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A Deep Dive into the Three Phases of Money Laundering
The three stages are as follows: - Placement– where the criminals try to introduce their illegal money into the legitimate financial system. - Layering– where the illegal money is routed through multiple transactions or accounts to distance the identity of the criminals and the source of the proceeds of crime. - Integration– where the illicit funds are put forth for final disposal. Our common goal is to counter money laundering and terrorist financing. This guide provides insights into: - Assessing the Business Exposure to Money Laundering and Deploying Customized AML Framework - Implementing the Right AML Solution - Adequate AML Governance and Oversight - Imparting AML Training
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A Deep Dive into the Three Phases of Money Laundering
- 1. PLACEMENT, LAYERING, & INTEGRATION ThreeStages of Money Laundering: +91 98248 84900 [email protected] www.amlindia.in
- 2. Table Of Contents Introduction 1.Placement 2. Layering 3. Integration B. Implementing the Right AML Solution C. Adequate AML Governance and Oversight D. Imparting AML Training A. Assessing the Business Exposure to Money Laundering and Deploying Customized AML Framework Basics of Money Laundering Stages Detect and Prevent Money Laundering Attempts Importance of Detection & Prevention of Money Laundering FAQs: The Three Stages of the Money Laundering Let AML India help Mitigate the Money Laundering Risk! About AML India 03 05 06 07 09 10 11 14 16 18 20 22 26 28
- 3. +91 98248 84900[email protected] www.amlindia.in 03 Introduction
- 4. Introduction We understand thatmoney laundering is a complex process or a networked structure involving multiple stages of routing the illicit funds. These stages make the criminal proceeds appear as if generated from legitimate sources, concealing their true identity or association with criminal activities. The reporting entity, its AML Principal Officer and the team need to understand this money laundering process and its stages to timely identify the transactions attempted to launder illegal funds. This identification and reporting of the money laundering activities is necessary for the reporting entity to comply with the Prevention of Money Laundering Act, 2002 (PMLA), or the IFSCA (AML, CFT, and KYC) Guidelines, 2022, as the case may be, and safeguard the business against exploitation. In this eBook, let us explore these three stages of the money laundering process and how to detect the risk indicators to curb financial crimes. Money laundering comprises three stages or sub-processes: The first is Placement The final one is Integration DNFBPs subject to PMLA, 2002 AML Business Risk Assessment: Your journey to comply with PMLA, 2002 begins here! Stepwise Process For Effective Implementation Of An AML Program In IFSC Entities Suspicious Transaction Identification process under PMLA, 2002 Anti-Money Laundering Legal Framework in India International Financial Services Centers Authority Guidelines, 2022 The Prevention of Money Laundering Act, 2002 (PMLA) +91 98248 84900 [email protected] www.amlindia.in 04 The second stage is Layering
- 5. +91 98248 84900[email protected] www.amlindia.in 05 Basics of Money Laundering Stages
- 6. +91 98248 84900[email protected] www.amlindia.in Basics of Money Laundering Stages The following are the three core stages of the money laundering process: Placement is the first stage of the money laundering process, where the criminals try to introduce their illegal money into the legitimate financial system. Once the criminal proceeds are put into the economy, the money launderers start disguising their illegal funds and making them look clean. The launderers use various techniques to place the dirty money in the financial system. Some examples of the methods used during the placement stage are: 06 1. Placement Structuring or Smurfing Money Mules or Cash Courier Disposal of Cash The large sum of cash is split into multiple smaller amounts, possibly below the AML reporting or Customer Due Diligence (CDD) thresholds. These smaller amounts are deposited using various accounts to avoid inquiries from the financial institution or other reporting entity. This method is used to physically move illegal cash from one country to another, making it difficult for the country’s authorities where such criminal proceeds were generated, to trace the origin or the owner. For placing the illicit cash in the economy, money launderers may use other routes, like Casinos Purchasing real estate properties or other luxurious items Investing in the business to mingle the legitimate business proceeds with the illegal ones, etc.
