Methods and Stages of Money Laundering

There are three stages involved in money laundering; placement, layering and integration.

Placement –This is the movement of cash from its source. On occasion the source can be
easily disguised or misrepresented. This is followed by placing it into circulation through
financial institutions, casinos, shops, bureau de change and other businesses, both local
and abroad. The process of placement can be carried out through many processes
including:

1. Currency Smuggling – This is the physical illegal movement of currency and

monetary instruments out of a country. The various methods of transport do not
leave a discernible audit trail FATF 1996-1997 Report on Money Laundering
Typologies.
2. Bank Complicity – This is when a financial institution, such as banks, is owned or
controlled by unscrupulous individuals suspected of conniving with drug dealers
and other organised crime groups. This makes the process easy for launderers.
The complete liberalisation of the financial sector without adequate checks also
provides leeway for laundering.
3. Currency Exchanges – In a number of transitional economies the liberalisation of
foreign exchange markets provides room for currency movements and as such
laundering schemes can benefit from such policies.
4. Securities Brokers – Brokers can facilitate the process of money laundering
through structuring large deposits of cash in a way that disguises the original
source of the funds.
5. Blending of Funds – The best place to hide cash is with a lot of other cash.
Therefore, financial institutions may be vehicles for laundering. The alternative is
to use the money from illicit activities to set up front companies. This enables the
funds from illicit activities to be obscured in legal transactions.
6. Asset Purchase – The purchase of assets with cash is a classic money laundering
method. The major purpose is to change the form of the proceeds from
conspicuous bulk cash to some equally valuable but less conspicuous form.

Layering – The purpose of this stage is to make it more difficult to detect and uncover a
laundering activity. It is meant to make the trailing of illegal proceeds difficult for the law
enforcement agencies. The known methods are:

1. Cash converted into Monetary Instruments – Once the placement is successful

within the financial system by way of a bank or financial institution, the proceeds
can then be converted into monetary instruments. This involves the use of
banker’s drafts and money orders.
2. Material assets bought with cash then sold – Assets that are bought through illicit
funds can be resold locally or abroad and in such a case the assets become more
difficult to trace and thus seize.
Integration – This is the movement of previously laundered money into the economy
mainly through the banking system and thus such monies appear to be normal business
earnings. This is dissimilar to layering, for in the integration process detection and
identification of laundered funds is provided through informants. The known methods
used are:

1. Property Dealing – The sale of property to integrate laundered money back into
the economy is a common practice amongst criminals. For instance, many
criminal groups use shell companies to buy property; hence proceeds from the
sale would be considered legitimate.
2. Front Companies and False Loans – Front companies that are incorporated in
countries with corporate secrecy laws, in which criminals lend themselves their
own laundered proceeds in an apparently legitimate transaction.
3. Foreign Bank Complicity – Money laundering using known foreign banks
represents a higher order of sophistication and presents a very difficult target for
law enforcement. The willing assistance of the foreign banks is frequently
protected against law enforcement scrutiny. This is not only through criminals,
but also by banking laws and regulations of other sovereign countries.
4. False Import/Export Invoices – The use of false invoices by import/export
companies has proven to be a very effective way of integrating illicit proceeds
back into the economy. This involves the overvaluation of entry documents to
justify the funds later deposited in domestic banks and/or the value of funds
received from exports.
This is the first stage in the washing cycle. Money laundering is a "cash-intensive"
business, generating vast amounts of cash from illegal activities (for example, street
dealing of drugs where payment takes the form of cash in small denominations). The
monies are placed into the financial system or retail economy or are smuggled out of the
country. The aims of the launderer are to remove the cash from the location of acquisition
so as to avoid detection from the authorities and to then transform it into other asset
forms; for example: travellers cheques, postal orders, etc. (more details follow).

ii)LAYERING

In the course of layering, there is the first attempt at concealment or disguise of the
source of the ownership of the funds by creating complex layers of financial transactions
designed to disguise the audit trail and provide anonymity. The purpose of layering is to
disassociate the illegal monies from the source of the crime by purposely creating a
complex web of financial transactions aimed at concealing any audit trail as well as the
source and ownership of funds.

