Money laundering is the process of masking the source of illicit funds to make them look like they were obtained legitimately. Criminals undergo 3 stages to achieve this, starting with the very first step which is to introduce the criminal proceeds into the financial economy. This is called placement in money laundering and criminals employ several means to achieve this.
This article discusses placement in money laundering, why is it done? How is it done? And how financial institutions can put measures in place to detect and prevent placement. This way, money laundering activities can be detected and stopped in their early stages.
What is Placement in Money Laundering?
Placement is the first in the three stages of money laundering wherein the illicit fund is “placed” or introduced to the financial system. Criminals achieve placement in money laundering through several means including cash deposits, gambling, purchase of high-value assets, etc.
What is the Purpose of Placement in Money Laundering?
The goal of placement is to inject the money into the financial market without suspicions, giving it a somewhat legal trail although it was obtained illicitly. By doing this, criminals provide a background history to the funds, making it hard for financial regulators to uncover the illegal source of the funds.
The larger goal is to both obtain funds they can spend without the fear of suspicions as well as protect their underground criminal operations. This is because more often than not, regulators can track the transaction paths of illegal funds, leading them to other key actors in the criminal enterprise.
In summary, the goal of placement in money laundering is to:
- Hide the source of illicit funds
- Separate the money from its illegitimate sources to avoid suspicions
- Introduce the money to the financial economy
Recommended: Layering in money laundering
How Can Businesses Identify Placement in Money Laundering?
Being the first stage, placement in money laundering is arguably the most difficult. This is because suddenly injecting huge amounts into the financial system without attracting regulatory attention is difficult to pull off.
Signs of placement in money laundering include:
1. Unusual Financial Transactions
Financial institutions with proper due diligence in place are expected to perform customer risk assessments and understand their translation history and patterns. This way, they can easily spot when there's an unusual activity contrary to the customer's regular pattern.
A good example of this would be a customer who earns an average income suddenly receiving millions and transferring them to several accounts within a short time frame. The customer suddenly depositing large sums of money broken into small deposits within a short time frame is also another indication of possible placement activity.
2. Unexplainable Source of Funds
Just like the act, the source or lack of source is also a good indicator of a placement activity. A customer suddenly receiving large sums without being able to explain its source could be trying to place the money with laundering intent.
3. Odd Body Language
Our body language speaks a lot. Customers trying to commit a crime or place money with laundering intent would often express discomfort and get excessively nervous. Evasiveness or being defensive when questioned about the details of their transaction is also another possible sign. At this point, the customer might threaten or bribe an agent to remain under the radar.
4. Poor Financial Decision Making
A customer looking to place money for laundering purposes is likely to make unreasonable financial decisions. For example, they may decide to suddenly cancel and reroute transactions without reason or refuse the opportunity to earn deposit interest although having large sums in their account because it may require higher regulatory scrutiny.
Techniques/ Examples of Placement Activities in Money Laundering
Some of the techniques used during placement in money laundering include:
a. Deposit Segregation
This is the process of depositing a huge sum of money in small amounts at different times to avoid scrutiny. Normally, sums above a certain threshold trigger money laundering investigations, therefore, the criminal will deposit sums just below the threshold at different points over a period to avoid this scrutiny from financial regulators.
They could also deposit the money in different accounts to avoid creating noticeable patterns in their transactions that may arouse suspicion.
b. Trading Assets in Less Regulated Jurisdictions
Some countries are more AML-tight than others, therefore, criminals tend to buy and resell assets in these less regulated countries as a way to place their funds before transferring the sum to their preferred destination. They mostly purchase high-value assets that retain their value over a long period. Examples include artwork, precious metals, real estate, luxury cars and more.
After a safe period, they can resell these assets and receive payments which now appear to be legitimate.
c. Foreign Currency Deposit and Exchange
Depositing and exchanging foreign currencies is another common technique used by criminals for money laundering. It involves smuggling the money out of the country it was illegally obtained to a country with less strict AML regulations. The criminal can then exchange the smuggled funds for the local currency of the country or any other foreign currency and deposit the sum in a financial institution.
Over time, they can transfer the sum from the financial institution to a destination of their choice, as it already has a good financial trail.
d. Leveraging Financial Institutions
Financial institutions could ignorantly play a role in aiding money laundering. Instead of directly depositing money to the financial institution, the criminal can instead obtain a loan and repay it with illicit cash.
Recommended: Integration in Money Laundering
How to Prevent Placement in Money Laundering
The best way to prevent placement in money laundering is to apply the right technology for customer risk assessment and spot the activity before it is executed. Criminals have developed sophisticated ways to introduce illegal money into the financial system and once it's in, run it through several processes to make it difficult to track.
To prevent placement in money laundering, financial institutions should ensure they verify the customer identity and perform AML checks to ascertain they are not on any watchlists, sanction lists or Politically Exposed Persons (PEP). People on watch and sanction lists have higher tendencies to engage in money laundering while PEPs can easily abuse their position to launder money compared to regular citizens.
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This way, financial institutions can easily spot high-risk customers and place appropriate money laundering prevention processes in place.
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