- 7. +91 98248 84900[email protected] www.amlindia.in The layering stage is the crucial stage of the entire process, where the money launderers do most of the disguising work. As the word suggests, in this process, the illegal money is routed through multiple transactions or accounts to distance the identity of the criminals and the source of the proceeds of crime. During the layering stage, the criminals aim to create a complex structure of transactions involving multiple persons, jurisdictions, accounts, etc., to make it difficult for the anti-money laundering authorities to locate the funds to their illegal origin. 07 2. Layering Basics of Money Laundering Stages
- 8. +91 98248 84900[email protected] www.amlindia.in Once the illicit money is placed into the system, the launderers use different methods for developing a complex web or layers of transactions. 08 Layering Techniques used by the Money Launderers Using various bank accounts opened under different names and moving funds in between these accounts to complicate the audit trail. Engaging in financial transactions with parties across different jurisdictions without business sense. Creating fake business transactions, such as over-invoicing, under-shipment, etc., to mix illegal funds with legitimate business activities. Creating shell companies in offshore jurisdictions with lax regulations to create a bogus layer of money transfers. Using complicated financial instruments such as derivatives creates challenges for financial institutions to spot the source of illegal funds. Using emerging technologies like anonymous wallets to transfer virtual assets across borders without adequately identifying the originator or beneficiaries. Layering Techniques used by the Money Launderers Basics of Money Laundering Stages
- 9. +91 98248 84900[email protected] www.amlindia.in Integration is the final stage of the money laundering process, where the illicit funds are put forth for final disposal. During the integration stage, the illegal funds are considered “clean,” allowing the launderers to use these proceeds as they wish without raising any suspicion or inquiries from the authorities. 09 3. Integration Generally, once the funds are disguised as legal proceeds, the same are introduced in the legitimate business or used for the owners’ enjoyment, such as to buy luxurious properties or high-value antique items or precious metals or stones. With the completion of the money laundering process, the money launderers use the proceeds of crime for personal benefits without drawing attention to the nature of its illegal source. A clear understanding of the money laundering process is pertinent to observing the unusual patterns or customer behaviour suggesting any of these three stages. Basics of Money Laundering Stages
- 10. +91 98248 84900[email protected] www.amlindia.in 10 Detect and Prevent Money Laundering Attempts
- 11. Detect and Prevent MoneyLaundering Attempts +91 98248 84900 [email protected] www.amlindia.in To detect and prevent money laundering activities, the reporting entities must implement a robust Anti-Money Laundering Program, considering the entity’s risk exposure, business profile, resources, tools available, etc. Here are a few best practices that the reporting entities must adopt to ensure the effectiveness of the money laundering detection and prevention measures: 11 The money laundering risk exposure of each reporting entity is different. To tailor-made the AML controls, the entity must identify and evaluate the possible money laundering exposure and its impact on the business. Assessing the Business Exposure to Money Laundering and Deploying Customized AML Framework A This will enable the entity to adopt the Risk-Based Approach and determine the required mitigation measures. This outcome of the Business Risk Assessment or the Enterprise-Wide Risk Assessment shall serve as a foundation for documenting the AML policies, procedures, and controls.
- 12. The AML programmust provide for a detailed note on the following: Detect and Prevent Money Laundering Attempts Approach and methodology that the entity shall follow for customer onboarding (Customer Due Diligence, Customer Risk Assessment, Enhanced Due Diligence) Process for complying with the sanctions regime Process for ongoing monitoring of transactions and the business relationship Details around AML Training requirements, etc. Mechanism for detecting and reporting suspicious transactions internally and externally Roles and responsibilities of the AML Principal Officer and senior management Ingredients of AML program +91 98248 84900 [email protected] www.amlindia.in 12
- 13. Detect and Prevent MoneyLaundering Attempts With adequately crafted AML policies and procedures, the reporting entity is committed to combating money laundering, complying with the regulatory landscape, and onboarding the entire team to play their part in preventing the laundering. Enhanced Due Diligence Under IFSCA (AML, CFT, and KYC) Guidelines Periodically Updating CDD Profile under IFSCA Guidelines Navigating the AML Compliance Journey under IFSCA (AML, CFT & KYC) Guidelines Customer Risk Profiling Under IFSCA Guidelines, 2022 Approach to Effective Implementation of an AML Program by IFSC Entities VIDEO AML Policies and Procedures under PMLA VIDEO Identifying the Beneficial Ownership under IFSCA AML Guidelines ARTICLE Role of Business Risk Assessment in AML Excellence eBook AML Enterprise-Wide Risk Assessment: Factors to be considered by the Regulated Entity in IFSC ARTICLE +91 98248 84900 [email protected] www.amlindia.in 13
- 14. B Detect and Prevent MoneyLaundering Attempts +91 98248 84900 [email protected] www.amlindia.in 14 Managing the AML measures manually with too much voluminous data is practically difficult, giving a loophole to criminals to exploit the economy. Further, money launderers are using emerging technologies to launder the funds. This calls for deploying advanced technologies and data analytics tools to stay ahead of criminals and spot red flags and suspicious transactions. Implementing the Right AML Solution Customer identification Right AML tools and systems support customer screening to determine whether the customer is sanctioned or a Politically Exposed Person (PEP) or has some negative media suggesting the person’s connection with organised crimes like money laundering or terrorism financing. This screening outcome and leveraging the technology for customers can help the entity create an accurate risk profile for the customer and maintain it as the business relationship progresses. This will enable the entity to stay aware of the changes in the customer’s risk profile and take timely action to mitigate the same without impacting the business.
