How to Spot Money Laundering- Red Flags at Each Stage of the Process

One type of crime that is often used as a base for other crimes is money laundering. This includes drug dealing and corruption. As experts have estimated that the volume of ‘dirty money’ runs between $800 billion and $2 trillion therein, financial and FinTech professionals must be aware of money laundering. To stop thieves in their tracks, it’s important to know what to look out for at each step of the laundering process.

Jacob Lewis, a former FBI agent, said that “money laundering is the lifeblood of crime”. There are 3 Stages of Money Laundering, where criminals put layers upon layers between their source of illegitimate money and the money itself.

Integration: This final layer of the money laundering process allows the laundered money to re-enter the economy in a way that its criminal origins are removed. Knowing these three money laundering stages can assist financial institutions in spotting suspicious transactions and following anti-money laundering laws.

Red Flags in the Placement Stage

This is where the launderer inserts his dirty money into a legitimate financial institution, usually in the form of cash. In this state, common red flags are things like significant cash deposits directly with a bank rather than through a business that is accredited. 

Depositing several sums below the reporting limit might cause alarms indicating such cases of stage 1 placement laundering. At the placement stage, it is critical to detect illicit funds and prevent them from being accounted for in the financial system by promptly identifying the identities of clients and transactions. 

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Warning Signs in the Layering Stage

During the layering stage, the money-recycled criminals attempt to distance the original funds from their criminal basis via elaborate layering financial transactions such as many account wire transfers. Unusual or illogical transactions specific to the client are red flags in this regard. 

In the layering stage of money laundering, modest but frequent reallocation of funds to foreign countries or international locations known for soft anti-money laundering laws might be one of many indicators of ongoing laundering. Identifying layering patterns is critical in tracing criminal money flows.

Integrating Is Where Criminals Go Wrong – Red Flags to Watch For

This final stage of Integration is when the laundered money is returned to the economy and used to generate straightforward, legitimate income or wealth. This is frequently where money launderers make mistakes, with about 70% of laundering disputes filed at Integration. Examples of red flags here would be a sudden lifestyle change that is different from the known legitimate income of the client and sudden changes in cash flows. 

It could be, for example, large deposits for the purchase of expensive assets that far exceed their declared salary. The vigilant Integration will help detect and disrupt the three money laundering stages, especially at the final stages, where, as has been estimated, up to $2 trillion is laundered annually.

Money Laundering Through Business – A Common Laundering Method

FATF estimates suggest that roughly 60% of this is processed through front or shell companies. Fraudsters often use shell companies and fake invoices to mix illicit funds with the funds of a legitimate business and use their bank accounts to appear legitimate. 

Examples of red flags are new businesses with no or low levels of trade suddenly paying large sums to overseas accounts that do not match their profile. During the money laundering placement and layering stages, where illicitly acquired funds are mingled with those of a business in a way that disguises their illegitimate origins, these AML stages involve reviewing company financials and cross-referencing owner identities.

The menace of International Money Laundering 

In recent times, rapid globalization has fuelled increased international criminal cooperation, with as much as over a third of illicitly laundered funds globally involving cross-border transfers. This is also known as the layering stage, in which they often move the money through other countries with looser tax laws. 

He also regards U.N. data that showed wire transfers to countries that the FATF points out as high-risk. Because geographic borders do not bind flows of money, global cooperation through AML regimes is necessary to follow dirty cash throughout the entire laundering process.

What is the Role of Compliance Programs in Detecting Money Laundering?

Compliance programs are critical to the mission of assisting financial institutions to detect and report money laundering. The anti-money laundering (AML) legislation prohibits firms from engaging in all sorts of non-transparent financial transactions. It demands that companies have risk-based policies, procedures, and internal controls to monitor client transactions and identify suspicious transactions. 

A well-designed anti-money laundering mechanism is the first line of defense against the process of channeling illicit money through legitimate financial and business complexes, Money Placement, Layering, and Integration.

Ensure your company is well-versed and armed against financial crime. 

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