The Second Stage of Money Laundering

Click on the bookmark to view chapters of this webpage
Click on the bookmark to view chapters of this webpage

Financial institutions don’t want money earned through illegal activities in their systems. Unfortunately, this is exactly what criminals try to do with money laundering—sneak illicit cash into an economy and disguise the fact that it came from unlawful dealings. The crime of money laundering is often conceptualized as having three main stages: placement, layering, and integration.

Here, we’ll discuss the second stage of money laundering: layering. We’ll explain what it is, why criminals do it, and how they try to get away with it. We’ll then outline some behaviors financial authorities can look for to tell if transactions are meant to simply layer funds for money laundering.

New call-to-action

What is Layering in Money Laundering?

Layering—also called structuring—is the second stage of money laundering, in which money is put through a series of financial transactions to obscure the true (and illicit) source of the funds. By building a legitimate-looking transaction history, it's more challenging to identify the true origin of the illicit funds.

What’s the Purpose of Layering in Money Laundering?

The placement stage of money laundering is about getting illicit funds into a financial system. But if that money just sits idly in an account, or is immediately spent, it’s easy for financial authorities to trace it back to illegal activities. So fraudsters need to make it look like the money is changing hands and thus legitimately belongs in a financial system.

This is where layering in money laundering comes in. The goal of layering is to build up a significantly long history of transactions for ill-gotten funds. This serves two purposes. The first is to make the money more difficult to trace back to its criminal sources. The second is to make it look like the money is being “used” and traded, so that whoever currently holds it appears to legitimately own it (even though they don’t).

Methods of Layering in Money Laundering

The layering stage of money laundering can involve some of the same techniques as the placement stage. However, it tends to focus less on getting illicit money into a financial system without looking suspicious, and more on moving money within a financial system to make it even tougher to trace back to suspicious activity.

Here are some ways criminals do that.

In-Bank Transfers

Fraudsters will sometimes use electronic funds transfers to move ill-gotten money between accounts they control—personal, business, or both—without the money ever leaving a financial institution (or group of institutions). This allows them to obscure where the funds came from without actually spending them, which would involve another party that could become suspicious of the funds’ origins.

Asset Investment, Especially in Foreign Countries

Criminals may layer illegal money by investing it in physical property with high resale value (e.g. vehicles, real estate, precious metals, or artwork), or in financial products (e.g. stocks, bonds, or even life insurance products). These assets can then be resold for legitimate cash later, making it more difficult to tell that the original purchase was fraudulent.

Some fraudsters may take things a step further and move illicit money to financial institutions in foreign countries with looser AML regulations. They may do so through electronic transfers, smuggling cash, and so on. Then they may exchange the illegal funds for foreign currencies, and/or invest in foreign financial products. The point is to move money through multiple jurisdictions to make it harder to keep track of.

Business Investment

Criminals can use businesses in many different ways to layer illicit money. As in the placement stage, they may invest in genuine (but less-regulated) local businesses to try to hide ill-gotten cash among legitimate money. Or they may set up an illegitimate business as a front, appearing to offer products or services such as private loans, but giving their suppliers or clients illegal cash.

Sometimes their fake businesses may be shell corporations—companies that have no active business operations and often no physical presence. Criminals will use them to move illicit money around and hide who the beneficial owners of it are.

Transfers Through Purchased Financial Instruments

Another way criminals may structure illicit funds within a financial system is by purchasing alternative methods of moving money. These include money orders, postal orders, wire transfers, traveler’s checks, and so on. This allows fraudsters to move ill-gotten money while adding another transaction layer to its history, making it harder to trace.

Cryptocurrency Trading

Virtual currencies have provided money launderers with new tools for structuring illegal funds. One reason for this is that transactions are partially anonymized – they are usually only associated with virtual currency wallet addresses and not much other identifying information. And even these links between senders and receivers can be broken by using “crypto tumbling” or “crypto mixing” programs like Tornado Cash.

Another reason is that many cryptocurrencies are decentralized, meaning transactions involving them are cleared by majority network consensus instead of by a central administrator. This can make it more difficult to reverse transactions once they’re completed, as this also requires a majority of network users to support it.

Now that we’ve covered some common money laundering layering techniques, we’ll talk more about how to spot and stop them.

How to Identify Layering in Money Laundering

The layering stage in money laundering is about trying to make illegal funds snuck into a financial system during the placement step look like they’re being used legitimately. However, creating this illusion can lead criminals to make some financial moves that are unusual or just downright don’t make sense.

Here are a few things to look for.

Recurring Transactions for Exact Amounts

When monitoring for suspicious activity, financial authorities should pay attention to the specific values of transactions. Transfers associated with layering are often for exact, “rounded off” amounts that end in multiple zeroes. Either that or the value of a sequence of money moves will end up being an exact amount – maybe one that AML operatives at a financial institution see oddly frequently. This may be fraudsters trying to move illegal money in amounts just small enough that they don’t have to be reported on.

Rapid Transfers Within an Account

Regulators should also focus on how quickly money is coming into and out of an account. If it’s frequently the case that funds are deposited into an account, only to be withdrawn a short while later, the account may be being used to layer illicit money.

An additional warning sign is if multiple accounts within the same financial institution are often transferring money back and forth between each other. Again, it’s likely the funds are illegal and the accounts only exist to facilitate layering in the money laundering process.

Frequent Use of Uncommon Deposit/Transfer Methods

Criminals will sometimes make frequent use of financial instruments—wire transfers, money orders, traveler’s checks, postal orders, and so on—in the structuring stage of money laundering. This lets them deposit or move illicit funds while adding an additional transaction to their history, making it harder to tell if they were sourced from illegal activities.

This is especially true of financial instruments that are difficult to trace or reverse, such as wire transfers. So if AML professionals notice an account primarily or exclusively using financial instruments to send and receive money, it’s a sign that it could be being used for layering.

A High Volume of International Transactions

Moving illegal money through multiple jurisdictions—especially different countries—is another common tactic in money laundering’s layering stage. Criminals may smuggle illicit funds into financial institutions in countries with inadequate AML systems. There, they may trade the ill-gotten money for foreign currencies, and/or invest it in financial products or shell corporations.

That’s why it’s important for AML professionals at financial institutions to be aware of which countries are on sanctions lists or other financial risk watchlists. If they notice a significant number of transactions moving funds to or from high-risk countries, it could be that the money is illicit and criminals are attempting to structure it to look legitimate.

In the end, the best defense against layering for AML teams is to ensure their financial institutions have Know Your Customer (KYC) programs that are up to standards. Employees should be trained to pick up on contextual cues, such as comments customers make or information they provide about certain transactions, that may point to layering.

More than that, they should be able to accurately verify customer identities, assess their risk profiles, and know what is or isn’t in character for them in terms of financial moves.

Download Transaction Monitoring Product Guide

Detect Layering by Getting a Big-Picture View of Transactions with Unit21’s AML Tools

Digital AML solutions, like Unit21’s Transaction Monitoring tool, go a step further in detecting methods of layering in money laundering. Taking additional contextual data into account can allow for visual link analysis, which can reveal activity patterns indicative of layering that would be difficult to spot otherwise.

Contact us for a demo to see how Unit21 can improve a financial institution’s AML monitoring.