- 15. Detect and Prevent MoneyLaundering Attempts Ongoing Monitoring With appropriate technology, the vast data analysis becomes quick, reducing false alerts and generating alerts for inconsistencies and unusual trends. Real-time transaction monitoring allows the reporting entity to stay on top of the business and spot suspicions immediately before it can impact the business, rather than investigating the already executed money laundering activity. By leveraging the tools and technology, the reporting entity can detect the red flags promptly, maintain the customer risk profile up-to-date, and effectively manage the money laundering risk. AML Software, Tools, and Technology How can RegTech help streamline AML Compliance ARTICLE +91 98248 84900 [email protected] www.amlindia.in 15
- 16. Unraveling the KeyRoles and Responsibilities of the AML Compliance Department VIDEO C Detect and Prevent Money Laundering Attempts +91 98248 84900 [email protected] www.amlindia.in The reporting entities must appoint an AML Principal Officer or the AML Compliance Officer to ensure the effective implementation of the designed AML Program. Further, the oversight and involvement of the entity’s senior management is also essential to set the right tone at the top and seek their input and feedback to improve the AML efforts. 16 Adequate AML Governance and Oversight To manage the quality and relevance of the AML measures, an independent AML audit must be periodically conducted. This will help seek an unbiased opinion on the entity’s AML program and identify the areas that need to be enhanced for better compliance and risk mitigation.
- 17. Detect and Prevent MoneyLaundering Attempts +91 98248 84900 [email protected] www.amlindia.in 17 AML Principal Officer: Appointment and Role in an IFSCA-regulated entity Appointment of a Principal Officer A management-level employee Hold adequate seniority and authority Must have: Suitable qualification and competence Adequate resources Access to relevant data, including customers and transactions Avoid conflict of interest Independent of routine business functions Key Roles and Responsibilities Overseeing and promoting AML Compliance across the organization Ensuring performance of ongoing monitoring of business relations Updating the team and senior management on the AML-related regulatory amendments Promptly addressing the ML/FT suspicions Reporting the suspicious transactions to FIU-IND Training the employees around AML/CFT measures Periodically reviewing the entity’s compliance with AML/CFT regulations Timely reporting of AML/CFT compliance issues, ML/FT risks, and remedial measures to senior management
- 18. Detect and Prevent MoneyLaundering Attempts +91 98248 84900 [email protected] www.amlindia.in AML Principal Officer cannot solely manage the entire AML show, staying regulatory compliant and protecting the business against money laundering exploitation. Thus, the contribution and support from all the organisation’s employees is required. The front-line employees play a significant part in detecting potential suspicion as they deal closely with the customer executing the transactions. The entity must develop a comprehensive AML training program for the team, including senior management, to create appropriate awareness around AML, impart knowledge about the implemented internal AML policies and procedures, and make the team aware of their roles and responsibilities. Only with a systematic and comprehensive approach can the reporting entity detect and prevent potential money laundering transactions from being conducted through the business. Further, with the joint strength of the AML Principal Officer, senior management, technology, and employee support, the reporting entity creates a strong shield against money laundering. 18 Imparting AML Training D Significance of Employees’ contribution to foster AML Compliance ARTICLE AML Training to the Employees: Strengthening the AML Compliance ARTICLE
- 19. Detect and Prevent MoneyLaundering Attempts +91 98248 84900 [email protected] www.amlindia.in 19
- 20. +91 98248 84900[email protected] www.amlindia.in 20 Importance of Detection & Prevention of Money Laundering
- 21. Importance of Detection& Prevention of Money Laundering +91 98248 84900 [email protected] www.amlindia.in Money laundering puts the business at greater risk – associated with business operations, reputational damage, regulatory fines, and legal proceedings. Failure to detect, report, or prevent money laundering attempts will lead to heavy non-compliance penalties for the business. Further, when a business is exposed to money launderers, it is subject to frequent investigations by the authorities, adversely impacting its reputation in the market. This results in a loss of trust and confidence among the customers and other stakeholders in the business. To avoid such non-compliance and potential exploitation by the criminals, the reporting entities must develop and maintain a comprehensive AML framework, covering the Customer Due Diligence process, identifying red flags and reporting the same with the FIU, implementing robust technology to support the AML policies, etc. 21 Reporting with FIU-IND Under PMLA The Complete Guide to AML Policies and Procedures under PMLA ARTICLE
