What is layering in money laundering? Well, it is simply the second and most crucial step that comes to play. Typically, crimes that generate significant financial proceeds mostly require money laundering strategies to keep relevant authorities away. Examples include extortion, human trafficking, drug trafficking and more, from which they seek to integrate the illegal money made into the legitimate economy. The 3 stages of money laundering are used to achieve this.
Due to the high global regulations and alert for money laundering, criminals have to develop processes to evade AML controls. Layering is the process that is employed to effectively conceal the illegal sources of their funds. Therefore, as an Anti Money Laundering (AML) compliant business, it is important that you understand the place of layering in the money laundering process and the effective counter measures to take.
What is Layering in Money Laundering?
Layering is the process of concealing the source of illegal money by making it as difficult as possible to detect by running it through a series of legitimate processes. It is the second of the 3 stages of money laundering.
Similar to placement, layering in money laundering is performed to distance the criminal proceeds from their illegal source. Basically, it masks the appearance of legitimacy of the money by passing it through layers of legal transactions or financial instruments. The money is usually passed through several layers, with each layer representing a higher degree of legal participation in the financial system, further hiding the illegal origin of the funds.
What is the difference between Placement and Layering in Money Laundering?
Placement is the first stage in the anti-money laundering process and it involves injecting dirty money into the legitimate financial system. On the other hand, layering is the second stage that seeks to mask the source of the money by running it through a series of legal financial transactions and bookkeeping tricks.
Money Laundering Layering Process
Layering is arguably the most critical and complex step in money laundering because it seeks to intentionally mask illegal money by running it through multiple financial transactions to circumvent AML controls.
The layering process even becomes more complex when money launders need to clean a high sum of money. Sometimes, layering processes are housed within each other, for example, investing it in a business, that then opens multiple bank accounts and begins investing funds in the stock market or paying offshore employees. Some also run loan schemes to further layer the money.
What is an Example of Layering in Money Laundering?
Some of the common examples of layering money laundering processes include:
- Setting up or using shell companies to move illegal funds and mask the assets, their owners, and beneficiaries.
- Investing in real estate
- Using professional associates to handle transactions
- Electronically transferring funds between countries and offshore bank accounts
- Converting illegal cash into legal financial instruments like stocks, bonds, purchasing life insurance, wire transfer, money orders, etc.
- Buying and reselling high-value goods like artworks and jewellery
- Investing in other legitimate businesses and loan schemes.
- Transferring funds between bank accounts between financial institutions or within the same institutions
How to detect Layering in Money Laundering
Despite the strategic efforts of money launders to frustrate and mislead AML control efforts, there are strategies you can take to identify layering activities. As a business, it is important that you set up effective AML programs and structures to monitor and detect these signs or red flags early.
Some of the signs to look out for include:
- Frequent wire transfers into and out of the accounts
- Frequent transfers between bank accounts within the same financial institution
- Noting the destination and source of funds e.g frequently to or from high-risk countries
- Regular transactions that end with exactly zero amounts when completed
- Deposit and withdrawal of money into accounts at a rapid rate
It is important that frontline employees are able to pick up suspicious information within transactions like the customer’s comment for the purpose of transactions. Also, this could be reinforced with a screening and monitoring software that would efficiently pick up red flags and raise immediate alarms.
Tackling Layering with AML Solutions
On completing the anti-money laundering process, criminals reintroduce their funds into the financial system as a form of legitimate money. These funds could be used to purchase legal high-value assets and in doing so, they would most likely engage financial institutions.
With robust AML, KYC checks, and enhanced customer due diligence (EDD), it is easier to fish out criminals due to their financial records and available data. You can run them through an automated AML screening solution, easing the pressure on employees to pick up suspicious red flags.