Money laundering involves converting illegal money into legal by diverting it through different channels, making it difficult to track its origin. Money laundering has potentially devastating economic, security, and social consequences.
Criminals retrieve their illicit proceeds after entering them into a lawful financial channel to use them further for any purpose.
After going through multiple laundering routes, the funds are integrated into the legitimate financial system as ‘legal’ tender.
The money placed and layered is further integrated into the economy and can be turned into major investments.
The money laundering integration stage further can also be used to purchase assets to facilitate future money laundering.
It fuels drug dealings, terrorism activities, illegal arms funding, corruption, and other operations of criminal enterprises. Crime has become increasingly international in scope because of money laundering.
Table of Contents
The three stages of money laundering
Money laundering involves placing criminal proceeds into financial institutions through deposits, wire transfers, or other means. These criminal proceeds can be any form of property.
So, this objective of laundering money is achieved through various processes mentioned below:-
Placement
It occurs by introducing illegal profits into the financial system. In the placement stage, the money is placed into the financial system through banks, casinos, shops, and other businesses.
To avoid the traceability of illicit money, various types of transactions can be done by:
- Breaking up large amounts of money into smaller sums and depositing them directly into various bank accounts within the country or outside the country or
- Depositing the funds in financial institutions abroad or;
- Buying precious goods like artwork, antique diamonds, and gold in small amounts.
These assets can be resold for payment by cheque or bank transfer.
Methods involved in the placement
Scaling
A common way that the placement stage of money laundering is accomplished is through scaling.
Often criminal entities will take large amounts of money and divide them into less obvious and harder to track sums.
The divided money appearing through small channels is complex to trace, and this divided money is brought back to the launderer from various small channels.
Offshoring
Another method to launder money through placement is offshoring. In this method, the illegally obtained profits from criminal activities are moved overseas, far away from the source of the ill-gotten gains.
Laundering the funds abroad moves the cash away from the source. So, it puts some distance between the criminals and the cash, at least on paper. However, the criminal entity still has control of the funds. Afterwards, the money moves through foreign investments, exchange houses and other businesses.
Funds can be deposited in a bank, added to the accounts of an existing business or disguised as a transaction (for example, for products that are never provided).
Layering
Its purpose is to create multiple financial transactions to disguise the source and ownership of illegal funds. It is the process of using a complex layer of financial transactions to separate the revenue of criminal activity from its source.
The layering of money gradually justifies illegal funding sources and makes them difficult to detect. It involves dealing with multiple financial intermediaries to confuse Anti-Money Laundering (AML) checks.
The depositing funds in the financial system make it difficult for authorities to detect money laundering.
The criminals do this by obfuscating the audit trail through a strategic stratification of financial transactions and fraudulent accounting.
- Change the currency of money.
- Multiple inter-bank transfers
- Multiple structured deposits and withdrawals, also known as “smurfing.”
- Purchasing high-value products such as diamonds, cars and real estate
- Multiple transfers between different accounts in different countries
- Making investments with minimal paperwork
- Use of money “mule.”
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Integration Stage (final stage of money laundering)
Money laundering Integration stage is the third and last stage of money laundering, wherein the cash is now back to the criminals legitimately after positioning within the monetary device, frequently breaking it into an extraordinary couple of smaller monetary transactions.
The money is channelled through various investment transactions by making multiple transfers of a large amount of money into smaller sums and brought back to the bank account of the launderer through various small transactions which are unnoticeable.
In the money laundering integration stage, the illicit money is brought back into the economy, which can further get used for funding criminal activities.
It often takes the form of a business investment that buys or sells the assets during the layering phase.
Generally, the detection and identification of money-laundered funds are made by whistleblowers; to prevent this, its source of origin is made untraceable.
The known methods of money laundering integration stage are:
- Real estate transactions
- Shell company and fraudulent loan
- The complicity of foreign banks
- Invoice for import/export against the product which is not even provided
How to prevent money laundering?
There are several ways companies can prevent money laundering activities. they are:
Improve search with technology
As technology advances, artificial intelligence (AI) can detect false positives and perform searches 24 hours a day, 7 days a week, reducing the burden on money laundering prevention (AML) regulators and false positives.
Regular cross-communication
It’s essential to have continuous communication between various stakeholders, including law enforcement agencies, governments, regulatory agencies, and more.
Communication can inform all parties, verify suspicions, identify possible networks, strengthen public-private partnerships, and ultimately build a united front against money launderers.
Use data analysis to identify patterns
With more data available, regulators can use historical information to identify and recognise patterns and develop customer models for investigating suspicions.
System standardisation
Different anti-fraud policies in different regulatory bodies can cause problems in different jurisdictions that use the network of legacy computer systems.
Without standardisation, it becomes more challenging to communicate and process data with other parties can prevent fraud detection.
Training
To prevent money laundering is to have the most trustworthy staff entrusted with such work. Training employees and stakeholders are essential for companies to take instant cognisance of any suspicious activity and initiate appropriate action if there is evidence of fraud.
Conclusion
In India, every year, 18 billion dollars is lost by the government through money laundering, and it is very much needed to take some effective steps regarding this concern and enhance the tracking mechanism of the transactions done by individuals, companies, or any other entity.
It’s getting harder to detect and trace illicit laundered money due to the changing technology and integration of economies among markets. Money laundering integration stage play a vital role in integrating financial marker, making it challenging to identify the source of fund and its objective.
The origin of the source of funds should be known by having a swift, reliable identification verification system to stop offenders in the beginning stages of money laundering. Once lost out of the track, the laundered money is difficult to trace.
FAQs
What is the punishment for money laundering in India?
The punishment for money laundering is prescribed under section 4 of the prevention of money laundering Act, 2002, which is imprisonment for a minimum of three years, extending up to seven years, including a fine.
What is the maximum period for an offender's property to be attached?
180 days.
What is smurfing?
Smurfing is a form of money laundering in which a major transaction is divided into a series of small transactions even below the threshold limit to avoid reporting.
These deposits are acquired through minimal transactions from various accounts within or outside the country to avoid regulatory inspection.
Who has the onus of proof in case of money laundering?
innocent. It is deemed that such a person was involved with the proceeds of the crime unless proven otherwise.
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