The First Stage of Money Laundering

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A major crime that financial institutions have to be on guard against is money laundering. This is when money generated by illegal activities is filtered through a financial system so that it becomes difficult to tell apart from legitimate funds. It typically involves three steps: placement, layering, and integration.

This piece will focus on placement in money laundering: what it is, why it’s done, and how it’s accomplished. We’ll also divulge some clues that financial institutions can look for to detect and prevent placement, therefore stopping money laundering at its earliest stages.

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What is Placement in Money Laundering?

Placement is the first stage of money laundering, in which criminal proceeds are introduced into the financial system. They can be deposited as cash, used to buy financial instruments, funneled through businesses, or used to buy high-value assets in less strictly regulated industries.

What’s the Purpose of Placement in Money Laundering?

The purpose of the placement process in money laundering is to introduce ill-gotten assets into a financial system without arousing suspicion that they were obtained illegally. Fraudsters are aiming to make it difficult for financial regulators to trace the source of their funds or assets back to criminal activity.

They need to do this to protect their criminal operations. This is because once financial regulators identify illicit assets, they can use techniques like link analysis to follow their transaction paths. This can allow them to identify other actors in money laundering or fraud rings, then notify the proper authorities to shut these enterprises down.

Examples of Placement in Money Laundering

The following are some common placement techniques in money laundering.

Dividing Deposit Amounts

Criminal deals tend to involve large amounts of money. But depositing that money all at once will often require the depositors to file additional information on where that money came from. At the very least, it can attract suspicion from financial regulators.

To get around this, fraudsters may try to deposit the illicit money in small amounts into several different accounts at irregular intervals. Their aim is to avoid creating noticeable patterns in the deposits that would make financial authorities suspect the money may be ill-gotten.

Purchasing and Reselling Stable Assets in Less-Regulated Industries

Fraudsters may also try to put illegal cash into circulation by using it to buy tangible property in industries with looser AML regulations than financial institutions. They will often buy assets that are worth a lot of money and/or are expected to retain their value, including precious metals, artwork, vehicles, and real estate. Then they can resell the goods later to get legitimate money.

Blending Funds

Fraudsters can also invest illicit money in local businesses that are lightly regulated and deal frequently with cash. These can include restaurants, “mom-and-pop” stores, nightclubs, casinos, and tourist venues. The aim is to mix illegal cash with legitimate cash so that it becomes difficult to tell which is which.

Exchanging or Depositing Funds in Foreign Countries

Criminals may sometimes smuggle illicit cash out of the country where it was obtained illegally, and into a country that has lighter AML regulations. There, the fraudsters can exchange the ill-gotten assets for the country’s local currency (or other foreign currencies), or they can deposit the money in local financial institutions.

Utilizing Financial Services

Instead of directly depositing illicit money, fraudsters can use it for other types of financial transactions. For example, they may take out a legitimate loan and repay it with illegal cash.

They may also use the ill-gotten funds to purchase alternative ways of moving money around. These can include traveler’s checks, money orders, and postal orders. Then, like with dividing up deposits, they use these financial instruments to make small, staggered contributions to different accounts to avoid raising suspicion.

Not only can the money be transferred to central criminal accounts later, but it’s also now harder to trace because it went through additional transactions before being deposited. This is an example of the layering phase of money laundering.

How to Identify and Prevent Placement in Money Laundering

The good news for financial institutions is that the placement stage in money laundering is usually the hardest one for criminals. Organized criminal activity tends to be rather lucrative, but this also means it’s more difficult to sneak those large amounts of money into legitimate financial systems without raising at least some red flags.

Some warning signs that a client is trying to place funds in order to launder them include:

Odd Behavioral Cues

A person trying to place money for laundering will sometimes display strange behavior. They may act excessively nervous, or get evasive or defensive when asked about the details of their transactions. They may ask seemingly irrelevant questions about a financial institution’s bookkeeping practices, and even attempt to threaten or bribe FI employees to avoid having their activities reported.

Illogical Financial Decision-Making

If trying to place money for laundering purposes, a client may make a financial decision that is inexplicably against their interests. For example, they may suddenly cancel a transaction upon learning that it’s large enough to warrant reporting. Or they may have a large deposit account, but refuse opportunities to have it make more money if it involves greater handling by the FI.

Inconsistent Information

Criminals may use fake, stolen, or synthetic identity information when attempting to place funds for laundering. This helps them avoid any uncovered financial crime from being traced back to their true selves.

A financial institution should look closely at the details a customer gives over the course of several transactions. Discrepancies need to be thoroughly justified; if they can’t be, then it’s likely placement—or some other shady activity—is going on.

Unusually Complex Transactions

Good financial institutions will build profiles on their customers, based on their transaction histories. This allows them to spot and inquire into moves that significantly deviate from a client’s normal financial activity.

Remember, a common placement tactic is to break up large deposits into smaller amounts and put them in separate accounts. An FI that knows its customers well should be able to flag such moves—and other meaninglessly complicated transactions—as being out of the ordinary.

Unknown Source of Funds 

The overall goal of money laundering is to integrate illicit cash into the financial system while making it difficult to trace back to criminal activity. So if a customer is making large cash deposits—or seeing large sums transferred to their accounts from third parties—without sufficiently explaining where the money came from, they could be trying to place the money with the intent to launder it.

Overall, the surest way of detecting and preventing money laundering placement is to have a robust Know Your Customer (KYC) system. Financial institutions should be able to rigorously scrutinize a prospective client’s identity to ensure it’s not fake, stolen, or synthetic. They should also be able to evaluate, from the client’s background, how much risk they represent and what does or doesn’t qualify as typical financial activity for them.

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Use Unit21’s AML Infrastructure to Detect Placement for Money Laundering

Of course, being able to tell everyday transactions from unusual ones—like the kind that may be placing money to be laundered—also requires looking at many different transactions of different kinds.

This is where a digital solution like Unit21’s Transaction Monitoring can help. It not only analyzes transactions inside a financial institution, but also factors in other contextual data to more accurately determine whether or not certain activity is suspicious.

To see it in action, contact us today for a demo.