What Is Layering in AML and How Does This Process Work?

Money laundering is a complex financial crime that involves disguising the origins of illegally obtained money to make it appear legitimate. It poses a substantial threat to the integrity of global financial systems, enabling various illicit activities such as fraud, drug trafficking, and terrorism financing. Anti-Money Laundering (AML) efforts encompass a range of laws, regulations, and procedures designed to detect and prevent these illicit funds from entering and moving through the financial system. These measures are crucial for protecting economies and maintaining trust in financial institutions. The process of money laundering involves several stages, each designed to obscure the connection between the illicit funds and their criminal source.

Defining Layering

Layering is a sophisticated stage in money laundering where illicit funds are deliberately separated from their criminal origin through complex financial transactions. Its main objective is to obscure the audit trail, making it extremely difficult for authorities to trace the money. Criminals create multiple layers of transactions to confuse and hide the funds.

This stage often involves moving funds through various financial instruments, across different institutions, and frequently, through multiple international jurisdictions. The goal is to distance the illicit funds from their criminal activity, making them appear as clean assets with a legitimate history.

Methods of Layering

Criminals use various methods during layering to obscure the origin of illicit funds. Electronic wire transfers move money rapidly between numerous bank accounts, often across different countries. This constant movement creates a convoluted path, making it challenging to follow the money’s true origin.

Shell companies, legal entities with no active business operations or physical presence, are common layering tools. Funds are transferred between these companies, often through fabricated invoices, creating a deceptive appearance of legitimate business. This network can span multiple jurisdictions, adding complexity and making beneficial ownership difficult to ascertain.

Investing in complex financial products is another layering technique. Criminals purchase and quickly divest from stocks, bonds, or other securities, or even life insurance products, to generate a legitimate transaction history. High-value assets like real estate, precious metals, or fine art are bought with illicit funds and then resold. The subsequent sale of these assets provides “clean” money, harder to link to the original criminal activity.

Trade-based money laundering disguises illicit funds through commercial transactions, such as over- or under-invoicing goods. This exploits the global trade system to move value and obscure origin. Casinos and gambling establishments convert illicit cash into chips, then into legitimate winnings. Digital currencies, including cryptocurrencies, are also used for layering due to their pseudonymous nature and rapid cross-border transfers, sometimes using mixers to obscure paths.

Identifying Layering Indicators

Detecting layering requires financial institutions and AML professionals to identify red flags and patterns. A key indicator is complex transactions lacking a clear business purpose. Such transactions appear designed solely to move funds, not to achieve an economic objective.

Frequent, rapid transfers between multiple accounts or jurisdictions also indicate layering. This includes high volumes of “rounded-off” transactions or quick fund turnovers. These patterns suggest an attempt to obscure the money trail, not normal financial operations.

Transactions involving shell companies or trusts with opaque beneficial ownership are concerning, as these entities hide the true source and control of funds. Additionally, structuring transactions, breaking down large sums to evade reporting thresholds, indicates an attempt to avoid scrutiny. Its continued use to move funds through multiple accounts is a layering technique.

Other red flags include rapid fund movement without economic reason, foreign exchange transactions without clear trade, and transactions involving high-risk jurisdictions. Frequent changes in account signatories or beneficial owners also complicate tracing. Financial institutions must file a Suspicious Activity Report (SAR) with the Financial Crimes Enforcement Network (FinCEN) if they suspect illegal activities, including reporting threshold evasion or lack of business purpose. SARs serve as a tool for law enforcement to investigate financial crimes.

Layering’s Role in Money Laundering

Layering is the intermediate stage within the three-part money laundering process. It follows the “placement” stage, where illicit funds are first introduced into the financial system, often through cash deposits or asset purchases. After funds enter the system, layering obscures their criminal origins.

This stage is complex, involving numerous and elaborate transactions. Its purpose is to create distance between funds and their illegal source, making them exceedingly difficult to trace. Once complete, the money appears to have a legitimate history.

Layering acts as a bridge to the final stage, “integration.” Here, “cleaned” funds are re-introduced into the legitimate economy, often through investments in businesses, real estate, or luxury goods. While placement gets money in and integration gets it out as legitimate wealth, layering is where obfuscation occurs. Without effective layering, successful integration would be challenging.