2.1.1 The Placement Phase

The placement is the initial stage of the process. The illegitimate funds have been obtained in some way, perhaps as a result of extortion, theft or drug trafficking, or any other form of predicate crime. These funds will need to be placed initially into the banking system to commence the money-laundering process.

Placement is not just the movement of cash into a bank account, even though this is the process that is most frequently considered. The initial placement purely means moving the funds from their original cash source into some other form which will enable the money launderer to undertake further layering and therefore disguise these amounts.

For example, were a money launderer to purchase a physical asset, say a painting or another asset of value, then this asset could be subsequently sold and this would then release funds which would appear to be legitimate. Consequently, the acquisition of the painting at an auction for cash would represent money laundering. So, it is not just the placement of cash into a bank account that represents the first stage in the layering process, rather it is the initial transfer of the questionable asset into another form.

Money launderers will typically focus on areas in the financial system where there appears to be the least obvious control. Consequently, if the money launderer has particular knowledge that an individual or company is in particular need of cash, then this will probably be an indicator as to an opportunity to be selected for the original placement of illegitimate funds. This is because the individual or company need is such that the level of due diligence that it conducts may be reduced, enabling the money launderer to profit.

All of the following could be used for the placement process:

• The purchase of paintings
• The purchase of antiques
• Buying things in a market
• The acquisition of stamps and coins
• The purchase of investment products
• Taking out unnecessary insurance products
• The purchase of new or second-hand cars
• The purchase of boats
• Buying chips at a casino
• Purchasing lottery tickets
• Purchasing premium bonds
• Acquiring shares in private companies
• Providing cash loans to companies
• Purchasing commodities or precious metals.

Effectively, the placement is limited only by the vision of the money launderer.

If there is a branch of a bank that is known to be under pressure to increase its deposit base, then the money launderers will actively seek it out. If there is a bank that is struggling to maintain liquidity, then it may also become an obvious target. If a salesman is given a target to achieve a bonus, then he may also become an opportunity for the money launderer, since he will potentially be liable to lower his money-laundering-deterrence guard while seeking to achieve sales. It is the person or business that most needs the cash or sales that is most likely to be targeted by the unscrupulous.

From the position of the firm, this highlights where additional controls are required. If a firm implements a bonus regime that requires a target of deposit to be achieved, then it has created an incentive that may run contrarian to the objective of a financial crime deterrence programme. By creating bias in the system, encouraging staff to seek out depositors, the message will be sent out to the market that this firm is actively seeking deposits. In trying to achieve the sales targets set, the employees of the firm may choose to ignore warning signals which at other times might have caused them to question the depositor.

However, given the nature of the current financial market, many firms are actively seeking to grow their deposit books. The additional reputational risks that are consequent to this route of action need to be addressed. This should be achieved through a combination of additional controls including the following:

• Secret shopping: A series of staff should seek to deposit funds at your branches, particularly those that are not currently achieving their targets. The secret shopper is, of course, an employee of the firm. They will pose a series of scenarios to the branch or other staff which, under normal circumstances, would have been expected to raise concerns. If the relevant employee fails to take the action intended, then the firm will be aware that its financial crime deterrence programme has ceased to operate effectively.
• Increased supervision: For a sample of accounts opened, the central management team should undertake a series of specific additional reviews to ensure that the risk profile identified for the customer is consistent with the information actually gathered.

2.1.2 The Layering Phase

Once the funds have initially been placed, the next phase of the money-laundering programme is the layering phase. As stated above, the objective of the layering phase is to disguise the proceeds of crime such that the original source and the current position of the funds are unclear. This can typically be as easy as using the illegitimate funds to invest in something legitimate, so that the funds now appear to be “clean”. In other cases, a far more complex series of transactions will be entered into.

In more complex schemes, the money launderer will move the funds between a number of accounts in a number of different jurisdictions and through a series of companies to ensure that the trail is as complicated as possible. This will essentially obscure the audit trail and sever the link with the original criminal proceeds. In the most professional cases of money laundering identified, the funds can actually “spin” up to ten times prior to being integrated into the banking system.

