What Are the Three Stages of the Money Laundering Process?

Money laundering is a sophisticated process criminals use to disguise the illegal origins of their funds, making them appear legitimate. The goal is to integrate illicitly gained money into the financial system, allowing its free use without suspicion. This enables criminals to enjoy ill-gotten gains and finance further illegal activities, challenging global financial integrity.

Placement

Placement is the initial stage where illegally obtained cash enters the legitimate financial system. The objective is to move physical cash, often from drug trafficking or fraud, into a more stable form within financial institutions. This stage is risky because large sums of cash easily draw attention.

Criminals use various methods for placement. They make numerous small cash deposits into bank accounts, a technique known as structuring or “smurfing.” They intentionally keep individual deposit amounts below the $10,000 threshold that triggers a mandatory Currency Transaction Report (CTR) filing.

Other tactics include purchasing monetary instruments like cashier’s checks or money orders with illicit cash for deposit elsewhere. Some criminals also blend illicit funds with legitimate earnings of cash-intensive businesses, such as restaurants or casinos, to make the money appear as genuine revenue.

Financial institutions must file Suspicious Activity Reports (SARs) for suspicious transactions, typically those involving $5,000 or more, even if below the CTR threshold.

Layering

After funds are placed into the financial system, the layering stage begins. It aims to obscure the money’s illegal origins and break the audit trail. This involves creating complex layers of financial transactions to distance funds from their criminal source. Tracing the money back to its original illicit activity becomes extremely difficult for investigators.

Layering techniques include transferring funds electronically through multiple accounts, often across different countries and jurisdictions with less stringent financial regulations. Criminals also use shell companies, legal entities with no active business operations, to move money.

These companies issue fake invoices for non-existent goods or services, making illicit transfers appear as legitimate business expenses. Further obfuscation occurs through investments in financial instruments like stocks, bonds, or real estate, and by quickly moving funds between different asset types.

This intricate web of transactions is designed to confuse investigators and conceal the true ownership and source of the money.

Integration

Integration is the final stage where “cleaned” funds are returned to the criminal, appearing as legitimate income or assets. The money has been distanced from its illicit origins through placement and layering. Criminals can then freely use their funds without detection, as they now seem derived from lawful activities.

Criminals achieve integration by making funds indistinguishable from legitimately earned money. They might purchase high-value assets like luxury vehicles, artwork, or real estate, using laundered money to acquire tangible wealth.

They also invest in or establish legitimate businesses, commingling illicit funds with genuine revenues. Profits from these ventures, such as rental income or sales, can then be freely spent or reinvested.

This final stage effectively completes the money laundering cycle, enabling criminals to enjoy their proceeds.