Typically, layers are created by moving monies in and out of the offshore bank accounts
of bearer share shell companies through electronic funds' transfer (EFT). Given that there
are over 500,000 wire transfers - representing in excess of $1 trillion - electronically
circling the globe daily, most of which is legitimate, there isn’t enough information
disclosed on any single wire transfer to know how clean or dirty the money is, therefore
providing an excellent way for launderers to move their dirty money. Other forms used
by launderers are complex dealings with stock, commodity and futures brokers. Given the
sheer volume of daily transactions, and the high degree of anonymity available, the
chances of transactions being traced is insignificant.

iii)INTEGRATION

The final stage in the process. It is this stage at which the money is integrated into the
legitimate economic and financial system and is assimilated with all other assets in the
system. Integration of the "cleaned" money into the economy is accomplished by the
launderer making it appear to have been legally earned. By this stage, it is exceedingly
difficult to distinguish legal and illegal wealth.

There are now five basic money-laundering offences:

i. assisting another to retain the benefit of crime;

ii. acquiring, possession and use of criminal proceeds;
 iii. concealing or transferring proceeds to avoid prosecution or a confiscation
order (also called Own Funds money laundering).
iv. failure to disclose knowledge or suspicion of money laundering;
v. tipping off.

Assisting another to retain the benefit of crime.

Assistance occurs where a person is involved in an arrangement with another

person, and knows or suspects that the other person is, or has been involved in, or
has benefited from drug trafficking or criminal conduct if the arrangement helps the
other person to retain or control proceeds directly or indirectly or enables the other
person to use the proceeds or to invest them for his benefit.

Acquisition, possession or use of criminal proceeds.

Acquisition is the offence of use or possession of property which you know or have
reasonable grounds to suspect to be the proceeds of drug trafficking or criminal
conduct and have acquired at less than full value.

The penalty for commission of an offence under this section is the same as for
assisting another to retain the benefit of crime.

Concealing or transferring proceeds to avoid prosecution or a confiscation

order (also called Own Funds money laundering).

Concealing is disguising, removing or transferring proceeds (directly or indirectly) of

drug trafficking or criminal conduct for the purpose of avoiding or helping someone
else avoid prosecution. The offence is committed by a person who assisted in the
offence if s/he knows or has reasonable grounds to suspect the nature of the
property.

Failure to disclose knowledge or suspicion of money laundering.

This offence only relates to drug trafficking and terrorism and not to proceeds of
crime in general. A person is guilty of an offence if, as a result of something he
learns in the course of his trade, profession or employment, he does not report a
suspicion to a police or customs officer.

Tipping off.

The requirement to report suspicions is not much use if the suspected person is
tipped off to the fact that s/he is under investigation. In order to preserve the
integrity of an investigation, the offence of ‘tipping off’ occurs when information or
any other matter which might prejudice the investigation is disclosed to the suspect
of the investigation (or anyone else) by someone who knows or suspects
 examples.

Placement Layering Integration

Stage Stage Stage

Cash paid into bank
(sometimes with staff
complicity or mixed with
proceeds of legitimate
business).
Wire transfers abroad (often False loan repayments or
using shell companies or forged invoices used as cover
funds disguised as proceeds for laundered money.
of legitimate business).

Cash exported. Cash deposited in overseas Complex web of transfers

banking system. (both domestic and
international) makes tracing
original source of funds
virtually impossible.

Cash used to buy high value Resale of goods/assets. Income from property or
goods, property or business legitimate business assets
assets. appears "clean".

mandatory for banks to report all suspicious transactions in STR, including those of over
Rs 10 lakhs in CTR, to the directorate of financial intelligence Unit and forged one in
CCR

Balance (in Rs.)

Date Mode Dr (in Rs.) Cr (in Rs.)
BF - 8,00,000.00
02/04/2008 Cash 5,00,000.00 3,00,000.00 6,00,000.00
07/04/2008 Cash 40,000.00 2,00,000.00 7,60,000.00
08/04/2008 Cash 4,70,000.00 1,00,000.00 3,90,000.00
Monthly 10,10,000.00 6,00,000.00
summation

i) As per above clarification, the debit transactions in the above example are
integrally connected cash transactions because total cash debits during the
calendar month exceeds Rs. 10 lakhs.
ii) All the credit transactions in the above example would not be treated as
integrally connected, as the sum total of the credit transactions during the
month does not exceed Rs.10 lakh