Money laundering is one of the most common forms of online financial crimes wherein money launderers try to hide the illegitimate source of income. This blog talks about one of the most important and intricate stages of money laundering: AML layering. We’ll also briefly discuss other stages, along with some examples explaining how layering happens and how businesses can detect it.
What Is Layering in Money Laundering?
Layering in money laundering is a process wherein criminals try to make the illegal source of funds as complex to detect as possible by gradually infusing legitimacy into it.
As the name suggests, the funds are passed through several ‘layers’ of transactions or financial instruments to increase legitimacy. Each layer adds more legitimacy to the transaction as the funds go deeper into the financial system, ultimately making it nearly impossible to track the source.
However, AML layering is only one stage of the 3-step money laundering process. Let’s discuss all of them below.
What Are the Different Stages of Money Laundering?
Typically, there are three stages in money laundering:
Stage 1: Placement
It’s the initial stage of money laundering wherein illegal money is introduced into the system. A large amount of money is usually broken into small amounts to arouse the least suspicion and is then disputed into a bank account either directly or via checks.
Stage 2: Layering
The AML layering stage comes once the money has entered the financial system. The launderer moves the money through several layers, viz., different bank accounts in different jurisdictions that are flexible in regard to AML regulations to legitimize the source of money.
Stage 3: Integration
Once the funds are layered enough, they’re finally integrated into a legitimate economy. And to do this, launderers invest in costly antiquities, business ventures, charity, or other high-value items. Other tactics include loaning out money to their confidants but never getting it back or paying fake employees who’re criminals in disguise.
Examples of AML Layering
Here’s a common way in which criminals proceed with AML layering:
Let’s say there’s a customer who withdraws small amounts of cash from an account where the money was deposited during placement. Every withdrawal is in $100 bills, which are well under the reporting threshold.
The customer then wire transfers the cash to an offshore account. Once there’s enough money, the offshore account is used to purchase a high-value item like real estate, antiquities, or a yacht. And there you go, the money has been laundered.
While the above is a common way how criminals use AML layering, here are some other approaches:
- Transferring money electronically between countries out of and into an offshore bank account.
- Moving funds between multiple financial institutions, banks, or bank accounts in the same bank.
- Investing in real estate.
- Investing funds in legitimate business interests.
- Reselling high-value items such as jewelry, prepaid cards, and antiquities.
- Converting cash into financial instruments such as wire transfers, life insurance, bonds, and stocks.
- Using professional associates or intermediaries for handling transactions.
- Setting up shell companies for moving illegal funds to hide the ownership of funds.
How to Detect Layering?
While the aim of AML layering is to make it harder to detect and trace the actual source of illegal funds, businesses can detect it by setting up AML programs that detect red flags, such as:
- Frequent transactions: Too many transactions with the same amounts are a red flag.
- Funding speeds: Money disputed into accounts is rapidly withdrawn.
- Frequent transfers: Money is transferred between accounts within the same institution.
- Risky destination and source: Sending money to or receiving from a high-risk account or country.
- Frequent wire transfers: Frequently transferring money into and from the account using wire transfers.
However, businesses can also opt for end-to-end identity verification solutions such as HyperVerge to verify customer identity while onboarding. Moreover, businesses can perform ongoing due diligence to understand the risk of a customer to minimize the risk of fraud.
FAQs
What’s the main goal of the AML layering stage of money laundering?
AML layering is a highly complex element of the money laundering process. Its basic purpose is to create multiple transactions to hide the actual source of illegal funds from authorities.
What are the three layers of money laundering?
Money laundering is typically divided into three stages: 1. Placement 2. AML layering 3. Integration
How can you tell if someone is laundering money?
Although it’s quite hard to tell if someone is laundering money, businesses can look out for red flags such as the secretive behavior of an individual around money matters, making large transactions using cash, and ties with a sell company.
