Wash, dry and iron – the three stages of (money) laundering
In our January article “A view on an ever increasingly popular method of laundering illicit funds – “In the world of mules…”, we briefly touched on two of the three stages of money laundering, and more specifically, during which stage of money laundering money mules are utilized. In this month’s article we will be exploring all three stages of money laundering, and really look at what it means to ”wash, dry and iron” in the realm of (money) laundering.
Although there are numerous money laundering techniques, each which vary in complexity, the process of money laundering itself can be broken down into three stages, being i) placement, ii) layering and iii) integration.
Stage 1: ‘Washing’ / Placement
The first stage of money laundering, known as ‘placement’, is the initial stage during which the dirty money is ‘washed’ and entails the movement of funds directly involved with crime. In order to disguise the origin of the dirty money, the launderer has to create distance between the money and its origin, which is achieved by way of circulating the money back into the legal financial system.
There are several methods through which placement can be achieved, with one of the more common methods known as ‘structuring’ or ‘scaling’. Structuring is achieved when the launderer divides large amounts of money into smaller less noticeable amounts, which amounts are generally below the stipulated anti-money laundering (AML) reporting threshold.
This enables the launderer to deposit money back into the legal financial system either by depositing money directly into a bank account or alternatively purchasing other legal monetary instruments (eg. checks and money orders) which are then deposited in different locations.
Other well known and used placements methods are:
Trusts and offshore companies
this method is generally used in order to conceal the beneficial owner of the dirty money.
a smurf is a type of money mule recruited with the sole purpose of depositing dirty money into the smurf’s account (in exchange for a commission), whereafter the smurf transfers the money to another account.
another very popular technique whereby payment is made in settlement of a false invoice. There are several ways in which invoice fraud can be achieved, with some of the more common techniques being the settlement of invoices which:
i) contain a false description of goods/services;
ii) under-invoice or over-invoice goods/services delivered;
iii) have been issued multiple times;
iv) justify payments abroad for goods that were ‘shipped’, the trick being that the goods were never shipped – so called ‘phantom shipping’.
Purchase of immovable property
a ‘safer’ placement technique whereby immovable property is purchased with cash. This technique is deemed ‘safer’ as it affords the launderer an opportunity to circulate the dirty money back into the formal legal economy, while simultaneously ensuring the safe investment of funds together with the opportunity to enjoy the property itself.
Depositing of cash in foreign bank accounts
physically taking small amounts of cash abroad which are below the customs declaration threshold, depositing the cash in a foreign bank account, and then sending the cash back to the country of its origin.
Stage 2: ‘Drying’ / Layering
The second (and renowned for being the most complex) stage of money laundering, known as ‘layering’, is the stage during which the dirty money is ‘tumble dried’. It entails the frequent movement of funds between multiple accounts and/or banks, and in most instances, through several jurisdictions. This stage essentially seeks to reconstitute the dirty money which had been broken down into smaller sums during the previous stage, to the point where it again forms a large sum of money, however this time, ‘clean’ money.
Layering is achieved by moving the money through a series of transactions which again makes it challenging to trace it back to its origin. Launderers make use of several methods in this regard and generally many of the same methods and techniques used during the placement stage recur during the layering stage.
Some common methods of layering include:
Use of shell companies
using or setting up shell companies to facilitate the movement of funds and ultimately conceal the ultimate beneficial owner/s and any assets held by the company.
Layering through cryptocurrencies
a common method of layering in this regard, known as “chain hopping”, entails the exchange of popular/well known cryptocurrencies for cryptocurrencies (“alt coins”) which are less popular/well known. Alt coins can only be purchased through more advanced crypto exchanges, which only accept payment in the form of cryptocurrencies (and not cash). Chain hopping makes it virtually impossible to trace the origin of a transaction which in itself renders this a very lucrative method during the layering stage.
Converting cash into financial instruments
this involves converting the money into wire transfers, stocks, bonds, money orders etc.
Stage 3: ‘Ironing’ / Integration
The third and final stage of money laundering, known as ‘integration’, is the stage during which the dirty money is ‘ironed’ and ‘folded away neatly’, and entails the process during which the ‘clean’ money re-enters the formal and legitimate economy. The purpose of this last stage is essentially to enable the launderers to now be in a position where the money can be used without attracting any ‘unwanted’ attention from authorities.
Again during this stage, we see the recurring use of some of the methods and techniques used during the placement and layering stage. The launderer can now sit back and fully enjoy the fruits of its labor. Generally, the money is then spent on luxury goods and/or long-term investments, which ranges from high end designer clothing, art, jewellery, luxury cars, sought after real estate etc.
And to this end, it still rings true – there is nothing quite like the sweet smell of fresh laundry and victory in the air, that follows the ironing and folding away of the last batch of laundry.