Table of Contents
What is Money Laundering?
Money laundering is a process of turning money earned from illegal activities into legal money. In this process, the money to be laundered is inducted into the financial organizations appearing as legitimate money. Then, the system is manipulated through various strategies and money is extracted at the end as white money. There are three stages of money laundering which are as follows:
Three Stages of Money Laundering
1- The Placement Stage
The first phase in the money laundering cycle is the placement of dirty money in the financial institutions. From the law enforcement point of view, this is the time where a criminal is the most vulnerable and expected to make a mistake. This is because the money launderer is holding on to a huge sum of illegal money and they have to physically place it in the financial system. However, with the advancements in the AML systems and law enforcement strategies, criminal tactics have also evolved. The placement of money can be done in the following ways:
- A bank employee gone rogue takes illegal money from the money launderers and moves it into the bank as legitimate money.
- Using legitimate businesses like laundry shops and car washes and claiming them as sources of your dirty money.
- Taking cash in little amounts within customer non-declaration limits, through multiple persons and depositing in the foreign institutions. Then, this money is moved back from foreign institutions to the country of origin as legal money.
2- The Layering Stage of money laundering
Layering comes second in the stages of money laundering where the criminal employs different tactics to hide the origin of money. Illegal money is deposited and withdrawn again and again till the place of origin becomes very difficult to track. Out of all the stages of money laundering, this is considered the most complex one. Other ways of laundering money at this stage include:
- Buying and selling large assets in the place of origin and in the international market so that linking its source with the money launderer becomes complicated.
- Using the black money to buy stocks, banker’s drafts, money orders, or different currencies from all around the world.
3- The Integration Stage
If the initial stages of money laundering deal with getting dirty money into the financial system, then the integration stage is concerned with getting it out as white money. Moreover, if the dirty money has reached this stage undetected then it becomes very difficult for law enforcement agencies to differentiate between black and white money.
- The money launderers employ their own shell companies to issue loans to their name. They claim the loan amount as the source of income. This works because they show no official affiliation with the shell company.
- Criminals even give permission for the black money to be taxed. Thus, it does not raise any eyebrows and increases the legitimacy of the money extracted.
- Foriegn banks exist under the umbrella of international laws so they, sometimes, become abettors in money laundering.
How AML Systems Help to Curb Money Laundering?
In many money laundering activities, banks are involved in one way or the other. Governments leave it upon these institutions to conform to Anti-Money Laundering (AML) and Know Your Customer (KYC) policies and procedures. There are plenty of anti-money laundering solutions available at the disposal of these banks. Employing an efficient anti-money laundering software can keep these banks compliant to AML and KYC policies along with deterring criminal activity at any of the stages of money laundering. Moreover, these systems protect the banks in following ways:
- These systems use biometric identity verification instead of knowledge-based authentication which removes any chance of identity fraud.
- Document verification features can detect any type of document forgery and tampering.
- Screening the customers remotely in the Covid times is a major problem for the institutions and these systems heed to this issue.