
The money trail is made more complex by the use of various currency accounts, financial products, and bank guarantees.
Unexplained Changes in Transaction Patterns
When the number of transactions suddenly goes up, or accounts start sending money to each other in strange ways, it usually means someone is moving money around to hide it.
Finale
Layering in money laundering is a key aspect, and the better we understand the concept, the safer the financial systems will be. By monitoring suspicious transactions, reporting quickly, and watching for red flags, we can make it more difficult for bad actors to transfer illegal funds to lawful use. Al Riyady stands firmly in support of businesses to promote clarity of knowledge, compliance, monitoring, and implementing procedures for safer financial systems.
