The Three Stages of the Money Laundering Cycle

Money laundering often involves a complex series of transactions that are usually difficult to separate. However, we generally consider three phases of money laundering:

Phase 1: Placement

The physical disposal of cash or other assets derived from criminal activity.

During this initial phase, the money launderer introduces the illegal proceeds into the financial system.

Often, this is accomplished by placing the funds into circulation through financial institutions, casinos, shops and other businesses, both domestic and international.

This phase can involve transactions such as:

  • Breaking up large amounts of cash into smaller sums and depositing them directly into a bank account.
  • Transporting cash across borders to deposit in foreign financial institutions, or to buy high-value goods – such as artwork, antiques, and precious metals and stones – that can then be resold for payment by check or bank transfer.

Phase 2: Layering

The separation of illicit proceeds from their source by layers of financial transactions intended to conceal the origin of the proceeds.

This second stage involves converting the proceeds of the crime into another form and creating complex layers of financial transactions to disguise the audit trail, source and
ownership of funds.

This phase can involve transactions such as:

  • Sending wire transfers of funds from one account to another, sometimes to or from other institutions or jurisdictions.
  • Converting deposited cash into monetary instruments (e.g. traveler’s checks).
  • Reselling high-value goods and prepaid access/stored value products.
  • Investing in real estate and legitimate businesses.
  • Placing money in investments such as stocks, bonds or life insurance.
  • Using shell companies or other structures whose primary intended business purpose is to obscure the ownership of assets.

Phase 3: Integration

Supplying apparent legitimacy to illicit wealth through the re-entry of the funds into the economy in what appears to be normal business or personal transactions.

This stage entails using laundered proceeds in seemingly normal transactions to create the perception of legitimacy.

The launderer, for instance, might choose to invest the funds in real estate, financial ventures or luxury assets.

By the integration stage, it is exceedingly difficult to distinguish between legal and illegal wealth.

This stage provides a launderer the opportunity to increase his wealth with the proceeds of crime.

Integration is generally difficult to spot unless there are great disparities between a person’s or company’s legitimate employment, business or investment ventures and a person’s wealth or a company’s income or assets.

Source: ACAMS.

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