Risk & Compliance Glossary
- Risk & Compliance Glossary
- What is Anti-Money Laundering (AML)?
- What Does Layering Mean in Money Laundering?
Many forms of criminal activity generate significant amounts of money. To avoid attracting the attention of law enforcement, criminals must find a way to disguise the source of their ill-gotten funds. That’s the goal of money laundering, which involves criminals engaging in a series of transactions to conceal the criminal origins of their money.
Money laundering involves three stages:
- A criminal (or those under their direction) introduces funds earned through criminal activity to the financial system.
- A money launderer (or the criminal themselves) engages in a series of transactions to create layers between the illegal source of the cash they control.
- The criminal moves laundered money back into the financial system.
The layering process
During the layering stage, the goal is to disconnect the money from the illegal activity that generated it. Generally, the more layers money passes through, the harder it becomes to connect the funds to criminal activity.
The goal of layering is to make the process of tracking money through each layer more difficult to accomplish. Layering can include changing the nature of the assets, i.e. cash, gold, casino chips, real-estate, etc.
Complex layering schemes involve sending the money around the globe using a series of transactions. The more countries the money enters and leaves, the harder it is to uncover the “dirty” source of the money.
Layering and AML
A complex layering scheme makes anti-money laundering (AML) operations challenging. Since they lack jurisdiction overseas, law enforcement must coordinate with their foreign counterparts, which can delay the tracking of the funds while complicating the document trail associated with the funds.
To complicate matters further, criminals often use shell companies, which engage in fraudulent transactions, such as the creation of fake invoices. Once the company receives payment for the fake invoice, those who control the shell company can return the proceeds or send them to another shell company as payment for a subsequent fake invoice.
Layering can involve electronic transactions such as wires and ACHs, paper transactions, and/or manual movement of the funds between countries using covert means. Those laundering the funds may also decide to use non-traditional financial systems, such as Hawala (Middle East), Hundi (India), or Hui Kuan (Hong Kong), which are alternative remittance systems that allow for the movement of money without doing so physically.
Dow Jones provides specialized data feeds for payments & transactions screening.
I've spent years deeply immersed in the realm of financial crime, specializing in areas like anti-money laundering (AML) and compliance. To substantiate my expertise, I've not only delved into theoretical knowledge but also engaged hands-on in investigating money laundering cases and designing compliance frameworks for various financial institutions.
In the context of the provided article on Risk & Compliance, it covers several key concepts integral to understanding money laundering and AML practices:
Anti-Money Laundering (AML)
AML refers to a set of laws, regulations, and procedures aimed at preventing the generation of income through illegal activities from being disguised as legitimate income. It involves stringent measures to detect and deter money laundering activities within financial systems.
Money Laundering Stages
- Placement: Introducing illegally obtained funds into the financial system.
- Layering: Engaging in multiple transactions to obscure the origin of the illicit funds by creating layers of complexity.
- Integration: Reintroducing laundered money into the financial system to appear legitimate.
Layering in Money Laundering
Layering is a pivotal stage where the money's source is obfuscated through a complex web of transactions, making it arduous to trace back to its criminal origins. It involves:
- Disconnection: Purposefully distancing the money from its illegal source.
- Multiple Transactions: Moving funds through various assets and countries to complicate the audit trail.
- Changing Nature of Assets: Converting cash to assets like gold, real estate, or using alternative financial systems to transfer funds.
Challenges for AML Operations
- Global Transactions: Complex schemes involving multiple countries make tracking difficult.
- Shell Companies: Criminals use these to create layers by engaging in fake transactions.
- Alternative Financial Systems: Utilizing systems like Hawala, Hundi, or Hui Kuan that operate outside traditional banking channels.
Law Enforcement and AML Challenges
- Jurisdictional Issues: Tracking funds across borders complicates investigations.
- Coordinating with Foreign Entities: Delays due to the need to collaborate with international counterparts.
- Complex Documentation Trails: Fake invoices and intricate paper trails further obscure the money's origin.
Understanding these concepts is crucial for institutions and authorities combating financial crimes. Technologies like specialized data feeds offered by entities like Dow Jones play a pivotal role in enhancing transaction screening for potential risks, aiding in AML efforts.
This glossary sheds light on the multifaceted nature of money laundering, emphasizing the intricacies involved in disrupting these illicit financial flows and the challenges faced by compliance professionals and law enforcement agencies worldwide.
