Integration is the third stage in the money laundering process which criminals undergo to “wash” illicit funds. After placement and layering, the criminal proceeds to integrate the funds, completing the money laundering cycle that is estimated to be up to $2 trillion yearly or 5% of global GDP. Integration in money laundering is the final stage, after which it becomes very difficult for regulators to trace the funds back to the illicit source or the criminals themselves.
Therefore, it is important that financial institutions and regulated businesses today understand integration in money laundering, how it works and ways they can combat it to ensure they don’t become a party to money laundering activities.
What is Integration in Money Laundering?
Integration in money laundering refers to the process by which criminals reintroduce or “integrate” illicit funds back into the economy through legitimate transactions after placement to make the “dirty” money appear clean.
The dirty money reaches the final process of money laundering at the integration stage, which if investigated, would have a series of legitimate translation trails. The criminal proceeds to confidently spend the money as they wish because they believe it is now “cleaned” and its illegal source cannot be proven.
One notable real-life example of layering in money laundering involves the case of the "Troika Laundromat." This operation was a complex money laundering scheme that purportedly involved billions of dollars from Russian oligarchs and politicians. The scheme was busted due to a collaborative investigation by several media outlets and the Organized Crime and Corruption Reporting Project (OCCRP).
The Troika Laundromat involved the use of shell companies, complex financial transactions, and banks primarily based in Lithuania and other parts of Europe. Funds were moved in a circular manner between these entities to obscure their origins. The layering process included creating fictitious loans, payments for non-existent goods, and other paper transactions between shell companies. This elaborate network made it extremely difficult to trace the true source of the funds.
Examples of Integration in Money Laundering
Some of the ways criminals launder money through integration include:
1. Property Investment:
Real estate purchase is one of the most common channels for laundering money. Criminals typically purchase properties in key global markets like London and New York, using these investments to clean their illicit funds through sales or rentals.
The cash transactions associated with these high-end properties often mask the origins of the money, seamlessly reintegrating it into the legitimate financial system.
2. Front Companies and Shell Corporations:
These entities serve as vehicles for laundering by blending dirty money with legitimate business revenues. While front companies engage in actual business activities, shell companies may exist only on paper, serving primarily to obscure ownership and financial flows. The Panama Papers scandal highlighted the scale of this method, revealing numerous shell companies used to conceal wealth and evade taxes.
3. Luxury Goods and Art Investment:
This method involves purchasing high-value items like art, jewellery, and luxury vehicles with tainted funds. These assets are easily resold, converting the items back into cash which appears clean.
The art market is particularly susceptible due to its private nature and subjective pricing, exemplified by cases like that of Edemar Cid Ferreira, a Brazilian banker who laundered money through the art acquired with funds from his bank's collapse.
3. Investing in Legitimate Businesses:
Launderers often use legitimate business ventures, especially those dealing in high cash volumes like bars and casinos, as fronts for their operations. This allows them to combine laundered money with genuine business earnings, complicating the tracing process.
4. Complex Financial Instruments and Wire Transfers:
Money launderers use intricate financial transactions and wire transfers across multiple jurisdictions to obfuscate the trail of money. By utilising complex instruments like derivatives and mutual funds, they add layers of transactions that make detection challenging.
5. Casino Exchange:
Casinos have long been recognised as potential avenues for money laundering due to the high volume of cash that circulates in these environments. The process typically involves individuals buying chips with illicit funds, gambling minimally, and then cashing out with a check from the casino or exchanging their chips for clean money. This makes the funds appear as legitimate gambling winnings.
Casinos are supposed to follow strict regulations to identify and report suspicious activities; however, the sheer volume of transactions can make enforcement challenging. This method exploits the gambling industry's structure to convert "dirty money" into "clean money" effectively.
6. Life Insurance Fraud:
Life insurance fraud as a method of money laundering is less well-known but can be equally effective. This scheme involves overpaying on a life insurance policy with illicit funds and then cancelling the policy or taking out a loan against it after a cooling period, thus receiving the laundered money back as a seemingly legitimate payment or loan.
Another tactic is purchasing life insurance policies with a high cash value, paying the premiums with laundered money, and eventually redeeming the policy or assigning it over to someone else. The complexity of life insurance products and the volume of transactions can often obscure the origins of the funds, making it a discrete option for laundering money.
Read more on the 3 stages of money laundering.
How to Identify Integration in Money Laundering
The integration stage of money laundering is difficult to identify due to the initial placement and layering stages that already provide extensive legitimate covers for it. Also, criminals employ intelligent tactics when integrating the illegal money back into the economy which makes it difficult unless you know the signs to look out for or processes in place to shut off the process.
Some of the processes to put in place to help you spot integration in money laundering include:
1. Customer Due Diligence: Identification, Verification and Authentication for Businesses and Individuals
Having the right Know Your Customer (KYC) and Know Your Business (KYB) processes in place will help a financial institution accurately verify and authenticate individuals and business clients. This is useful because criminals will likely use stolen or fake IDs to open an account with a bank to ensure that illegitimate transactions cannot be traced to their real identity.
Customer due diligence also helps financial institutions conduct accurate risk assessments on customers and businesses during onboarding to help them put appropriate measures in place. With the right identity verification and biometric authentication solutions, they can catch criminals in the act and prevent integration.
2. Enhanced Due Diligence
Enhanced due diligence should be conducted for high-risk customers. This involves running: AML checks
- Adverse media screening
- Sanction and watchlist screening
- Politically Exposed Persons (PEPs) Check
Running these checks helps the financial institution get an idea of the custom background and financial history. With this information, they can predict and monitor who could easily become engaged in illegal activities.
3. Constant Monitoring
Spotting the early signs and putting an end to the process remains the best way to fight money laundering. This is why it is important for a financial institution to constantly monitor customer transactions and identify suspicious activities that deviate from their expected patterns.
Combat Money Laundering Integration with Smile ID
Combating money laundering at the integration stage is very difficult. Therefore, it's best to identify and put a stop to it in the initial stages through effective due diligence and ongoing monitoring. Smile ID KYC and AML solution simplifies this process, helping businesses accurately identify, verify and authenticate their customer transactions.
Smile ID offers a suite of compliance solutions that make preventing money laundering much easier. Financial institutions can conduct KYC due diligence, and AML checks, and compile the right data for suspicious activity reporting. This improves customer onboarding rate and makes it easier for the institution to comply with AML regulations and protect against money laundering and other financial crimes.
Book a free demo with our experts today to learn more.
