An exclusive article by Fred Kahn.
Layering is one of the most sophisticated and challenging stages in the money laundering process. After criminals successfully place illicit funds into the financial system (through placement), they use layering techniques to obscure the origin of the money. The goal is to make it increasingly difficult for financial institutions and law enforcement to trace the illegal funds back to their original source. Understanding these techniques is crucial for anti-money laundering (AML) specialists, as it helps detect and prevent financial crimes.
In this article, we will explore various layering techniques used in money laundering. By the end, you will have a clear understanding of how these techniques work and the steps you can take to identify them in practice.
Table of Contents
What Is Layering in Money Laundering?
Layering, also known as “smurfing” or “circulation,” involves separating illicit funds from their illegal origins by moving them through various complex transactions. The purpose is to confuse and obscure the trail of funds, making it harder for authorities to detect money laundering activities.
The core idea behind layering is to add complexity to the financial transactions so that any initial links to criminal activity are lost. These complex moves can be difficult to trace, which is why criminals often use them as a means to disguise the illicit origins of their money.
Common Layering Techniques in Money Laundering
There are several ways criminals attempt to layer illicit funds to avoid detection. Each technique is designed to make tracing the origins of the funds more difficult, whether through movement across multiple accounts, jurisdictions, or forms of financial instruments.
1. Structuring or Smurfing: Breaking Down Large Transactions
One of the most common techniques used in layering is structuring, also known as smurfing. This method involves breaking down large sums of illicit money into smaller, less suspicious amounts. These smaller sums are then deposited into multiple bank accounts or withdrawn in small amounts to avoid triggering the regulatory threshold for reporting suspicious transactions.
For example, a criminal might deposit $50,000 into an account in amounts of $9,000 each. These smaller amounts fall below the $10,000 reporting threshold, making it less likely to be flagged by banks or authorities.
The key challenge for financial institutions is identifying patterns in deposits or withdrawals that may indicate structuring. While individual transactions may seem innocuous, they can still represent an attempt to layer illicit funds.
2. Transferring Funds Between Accounts or Countries
Another popular layering technique is transferring illicit funds between multiple accounts, often across different countries. Criminals typically use a network of bank accounts to move money from one jurisdiction to another, further complicating the process of tracing funds.
By transferring money through international accounts, criminals can exploit jurisdictional differences in financial regulations. Some countries may have less stringent AML laws or slower reporting requirements, making it easier for criminals to layer their funds and avoid detection.
In some cases, criminals may use “shell” companies or fake businesses to hide the true ownership of the accounts involved in these transactions. This further complicates the investigation for law enforcement agencies and financial institutions, as they need to trace the ownership and movement of funds across international borders.
3. Using Virtual Currencies and Cryptocurrencies
The rise of virtual currencies and cryptocurrencies has added a new layer of complexity to money laundering. Cryptocurrencies like Bitcoin, Ethereum, and others provide a relatively anonymous way to move money across borders without being subject to traditional financial regulations.
Criminals can use digital wallets and exchanges to convert illicit funds into cryptocurrency and transfer them between different virtual wallets. The decentralized and relatively anonymous nature of cryptocurrencies makes them attractive to money launderers seeking to avoid detection.
To further complicate the process, criminals may use mixing services or “tumblers” that obfuscate the source of the cryptocurrency by mixing it with other digital currencies before sending it to its final destination. These services help break the direct link between the illicit funds and their original source.
4. Over- or Under-Invoicing and Trade-Based Money Laundering
Trade-based money laundering (TBML) is a technique in which criminals manipulate international trade transactions to move illicit funds. This can be done by over- or under-invoicing goods and services. By inflating or deflating the value of a transaction, the criminal can effectively move money across borders under the guise of legitimate trade.
For example, a criminal may overstate the value of goods being imported or exported, allowing them to move additional funds beyond the actual value of the transaction. This allows illicit money to be disguised as legitimate revenue from trade, making it harder for authorities to detect the crime.
Trade-based money laundering is particularly challenging to detect due to the complex nature of international trade and the wide range of financial instruments used in cross-border transactions. Financial institutions and trade regulators must be vigilant in scrutinizing invoices, shipping documents, and other trade-related paperwork to uncover potential money laundering activities.
5. Using Shell Companies, Trusts, and Offshore Accounts
Criminals often create shell companies or trusts to hide the true ownership of illicit funds. These companies are set up in jurisdictions that have less stringent financial regulations, making it easier to disguise ownership and obscure the trail of funds. Offshore accounts and anonymous trusts can be used to further obscure the origins of the illicit money.
By using complex corporate structures, criminals can avoid drawing attention to themselves and their financial activities. These structures can involve multiple layers of ownership, making it difficult for investigators to trace the flow of money and identify the individuals behind the illicit funds.
Financial institutions need to conduct thorough due diligence when working with clients who have offshore accounts or complex corporate structures. Identifying and verifying the true ownership of companies and accounts is a key aspect of detecting layering techniques used in money laundering.
How Financial Institutions Can Detect Layering Techniques
Detecting layering activities requires sophisticated tools and a deep understanding of money laundering schemes. Here are some common methods financial institutions use to spot layering activities:
1. Transaction Monitoring Systems
Modern transaction monitoring systems are designed to detect suspicious activity by analyzing patterns in financial transactions. These systems use algorithms to flag unusual transactions, such as large cash deposits or rapid transfers between accounts. By monitoring these transactions in real time, financial institutions can quickly identify potential layering activities.
2. Know Your Customer (KYC) and Enhanced Due Diligence (EDD)
KYC procedures are essential for identifying the beneficial owners of accounts and preventing illicit funds from entering the financial system. Enhanced due diligence (EDD) procedures can be used to dig deeper into the activities of high-risk clients or those involved in international transactions. These procedures help financial institutions build a clearer picture of the legitimacy of the client’s financial activities and identify any potential links to money laundering.
3. Cross-Border Collaboration and Information Sharing
Cross-border collaboration between financial institutions, regulatory bodies, and law enforcement agencies is crucial for detecting and preventing layering techniques. Money laundering often involves moving funds across borders, and having access to international databases and transaction records can help investigators identify suspicious activity more effectively.
Sharing information between jurisdictions allows authorities to trace the movement of funds across different countries and identify the individuals behind illicit transactions.
Conclusion: Combating Layering in Money Laundering
Layering is a complex and evolving challenge in the fight against money laundering. As financial criminals continue to exploit new technologies and methods to obscure the origins of illicit funds, financial institutions and law enforcement agencies must remain vigilant. By understanding common layering techniques and utilizing robust transaction monitoring systems, financial institutions can play a crucial role in detecting and preventing money laundering activities.
While it may be difficult to stop all instances of layering, a proactive approach involving KYC, enhanced due diligence, and cross-border collaboration can help institutions stay one step ahead of criminals. Continued education and awareness of emerging money laundering techniques are essential for AML professionals to effectively combat this ongoing threat.
Related Links
- FATF Recommendations on Money Laundering
- The Impact of Cryptocurrencies on AML Compliance
- Understanding the AML/CFT Risk-Based Approach
- AML Best Practices for Financial Institutions
- Global Efforts to Tackle Trade-Based Money Laundering
