A money laundering activity is only successful when the criminal can stay unnoticed by regulatory authorities. Therefore, they employ several techniques to stay hidden and “wash” the money from their illegal proceeds to appear clean. This is referred to as the three stages of money laundering; placement, layering and integration. Layering in money laundering is the second stage, and it involves running illicit funds through several transaction layers to give it a legitimate trail.
This article discusses layering in money laundering, highlighting what it means, how it is performed and the steps businesses can take to curtail it.
What is Layering in Money Laundering?
Layering is the second stage in the money laundering process after placement, where the criminal runs the illegal proceeds through several transactions to create several layers of legitimate trail. This way, it becomes difficult to trace the illicit funds to their actual origin or the identity of the criminal.
To make it very effective, the criminal usually layers the money across multiple transactional processes.
What is the Difference Between Layering and Placement?
The major difference between layering and placement in money laundering is that the placement process introduces the newly acquired illicit fund to the financial system through strategic deposits or purchasing assets while layering strategically moves the fund through various accounts or forms of assets to hide the original source.
How Does Layering in Money Laundering Work?
Layering in money laundering occurs when the criminal runs illicit funds through several layers of transactions till its original source becomes too complex to unmask. It usually involves sending money around the globe using a series of transactions and between different currencies. This creates a complex layer of legitimate financial trail that is difficult to track.
Money launders also often entice individuals with unsuspicious financial histories to initiate some of these transactions in bit parts. They could break down the fund into small amounts, and then transfer it to the account of these individuals, who then exchange it for another currency or purchase crypto, which is held for a while and then transferred later to a unanimous account.
What is an Example of Layering in Money Laundering?
A good example of layering is converting dollars from illegal proceeds to Yen, then Euros. Tracking across several currency conversions across different continents is much more difficult than within the same currency or country.
It could also involve changing the nature of the asset itself, for example, from cash to gold to art, real estate and then casino chips. Ideally, the more countries, currencies and asset types the money enters and leaves, the more difficult it is to track the illegal source of the money.
What are the Methods of Layering in Money Laundering?
Here are some of the common methods of layering in money laundering:
i. Complex transactions
This involves the use of different kinds of transactions like forex trading, currency exchange, international transfer and similar processes to mask the illicit origin of the funds.
ii. Shell Companies
Shell companies are corporations without any significant assets or active business operations. In this method, criminals use shell companies as a front to transact with laundered money.
iii. Investing in Assets
Criminals could also purchase high-value assets like real estate or artworks with illicit funds which could then be transported to another country and converted into cash after a period.
iv. Strategic associations
Money launders could go the traditional way of forming strategic partnerships with key players like bankers or top government officials who can help them layer money easily. Because they understand the financial system and know its weaknesses, they could also help obfuscate the original source of the illicit funds.
How can Businesses Prevent Layering in Money Laundering?
Placing the right Anti Money Laundering (AML) processes in place can help organisations prevent layering activities or lessen the chances of it being successful. This includes:
1. Customer Due Diligence and enhanced due diligence
Customer due diligence involves conducting basic checks like verifying the customer's identity and other key information before onboarding. Depending on the type of business relationship or customer risk level, enhanced due diligence verification like AML checks may be conducted.
Due diligence can help a business spot high-risk customers who have a higher tendency to engage in illicit activities. They can then proceed to put appropriate measures in place or decide against onboarding the customer.
2. Government KYC check
Government KYC check verifies the customer ID information from government databases. With this step, the business does not only verify that the ID provided by the customer is valid, but verifies the information on the ID from the government. Government KYC check adds an extra verification layer to protect against AI-generated IDs that may pass verification MZR tests.
3. Ongoing monitoring
This is one of the most important steps in spotting layering activities in money laundering. Beyond verification during onboarding, businesses should constantly monitor customer activities for suspicious activities as it may be an indication of money laundering.
4. Suspicious activity reporting (SAR)
General AML laws mandate businesses to report suspicious customer activities to regulatory authorities. This would help them carry out investigations in time to put any money laundering activity to a halt.
Preventing Layering in Money Laundering with Smile ID
Smile ID offers comprehensive KYC onboarding and AML solutions that help organisations conduct effective due diligence on customers to fight money laundering activities. Our AML solution instantly screens users against:
- 1100+ global and African sanction lists
- PEP list of approximately 1.5 million individuals across four levels.
- Adverse media from 75,000+ reputable news sources with a minimum of 2 news sources from every country in the world.
With AML checks, the business can identify high-risk customers who have a higher chance of being involved in money laundering and put appropriate checks in place to monitor them. Book a free demo today to learn more.
