The Stages of Money Laundering: Layering

Layering is the process of conducting a series of complex transactions to make it more difficult to trace illicit funds back to their source. Money launderers utilize numerous methods to layer dirty cash, all of which aim to obfuscate both the money trail and the identities of the people involved. This presents a significant challenge to law enforcement during financial crime investigations. However, compliance professionals have tools and processes at their disposal to help detect and report layering before it gets out of hand.

Introduction

Money laundering is notoriously difficult to investigate, in large part because complexity aids in the crime. Criminals take great pains in laundering their funds, following an exacting three step process involving placement, layering, and integration. For our second article in a three-part series, we’ll take a close look at the layering stage. We’ll explain how and why it’s conducted, the techniques criminals often use, the challenges it creates for law enforcement, and the AML processes that can reduce the success of layering.

What is Layering?

The money laundering process begins with placement, in which illicit funds enter legitimate financial systems. However, even after successfully integrating that dirty money, whether by depositing it into bank accounts, buying and selling property, assets, or luxury items, the launderer’s work isn’t done. It’s actually just getting started.

The goal of layering is to disconnect illicit funds from the crime that generated it in the first place. At its most basic, layering involves conducting a web of transactions to make it more difficult to trace the money back to its original source. In addition to simply bouncing money around from destination to destination (which criminals will often do both across banks and banking jurisdictions), layering often involves illicit funds changing asset type. When a money launderer converts cash to gold or cash to real estate, such activity helps mask the money’s true origin even further.

Methods Used to Conduct Layering

There are quite a number of different techniques that launderers use to layer money. This is deliberate. There’s no benefit to a straightforward story in the criminal world. The more varied the layering methods, the more complex the web of transactions becomes, complicating the money trail beyond recognition. 

Some of most common layering methods include:

• Offshore accounts and shell companies. Perfect for obscuring funds, offshore accounts and shell companies are ideal for helping hide the true identity of the owners (making it difficult to trace the money back accurately). They also provide a front for criminal enterprise by providing an avenue for what appear to be legitimate business transactions, such as fake invoices or payments.

• International electronic transactions. From wires to ACH, financial criminals can move funds across multiple jurisdictions through complex networks of international money transfers. Things get even more complicated if alternative financial systems in certain parts of the world are used, such as Hawala, Hundi, or Hui K’uan (all of which predate modern banking). No bank accounts, little to no paperwork, no paper trail – no problem.

• Asset investments. Buying and selling expensive assets helps confuse the money trail by introducing multiple owners into the mix. High-value art and real estate are two assets commonly used in this scheme. Some launderers even invest in trading securities, which are highly susceptible to becoming involved in layering plots due to the sheer daily trading volume, ease of access, speed, and the certain degree of anonymity they provide.

• Accomplices. The people who help launderers “wash” their money are sometimes willing participants, such as a corrupt banker who knowingly accepts illicit funds into the bank. But many others are unwitting and get embroiled in layering schemes through lies, manipulation, and abuse of trust. An elderly person gets taken advantage of through a romance scam on a dating site and told to receive funds and send them to someone they don’t know. An employee is asked by their employer to receive funds in their bank account and then wire transfer them elsewhere. Whether witting or unwitting, these people are known as money mules: someone who transfers or moves illicit funds on behalf of someone else.

Challenges Faced by Law Enforcement

Layering poses a significant challenge for law enforcement agencies worldwide (which is, of course, the goal of the launderer).

Here are some of the biggest problems confronting law enforcement as they work to catch launderers in the act of layering:

• Complexity and volume. The sheer number of transactions and people, entities, and jurisdictions involved in layering schemes makes it incredibly difficult for authorities to trace dirty money back to its source.

• Lack of transparency. Exploiting offshore accounts, hiding behind shell companies, using alternative financial systems. Launderers’ constant obfuscation of identities prevents law enforcement from narrowing down UBOs, sellers and buyers in exchanges of high-value items, and more.

• Weak cross-border coordination. Because money laundering is a global issue, it’s crucial that law enforcement be able to work with their counterparts in other countries to track down the source of illicit funds. Unfortunately, the differences in laws and regulations from one jurisdiction to the next, bureaucracy, or a lack of enforcement of AML procedures hinder collaboration and the exchange of information.

• Rapidly evolving technology. Money launderers adopt emerging tech, like crypto or digital payment systems, to facilitate layering. The fast pace of tech evolution makes it hard for law enforcement to keep up, especially since many agencies work with outdated or siloed tech infrastructure and conduct many processes manually.

How to Detect and Prevent Layering

While money launderers have a deep bag of tricks, investigators and compliance professionals have a few cards up their sleeve where stopping layering is concerned. 

• Regular customer due diligence (CDD). CDD is critical in stopping layering because it shines a light on red flags that may not have been there when the customer was first onboarded. Ongoing monitoring — and not just one-time investigations — help ensure these red flags don’t go unnoticed and get reported as soon as possible.

• Transaction monitoring. Keep an eye out for potentially suspicious activities, such as large and frequent payments or transactions in high-risk countries. It’s important to also stay familiar with what’s typical behavior for a customer versus what behaviors stand out as anomalous for them and could be cause for concern.

• Regular internal risk assessment. How vulnerable is an organization to facilitating money laundering? Every financial institution should ask themselves this and conduct self-evaluations regularly. Reviewing internal policies and procedures and ensuring employees are always up to date on the latest trainings will go a long way towards keeping an organization safe.

• Stay on top of SAR filing. Remember: SARs aren’t just a suggestion, but a requirement when customer behavior seems to imply possible financial crime. But even if you’re unsure or think there may be room for doubt, file a SAR. As Tennyson once wrote, “It’s better to have filed in an abundance of caution than to have never filed at all.”

Wrap Up

Layering can be an extremely frustrating knot to untangle for law enforcement, complicated by deliberately complex networks of transactions involving numerous entities along the way. With all of the methods and tools at their disposal, it can feel surprising that we ever catch money launderers at all. But the hard work of compliance professionals and law enforcement – as well as the growing number of tools allowing them to work in service of one another – helps them stay on top of layering before it snowballs out of control.