Money launderers will face varying levels of difficulty during the layering phase depending on the chosen method of investment. For example, antiques, paintings and stamps can all be legitimately acquired privately, and thus have a low level of risk for the money launderer. You can purchase them at antique markets, shops, auctions or even car boot sales or flea markets. They can be inherited, found or gifted. Some of these routes maintain formal records of the purchase or sale, whereas others do not.

That legitimate activity may not have records provides a good cover for the money launderer, since there can be little proof of where the asset came from. They could say it was inherited when, in fact, it was purchased from a flea market. If no questions are asked, then the money launderer is clearly at a significant advantage.

A more risky method of layering would be the purchase of property. This is because lawyers or solicitors will become involved. Lawyers generally are also under money-laundering obligations and need to conduct various due diligence of their own to meet the standards placed upon them. Accordingly, the lawyers may be alerted to concerns as a result of conducting their own due diligence. They may also be under an obligation to report inappropriate activity, but again this will depend on the rules of the jurisdiction and, of course, the scruples of the lawyer.

2.1.3 The Integration Phase

Integration is the final stage of the money-laundering process. It is the stage where illegal proceeds are re-integrated into a legitimate financial system to be assimilated with other assets in the system. This is where the disguised criminal proceeds can be returned to and used by the money launderer and they will now appear to be legitimate funds. Money launderers will typically put the “cleaned” money into the normal economy to make it appear to have been earned legitimately. The main aim of the money launderer is to integrate funds successfully so that it becomes difficult for anyone to distinguish between legitimate and illegitimate (criminal proceeds) funds and they will then be free to use them for any purpose they require.

There are many ways in which laundered money can be integrated back into the normal economy. With the money launderer, however, the main objective of money laundering at this stage is to reunite themselves with the criminal proceeds in a manner that does not draw attention or suspicion. More about suspicion later, but it is often by the money launderer abusing successful schemes of money laundering through greed that the financial institution subsequently becomes suspicious and the criminal is identified.

For example, the purchases of property, sports cars, art work, jewellery, etc. are common ways for the launderer to enjoy their laundered money without necessarily drawing attention to them. The risk is that conspicuous displays of wealth could either cause suspicion or result in envy, resulting in identification of inappropriate actions. However, money launderers will use more and more creative and unique ways to achieve their objectives.

Common methods of integration used by money launderers include the following:

• One of the simplest methods of integrating funds was to transfer money to a legitimate bank from a shell bank owned by the launderers. Shell banks, which have little legitimate business, are now generally addressed in jurisdictional rules and therefore this is becoming a more complex area to manage.
• Money launderers can send embellished invoices overvaluing goods or services which allow them to move funds from one country to another. The invoices act as verification for the origins of the funds placed with financial institutions.
• Money launderers can establish anonymous companies in countries where the right to secrecy is guaranteed. They are then able to grant themselves loans out of the laundered money in the event of a future legal transaction. Furthermore, they may increase their profits, they will also claim tax relief on the loan repayments and charge themselves interest on the loan.
• The use of trading accounts with financial institutions is another obvious example. The money launderer transfers funds into an open brokerage account, allowing the financial institution to trade on their behalf. At some later stage they take the funds, which have then been laundered, from the account.
• The money launderer can cancel an insurance policy after the premium has been paid. The premium returned by the insurance company is, of course, laundered funds.
• Assets acquired can be sold either in an open market or as a private sale, with funds being received ideally electronically into a legitimate bank account, perfectly laundered of course.

These are but a few of the ways in which the assets can be integrated back into the normal economy. The launderer's objective is normally to obtain cash payment from a legitimate bank that they can pay into their account at another legitimate bank. Once this has been achieved, the laundering cycle is normally complete and the criminal is free to use the funds for any purpose they require without any expectation of being detected.