In today’s digital world, imposters have implemented advanced methods to conceal illicit funds under legitimate entities. They smuggle large amounts of money, which allows them to disguise the illegal money and use it for terrorist financing, human trafficking, and insider trading. A report shows Haiti has experienced an increasing money laundering risk index score from 7.35 in 2015 to 8.25 in 2023. The recent shift to online business activities has opened doors for cybercriminals to make illegal monetary transactions. Imposters can illegally withdraw large amounts of money through the 3 stages of money laundering.
Money Laundering – And Illicit Working Mechanism
Money laundering is an evolving financial crime in which criminals acquire monetary funds from illicit sources and use unauthorized methods to convert them into authentic assets. The money launderers breach the customer’s account details and use their accounts to store the unlawful money to make it appear legitimate. They can disguise the money through various transactions, such as smurfing, cash smuggling, and storing money in shell companies.
Money launderers can smurf large amounts of money by classifying these transactions into smaller deposits that can be stored in various financial accounts. They also smuggle cash to other countries and deposit them in an international account for illicit asset purchasing. Recently, money launderers have started to access the official documents of shell companies and use their legitimate account for their illicit monetary funding and transactions. The digital evolution has enabled them to use proxies and unknown software without IP addresses, making fraudulent activities challenging to detect.
Let’s examine briefly what are the 3 stages of money laundering to get a better picture of this financial crime.
3 Phases of Money Laundering
Money launderers can release unauthorized funds and transform them into a legitimate financial server by following the 3 steps of money laundering. These three money laundering stages are briefly discussed below:
Phase 1: Placement Stage of Money Laundering
The first stage of money laundering is when the money launderers find possible accounts to place their illicit funds. They usually break down large sums into smaller transactions that appear to be more authentic and deposit them in an authorized bank account. Sometimes, they convert these illicit funds into checks and money orders, which are later stored in some other locations. They use other methods to place the laundered funds, such as creating a fake invoice showing the underlying transaction’s funds. Mostly, they buy some securities with this amount and use them to make bets on online games.
Phase 2: Layering Stage of Money Laundering
The layering stage of money laundering aims to ultimately conceal the original source of the monetary funds. Money launderers achieve this by making several transactions and moving the money through various bank accounts, confusing the financial institutions into detecting the original source of these funds. They also misuse shell companies to store the monetary funds in their authorized bank accounts.
Sometimes, the launderers convert these funds into digital currencies, such as cryptocurrency, causing inconsistencies in the financial transactions and invoices. They deposit these funds in one bank and use them to invest in digital cryptocurrency. The proceeds from such currencies are transferred to some other banks, confusing the entire financial system.
Phase 3: Integration Stage of Money Laundering
In the final phase, money launderers integrate the unauthorized funds into authentic financial accounts. They usually invest these funds in purchasing land, tangible assets, and investing in real estate. This makes the funds appear legitimate, making fraud actions difficult to detect. The ultimate aim is to conceal the source of illicit funds and convert them into legitimate assets.
Combat Money Laundering Risks with Digital Identity Verification and AML Compliance
Money laundering affects not only the institutions but also the bank account holders. They place the illicit funds into authentic customer’s accounts to hide their identity. It is crucial for financial institutions to verify the customer’s identity before registering their bank accounts. This can be done through digital identity verification, which incorporates a biometric verification solution to authenticate the identity of each account holder. Businesses must comply with the regulations of Anti-Money Laundering (AML) obligations as they provide security against the money laundering acts. It prompts financial institutions to conduct a due diligence analysis to detect malicious entities. AML regulations require the financial sector to uncover the presence of illicit monetary funds, preventing money laundering attempts.
Summing It Up
Money laundering is one of the most recurring financial crimes in today’s digital world. The money launderers conceal the unauthorized funds in legitimate forms to prevent the suspicions of illicit attempts. They commit this crime in three different stages: placement, layering, and integration. They first store the illicit funds by breaking down the large monetary funds into smaller chunks. Then, they make several transactions by moving the funds across various bank accounts, complicating the detection of illicit funds. Lastly, these funds are used to purchase tangible assets, which makes the funds appear legitimate.
