Money Laundering and Its Impact on Business

According to the FATF, $1.6 trillion are laundered each year from lower-income countries—most often the proceeds of political corruption. Corruption deepens poverty in such regions, also leading to environmental degradation and economic stagnation. Given the close link between ML and corruption, any efforts to limit the spread of illicit money also plays an important role in lowering corruption worldwide.

The 3 basic stages of money laundering

There are three stages of money laundering introducing laundered funds into the financial system:

1. Placement
2. Layering 
3. Integration/extraction

Money laundering stage #1: placement

Placement of illegal funds into the financial system may happen directly or indirectly.

The most popular method used in the placement stage is to divide large amounts of cash into less suspicious smaller sums, which can then be deposited into a single  bank account or several bank accounts (which could involve the ‘smurfing’ technique). 

Smurfing often occurs through money service businesses.

Other placement methods include: 

• False invoicing (over-invoicing and pseudo-invoicing for payment of  non-existing goods or services)
• Blending illegal money with legitimate money
• Buying foreign currency
• Buying securities or insurance with cash
• Gambling and betting on sports events

Money laundering stage #2: layering

“Layering” is the process of separating illicit money from its source and creating “layers” of transactions to confuse an audit. The purpose is to hide the origins of illegally obtained assets. This stage is considered to be the most complex, as it involves multiple transactions, often including international money transfers. 

For the purposes of layering, money can be moved through the purchase and sales of investments, or through a series of accounts at banks in different countries. Most often, such funds are directed to jurisdictions which have loose AML regulations or do not cooperate with AML investigations.

The most “popular” examples of the layering:

• Investing in real estate
• Reselling high-value goods
• Transferring funds between countries
• Chain-hopping (converting one cryptocurrency to another, and moving crypto from one blockchain to another)

 and a number of others.

Differences between placement and layering

While placement injects illicit funds into the financial system, layering hides the source of these funds through a series of transactions and financial tricks.

Money laundering stage #3: integration

After placement and layering, criminals then integrate—or, in other words, “return”—illicit money to themselves in a way that appears “clean.” If this stage is successful, the funds are now part of the legitimate financial system, and can be used freely. 

The main objective here is to integrate the money without drawing the attention of the law enforcement. This can be done, for instance, by purchasing property, art, jewelry, or luxury automobiles.

The impact of money laundering

Here are only a few of the negative consequences that ML brings to business:

• Loss of revenue
• Reputational harm
• Multimillion-dollar fines or license suspension by regulators

Moreover, money laundering has damaging socio-economic effects worldwide, including:

• Fueling corruption
• Increasing crime
• Undermining trust of foreign investors
• Widening the gap between the rich and the poor
• Slowing economic growth

Common money laundering schemes

Criminals use all available financial instruments—from NFTs to real estate—to make their illicit funds look legitimate.

Gambling, gaming and betting

Gambling and betting (both online and offline) are often used to launder illicit cash. 

Money laundering here takes up the following forms:

• Criminals leverage low-outcome bets to deposit dirty money and withdraw it as “winnings.” 
• Money obtained from illegal sources is used to sponsor betting as a leisure activity.
• Criminals directly invest in or acquire betting shops.

Suggested read: A Global Guide to AML Compliance in Gambling, Gaming, and Betting (2023)

Money mules

A money mule is a person “hired” by criminals to launder illicit proceeds. Mules usually have a good banking history and reputation, which allows them to move dirty money without being noticed.

Money mules are recruited through online job offers or dating sites. Criminals can lure individuals by promising easy money or creating job adverts that appear like legitimate offers.

Suggested read: What’s Money Muling and How Does It Affect Businesses?

Sports

There are many ways to make—and therefore launder—money on sports: from sports betting to sponsorships to action figures. The higher the profit from these activities, the higher the risk of money laundering.

The most vulnerable sports include football, cricket, rugby, horse racing, motor racing, ice hockey, volleyball and basketball.

Here is how criminals use football to clean dirty money:

• Purchase and sale of football clubs
• Player trades
• Involving football agents in ML schemes
• Sale of player image rights
• Forgery of ticket sales

Suggested read: How Money Is Laundered Through Football

Detection and prevention of money laundering

To keep businesses safe, a thorough AML compliance program must be in place. It should define how the company detects, assesses, and reports financial crime, including the following measures:

• Customer Due Diligence (CDD). Before a customer is allowed to use the service, they must go through a Customer Due Diligence check. This involves obtaining the customer’s information to verify their identity and evaluate whether they are involved in any crime.
• Enhanced Due Diligence (EDD). In cases of higher money laundering risk, companies apply what is known as Enhanced Due Diligence. One of the most vital components of EDD is checking clients’ source of funds to ensure that they don’t come from illegal activity. 
• Ongoing customer monitoring. This is an extra layer of risk management that involves ongoing due diligence checks on customers and scrutiny of their transactions.
• Independent AML audits. These allow businesses to detect deficiencies and failures in their AML strategies and correct any problems before regulatory inspections to prevent fines. 
• Transaction monitoring. Transaction monitoring is an ongoing security process that helps detect suspicious transactions. A reliable Transaction Monitoring software spots unusual patterns and reviews dubious transfers and transactions made in digital or fiat currencies.

How to monitor and stop money laundering using Transaction Monitoring

Let’s look at how to monitor and stop a common money laundering technique known as smurfing, using Sumsub’s Transaction Monitoring tool.

Smurfing is structuring large amounts of money into smaller and multiple transactions. The people moving these smaller amounts—known as smurfs—will often spread the transactions over various accounts to keep them under the regulatory reporting thresholds and avoid detection.

This AML rule compares ingoing and outgoing transactions and checks if a withdrawal amount is 10% less than the original deposit amount. This is a tell-tale sign of money laundering because the participant is usually paid a percentage for their efforts.

This rule can trigger one or both of the following automated actions:

1. Customer is asked to provide proof of Source of Funds (SOFR
2. Customer is assigned a tag that will show if further transactions are made

Sumsub makes it easy to detect money laundering with an expansive variety of customizable rules. In the rule below, you can see how the conditions can be altered if customers attempt to initiate multiple outgoing transactions within a certain time period after registration:

Download our eBook to learn further details on how transaction monitoring prevents money laundering and fraud, and how to combat them with the most up-to-date solutions, helping you fill your organization’s transaction monitoring knowledge gaps.

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FAQ

• What are the 3 basic stages of money laundering?

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• What is placement vs layering vs integration?

  Placement is injecting illegal money into the financial system, layering is the process of moving illegal funds through multiple transactions in order to conceal their source, and integration is the process of returning the money to the criminal in a way that appears to be legitimate.

• Do the 3 stages of money laundering overlap?

  They can. The placement, layering and integration stages can occur simultaneously, separately or in an overlapping manner.