The layering stage of money laundering is moving illegal money via various financial instruments to make the criminal source of the funds untraceable.
With illegal activities generating huge amounts of money, especially in amounts that put transactions on the radar for investigations, money laundering has been one method criminals have used to escape attention from authorities. It involves several stages and processes for its execution to be successful, the most important stage for investigators to unravel being ‘layering’.
There are three major stages in money laundering;
The placement stage is where the criminal introduces the illegally acquired funds into the financial system. In addition to introducing these funds into the financial system, one goal of the placement stage is to distance the criminals from the funds.
However, after this stage, the illegally acquired money remains traceable.
There are a host of methods criminals use to introduce illegal funds. These include smurfing, partnering up with “legal” companies that ordinarily engage in very large transactions, creating fake invoices and paying them to criminal associates, or smuggling physical cash to countries with weak anti-money laundering restrictions and policies.
As said before, money placed into the financial system at this stage remains very traceable to the criminal. This is where the layering money laundering stage comes in.
Now, the layering money laundering stage is the main phase where the criminal does all the work required to make the money “clean”.
It involves a series of complex transactions and financial instruments aimed at obscuring the auditing process for funds, separating funds from their criminal source, and making the source of these illegally acquired funds look legitimate.
Layering in money laundering typically involves offshore techniques and accounts, as well as very fraudulent financial bookkeeping processes.
There are many enabling frameworks, techniques, and transaction types.
An offshore bank is a financial banking institution that typically keeps funds or accepts deposits solely on behalf of non-residents.
Offshore banking is a legal financial concept, one ordinarily developed to help individuals and companies avoid strict taxes in the jurisdiction where they reside or do business.
Jurisdictions that operate this offshore banking system typically introduce beneficial financial policies and tax rates enticing foreigners. With the increasing financial instability in recent years, a lot of countries have seen the benefits of this framework in attracting investors and have become offshore banking jurisdictions themselves.
Money is moved by criminals to offshore banks located in jurisdictions with very weak anti-money laundering policies and frameworks. This allows them to make transactions under the radar of other stricter jurisdictions and engage in other layering activities with fewer litigation issues or raising FIU suspicions.
Bank Secrecy Laws
Bank secrecy laws help put a cloak of anonymity over who owns accounts and the money stored in them. Although not deemed illegal, a lot of Western countries have legal frameworks discouraging citizens from dealing in this way.
The US, for example, requires an individual to report on all offshore banking transactions and to go to the extent of denouncing citizenship before being legally deemed to bank with secrecy. Other Western countries as well usually require a legal process for this.
Now, when this is engaged in by residents from countries with weak AML measures, combined with offshore banking, it could be very dangerous and useful for money laundering purposes.
To funnel large amounts of funds, doing so in the name of a company or corporate institution makes transactions less suspicious.
Doing so in the name of a shell company, which is a company merely registered on paper without any associated physical existence or employees, makes the layering process easier.
With a lot of jurisdictions having unregulated trust companies, illegal bookkeeping activities for money laundering purposes are used by criminals. For one, the possession and control of a company and all its assets may be simply put in unregulated offshore companies and these, in turn, simply give access to the receiving criminal individuals under a different company name.
Corporations are merged, false paper trails and documentation are created, and a “flee clause” compelling the trust company to transfer the trust is developed to facilitate the movement of assets.
A tool used to make seizing money difficult for law enforcement officials, walking accounts involve bank officials and the quick transfer of funds into multiple accounts.
Here, an account is opened and money deposited into it is instructed to be immediately transferred into a secondary account. Bank officials in charge of the initial account are instructed to immediately inform officials in charge of the secondary account of any inquiry by law enforcement authorities.
These officials then follow the instructions of immediately transferring these funds to another account.
The illegal funds keep “walking” through multitudes of accounts and don’t stay in one place. This technique acts as an early warning system to the money launderers.
Self-Owned Financial Institutions
Money Launderers purchase financial institutions for themselves in jurisdictions that permit this. These self-owned banks are then used as one of the institutions through which funds are channeled and, once received, banking records could be destroyed or altered.
Certain information shared between individuals and their private lawyers, accountants, brokers, and agents are required to be private, following the requirements and best practices of these professions.
Due to this, these professional individuals are used to funnel illegal funds and have no obligation to disclose any information. Institutions and individuals in this profession also help to generate illegal documents to facilitate the money laundering process.
Layering involves a combination of these complex processes. One other layering process is an investment in flipping real estate and other assets, both physical and digital, with illegal funds.
This involves processes aimed at giving the criminal back their “cleaned” funds. Here the funds are given back in the form of real estate properties, expensive valuables, invoices, or even loans. The illegal funds are deemed untraceable by the criminals to the best of their ability at this point.
Here’s an example to explain the concept:
Consider a situation where a fund of $1 million is stolen from a financial institution in cash (pre-layering stage).
A total of $250,000 is deposited into bank accounts using the smurfing technique, then $750,000 smuggled out of the country to country X, one of the countries with poorer AML compliance.
This $750,000 is then deposited into bank accounts in country X. Here, the placement stage of money laundering is complete.
The layering money laundering stage then begins and involves the $250,000 sent to bank accounts in country X also using the smurfing technique.
With all stolen funds within a jurisdiction with weak AML compliance, funds are then more easily transferred to offshore banks operating with bank secrecy laws and under the name of shell companies.
Walking accounts are established to ensure funds are not seized by law enforcement agencies. Funds are freely transacted with, and unregulated trust companies alongside intermediary professionals with fiduciary relationships are brought into the mix to create false identities, transactions, and documents.
The criminals establish a self-owned bank to further obscure the whole trail and a couple of investments are engaged. With a mix of all these, the layering money laundering stage is complete and real estate properties in the county Y are bought with money obtained from “legitimate” sources.
This real estate property is sold and the initial criminal gets their illicit gains back, although this will not amount to the total $1 million, due to the bribes and fees.
The money laundering process is complete. Sometime in the future after all that effort the criminal is then apprehended by law enforcement and sent to prison.