3 stages of money laundering describe the activities and the process, how a criminal organization performs series of activities to make the illegal money look clean. As the entire process is illegal and punishable in almost every country of the world. So, in this blog, we will explain how the process usually takes place and how the world started initiated to make all these 3 stages of money laundering illegal.
What Is Money Laundry And Why Is It Illegal
What is money Laundry?
Money laundering referred to a process of money generated from illegal sources that appear to come from a legitimate origin. Illegal activities such as drug trafficking, human trafficking, terrorist activities etc are considered dirty, so the process ‘launder’ to make the money look clean.
Such activities take place in a criminal organization where the need to use the big cash effectively. So, these organizations need to show the legitimate source of money to invest in financial sources
Why Money Laundry Is Illegal?
Money Laundry is used by criminal organizations to show the money which is generated from criminal sources as clean. As the origin of money is from illegal activity. Moreover, it promotes such activities and blocks the money in the circular flow of income and expenditure in the economy.
Word ‘launder’ in money laundering refers to make the money look clean.
3 Stages Of Money Laundering
There are 3 stages of money laundering, the whole process is divided into 3 stages. So, here are the 3 stages of money laundering:
Placement is the very first step of the 3 stages of money laundering, which includes moving the money into legitimate source like- casinos, financial institutes, financial instruments etc also hiding the source of money.
A criminal organization holds cash in bulk which is needed to be inserted into a financial system.
This is the most vulnerable stage of money laundering as criminals are holding on to a bulk of funds and placing it into the financial system, which may attract the attention of law enforcement agencies.
Afterwards, there is a stage of layering in 3 stages of money laundering. In this stage financial structure is broken by small transactions, ti makes it difficult to deduct and find out the laundering activities.
Mostly, these transactions include the international money movement. So, the financial agencies won’t be able to track the financial gain to a criminal organisation.
In layering stage of 3 stages of money laundering includes the moving of money global electronically by trading in overseas markets.
Criminals usually convert the cash into monetary instruments once the funds are placed in the financial system without detection. The proceeds can either be banker’s drafts or money orders. In the modern world, funds can also be used for trading in different stocks or currencies across different markets.
Another common way that criminals use to cover the trial is buying assets with cash and selling them. Assets can be re-sold locally or abroad and hence makes it harder to trace and thus seize.
Finally, in the 3 stages of money laundering, the money will return to a criminal organization legitimately after being placed in a financial institution. Now a criminal organization make multiple smaller financial transactions. As the illegal money is shown legally with a full legitimate source. So, it can be retrieved and use for any purpose. Usually, these transactions make to purchase an asset like legally retrieve their illicit funds after fully integrating them into a legitimate source, and can use them for any purpose.
Money Laundering Techniques
There are different techniques of money laundering. So to understand the 3 stages of money laundering here are the different money laundering techniques:
In the case of the structuring method, the cash placement is divided into smaller deposits. This method is usually done to avoid detection and anti-money laundering reporting requirements.
As a result, sub-components can be used to purchase a smaller amount of instruments like- demand drafts and then ultimately deposit those, again in small amounts of money.
Bulk cash smuggling
This method in the 3 stages of money laundering involves the physical transportation of cash to another jurisdiction. Usually, these other jurisdictions have the least money laundering enforcements or the bank has high secrecy policies. One part of bulk cash smuggling involves transporting fake currency to enemies.
A criminal organization which are involved in money laundering activities deals in huge cash transactions. So, these organizations use bank accounts cash-intensive business and deposit cash proceeds of crime.
Usually, these organizations deal in hop in a mall or a petrol station. Cash revenue from the legitimate business is added to the illicit cash. In such cases, the business will usually claim all cash received as legitimate earnings.
Trade-based money laundering
A trade-based money laundering referred to the under or overvaluation of invoices to disguise the movement of funds. For instance, in the case of the art market is can be used for money laundering. Because several unique aspects of art are the subjective value of artworks which are difficult to ascertain. Also, the auction houses keep the complete secrecy of buyer and seller. Hence it is used for tax evasion.
Shell companies and trusts
Trusts and shell companies console the true owner of the money. As depending upon the jurisdiction the shell companies and trust do not need to disclose the owners. Sometimes referred to by the slang term rat-hole, though that term usually refers to a person acting as the fictitious owner rather than the business entity. There is a difference between Shell, Shelf and Front companies.
Credit Card Laundering
Usually, in the 3 stages of money laundering, this technique is used in the layering or integrating stage. For example, if a criminal organization uses a credit card and overlaps the credit card balances and then they ask for a refund. So, receiving a bank transfer from a reputed credit card company will make it look like the source of funds legitimate.
The money laundering technique of round-tripping includes depositing money in a controlled offshore foreign entity. Mostly the country is a tax haven. Because it not only facilitates money laundering it also facilitates tax evasion. Afterwards, it comes back as foreign direct investment
A subpart of round-tripping includes transferring the funds to a law firm as a fee. Later on, the agreement of retainer is cancelled. As a result, the beneficiary receives the money towards the settlement of a dispute from a law firm.
Another technique that is used in the 3 stages of money laundering is bank capture. A bank capture is referred to buying a controlling interest in banks. Generally, these activities take place in a jurisdiction having weak AML controls.
In the case of casinos, a person buys the chips from illicit cash and pay for a relatively short period. Afterwards, the person will claim a refund on the chips. Which will be given in form of a cheque. As a result, it is shown as the winning from gambling.
Gambling on Cricket
It is one of the easiest ways of completing the 3 stages of money laundering, as it minimises the risk. A gambler can place the money on the outcome of a match or small over or small outcome. In last if the winner wins the bet can disclose the income as winning. And in case of losing a bet, they can keep the bet disclosed.
The unorganized sector is still has a huge involvement in the economy. Since the daily wagers do not have any government registrations nor any contracts. As a result, the organization pay them in cash with no salary slips.
Voluntary Disclosure Schemes
These are the tax amnesty schemes for the tax defaulters. If the defaulter declares his hidden wealth, the government offers to take no action against the default. For example, those that legalize unreported assets and cash in tax havens.
Transaction based money laundering in this case, 3 stages of money laundering are completed when a merchant unknowingly processes illicit credit card transactions for another business.
In India, there are no taxes on agriculture activities. So, a launder mixes the illicit money with other sources. And they disclose the income, file the documents with the government but under the wrong head.
Anti money laundering
Anti money laundering (AML) refers to the laws, regulations and procedures intended to prevent criminals from disguising illegally obtained funds as legitimate income.
The concept of anti money laundering rose globally after 1989 after the formation of the financial action task force. As a result, it focused on developing and promoting international standards to prevent the 3 stages of money laundering. And after the 9/11 terrorist attack, they expanded its mandate and included terrorist financing.