Money Laundering Layering: Exposing the Hideout of Financial Criminals

Money Laundering Layering is considered the second stage in money laundering. It is by far the most complex and difficult-to-detect stage of money laundering. In this stage, the money launderers make a large number of transactions in different ways. This makes the trail of the paper money difficult to detect and trace the owner’s identity.

M Abd'al Bari

Research Associate | Fintech and KYC

In our previous publication, we discussed the 3 stages of money laundering in a summarised form. The process of Money Laundering itself is complex and difficult to detect. In this article, we will explain the Money Laundering Layering Stage in detail.

In simple words, the Layering stage of money laundering is the process in which illicit money is mixed with legitimate money through various transactions and the money is kept in continuous circulation. In this way, the regulators or law enforcement cannot easily identify or trace it back to the original owner.

Layering is the core stage of the money laundering process and cash becomes legitimate through layering. As the name suggests, multiple layers of transactions are added to conceal the criminal sources of cash.

Also Read: Embezzlement and Money Laundering

How Does Layering In Money Laundering Work?

Mainly, there are four ways to execute the layering stage. Each way is used to increase the complexity of the laundered money trails and add as many layers of cash as possible.

1	Financial Transactions	It includes various approaches to make a high number of transactions in multiple accounts such as forex trading, international payments, and of course Crypto asset investments.
2	Shell Companies	The inactive companies without business operations are extensively used by Money Launderers. Their shares are owned by money launderers through their illicit money to make this investment appear legal.
3	Luxury Assets	Seemingly legitimate but high-end investments are made for hiding the illegal cash such as buying luxury cars, real estate investments, and high-value artwork investments. The ownership of illegal cash is spread into multiple assets in this approach.
4	Helping Hands	Criminals help other criminals for their personal gains. Corrupt bankers, managers, and other influential figures such as PEPs (Politically Exposed Persons) help money launderers in layering illicit funds through bank accounts and even provide physical hideouts for cash reserves.

Read the FATF publication on Money Laundering through Arts & Antique Market

Different Strategies to Identify & Prevent Layering

1	Enhanced Due Diligence (EDD)	Conducting a thorough due diligence (EDD) procedure verifies customer identities and their financial activities. It helps in tracking the sources of funds with deep checks to detect layering and other stages of money laundering.
2	Transaction Monitoring	Transaction Monitoring is critically important while implementing Anti-Money Laundering procedures. Advanced transaction monitoring systems can detect unusual and repetitive transaction patterns indicating layering.
3	Suspicious Activity Reporting	Raising Red Flags for suspicious activities help in identifying layering activity well before time. In this way, the SAR filed to authorities is used to stop money laundering activity.
4	Risk Profiling	Categorization of customers as per the risk they pose to the financial institution is helpful in implementing KYC (Know Your Customer) measures. This helps in identifying money launderers and stopping their activities timely.
5	Compliance Training	Employees of banks and financial institutions can be trained to have a watchful eye and expertise in identifying layering activities and suspicious behaviors of risky customers.

Bottom Line

Money Laundering is a punishable crime and is considered the lifeblood of criminal organizations. Regulatory bodies, authorities, and Fintech firms must recognize the importance of joint effort and technological advancement in staying ahead of the criminals to make their survival impossible. To do so, stringent and automated KYC & AML systems implemented under the universal guidelines will help fintech firms and other businesses in maintaining compliance across the world.