The traditional approach to the stages of money laundering – helpful or hindering?

In our February article, “Wash, dry and iron – the three stages of (money) laundering”, we considered and analyzed the traditionally recognized three stages of money laundering, which most financial crime professionals are familiar with. In this month’s article we will explore whether the traditional approach to the stages in money laundering might be flawed in certain respects and consider if it is actually helping or hindering the combating of money laundering. 

In Chapter 31 of B. Unger and D. van der Linde’s “Research Handbook on Money Laundering”, Jan van Koningsveld (“van Koningsveld”) explores the possibility of rethinking the stages of money laundering in a bid to make enforcement more efficient.

Where did the concept “the three stages of money laundering” originate?

The globally recognized and accepted concept of the three stages of money laundering (“the three stages concept”) dates back as far as 1986.

Originally the three stages concept was conceived by the United States (“US”) investigation service, the Drugs Enforcement Administration (“DEA”) in order to define and simplify the money laundering practices that were related to the US drug trade scene during the 1980’s.

Concerns around the large sums of money (originating from the drug trade in the US) that were being transferred out of the US, sparked the intensification of the US’ ‘war against drugs’ and subsequent listing of money laundering as a major problem on its political agenda.

Once the concept had been formulated and introduced in the US’ first anti-money laundering legislative act – the Money Laundering Control Act, the Financial Action Task Force (“FATF” and renowned global money laundering and terrorist financing watchdog) subsequently adopted the concept which became custom in the Anti-Money Laundering (“AML”) landscape.

A concept which is, to this day, recognized and accepted by numerous international organizations and supervisory authorities, including but not limited to the FATF.

Van Koningsveld is of the opinion that the three stages concept is not fit for purpose in the modern day era as the concept was originally formulated in the very narrow confinement of the drug trade alone. With time money laundering as a concept has evolved and has its applicability extended beyond the confines of the cash economy of the US drug trade, and is therefore due for reconsideration and reinterpretation.

Van Koningsveld suggests an expansion or rather a split of sorts of the stages of money laundering, which will make its applicability much more prevalent.

Van Koningsveld’s reimagination of the three stages concept – a proposal for a four stages concept

Van Koningsveld’s criticism of the three stages concept does not necessarily propose a complete reimagination of the three stages concept, but rather of the third stage (“Integration”) only.

Based on the FATF’s October 2006 report “Misuse of Corporate Vehicles, including Trust and Company Service Providers” wherein the FATF distinguished four phases of money laundering, Van Koningsveld proposed moving to a four stages concept which will not only prevent legislative and practical (in relation to the sharing of knowledge, investigations and subsequent prosecutions) consequences but is in addition better suited to current money laundering practices and legislation.

The four stages concept will thus compose of the current first two stages as is (“Placement” and “Layering”) together with a tailored version of the Integration stage by subdividing the Integration into two separate stages, “Justification” and “Investment” respectively.

The new third stage: Justification

The Justification stage entails the completion of the cycle of ‘dummy’ or fake transactions, which covers various established and newly found techniques and methods.

Van Koningsveld distinguishes that the available techniques and methods are based on two basic principles:

The money launderer creating fake income or profits; and/or
The money launderer borrowing his own money.

This way the money launderer thus creates for all intents and purposes a demonstrable and real, but actually fictitious, paper trail to be able to demonstrate where the money originates from.

The introduction of the Justification stage will assist in developing future specific justification typologies, serving as/contributing to the evidence of money laundering.

The new fourth stage: Investment

Once the Justification stage has been completed the illicit funds have officially been incorporated in the formal legal economy with no trace of its origin, which is after all the main aim of money laundering.

The money launderer is thus now in a position where not only is the origin of the illicit money concealed, but they can further justify how and why they are in possession of the money.

The Investment stage thus concerns itself with the conversion of the illicit funds by executing legitimate legal transactions or investments, be it by way of purchasing immovable or movable property such as real estate and cars or by investing in companies or shares.

Air Holland case illustrating the four stages of money laundering

The airline company, Air Holland (“AH”), was approached by two investors after having endured financial hardship for some time. In order to stay afloat AH required a substantial capital amount to stay afloat, which capital the two investors (who belonged to a criminal organisation in the drug trade) were able to provide, but in cash only.

In order to accommodate this investment, the financial director of AH set up an international structure in order to launder the money.

In Stage 1: Placement, the financial director of AH transported the cash to the United Kingdom in his car, whereafter it was deposited at an exchange office.

In Stage 2: Layering, the money was transferred in the name of an offshore company which was incorporated in the British Virgin Islands, whereafter it was transferred to a bank account in Luxembourg in the name of company Y.

In Stage 3: Justification, company Y provided a loan to AH – a seemingly legitimate, but actually fictitious transaction.

In Stage 4: Investment, the ‘legal’ loan is booked in the business accounts of AH and used for AH’s operational purposes.

Applying the three stages concept – helpful or hindering?

Van Koningveld notes that when applying the three stages concept, there are a number of possible consequences that may follow which are in relation to inter alia:

Investigation of and evidence gathering in money laundering cases

Are authorities investigating the correct and not the misleading tracks of the money when investigating the company in concern?

Knowledge of and understanding money laundering

In order to understand the money laundering constructions in a specific case, do authorities and professionals focus too much on the Placement stage when in fact their attention should actually be devoted to the Justification and Investment stage, in order to aid them in tracing the origin of the illicit funds?

Typologies and characteristics of money laundering

Do professionals and authorities understand what techniques and acts belong in each stage?

These possible consequences leave us with the following to consider:

Is the three stages concept outdated with no purposeful place in the current money laundering landscape?

Is the four stages concept not better aligned with the current money laundering landscape and legislation, which will clarify money laundering processes and its various actors more effectively and will assist in the overall efficacy in our fight against money laundering?

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