- 22. +91 98248 84900[email protected] www.amlindia.in 22 FAQs: The Three Stages of the Money Laundering
- 23. +91 98248 84900[email protected] www.amlindia.in Placement is the first stage in which illegal proceeds are introduced into the legitimate financial system. What is placement in money laundering? 23 Question 1 Answer The following are the placement techniques in money laundering: • Structuring & smurfing • Insurance purchase • Gambling • Buying stored value cards • Currency smuggling • Currency exchange • Blending funds • Loan repayment using cash What are placement techniques in money laundering? Question 2 Answer Structuring and Smurfing are the terms used interchangeably, but they differ from each other. Structuring involves intentionally splitting a large financial transaction into a series of smaller transactions to avoid catching the eyeballs of regulators. Smurfing, however, includes structuring and using different accounts to deposit money into one or multiple financial institutions. What is the difference between structuring and smurfing? Question 3 Answer FAQs: The Three Stages of the Money Laundering
- 24. +91 98248 84900[email protected] www.amlindia.in Placement is the first stage of money laundering, where dirty money gets injected into the legitimate financial system. Layering is the second stage of money laundering, where the source of illegal money is concealed through a series of transactions. What is the difference between placement and layering? 24 Question 4 Answer Placement is the most vulnerable stage for money launderers as it’s the introduction of illicit funds into the system for the first time. So having an effective red flag indicators list will help mitigate money laundering risks in the initial stages. How does the placement stage of money laundering affect AML regulations? Question 5 Answer The money laundering process begins with the placement stage, wherein the proceeds of financial crime are placed into the legitimate economy. How does the money laundering process usually begin? Question 6 Answer The act of depositing illicit money in a financial institution corresponds with the placement stage of money laundering. Which stage of money laundering does the act of depositing illicit money in a financial institution correspond with? Question 7 Answer FAQs: The Three Stages of the Money Laundering
- 25. +91 98248 84900[email protected] www.amlindia.in Layering is the second stage of money laundering. What makes layering in money laundering challenging to detect is the way it involves multiple fake transactions, conversion of money from one form to another, and frequent change of hands of such dirty money. Why is layering considered the most difficult stage of money laundering to detect? 25 Question 8 Answer Layering is a complex web of transactions intertwined in such a way that the origin of the criminal proceeds is disguised, and the identity of the criminals is concealed. What is the process of layering? Question 9 Answer Once the criminals have introduced the funds into the financial systems (during the Placement stage), in the Layering stage, a complex network of transactions is created to create multiple layers between the criminal proceeds and their origin. During the Integration stage, the movement of funds is almost done, and now the illicit funds are integrated with the legit funds, making its disintegration and identification as “illicit funds” challenging. What is the difference between layering and integration? Question 10 Answer FAQs: The Three Stages of the Money Laundering
- 26. +91 98248 84900[email protected] www.amlindia.in Let AML India help Mitigate the Money Laundering Risk! 26
- 27. Let AML Indiahelp Mitigate the Money Laundering Risk! Understanding the intricacies of the process is very important for the reporting entities to identify and report suspicious activities involving money laundering. Here comes AML India for your assistance. With our team of experienced AML professionals, we impart comprehensive training on the concepts of money laundering, its stages, red flags suggesting attempted money laundering activities, measures to identify, report, and curb the same, etc. Additionally, with a systematic assessment of the money laundering risk, AML India helps the reporting entities in India, including the IFSC-regulated entities, customise the AML Program to stay regulatory compliant and protect the business against financial crime vulnerabilities. Let’s join hands to combat the global vice of money laundering. +91 98248 84900 [email protected] www.amlindia.in 27
- 28. +91 98248 84900[email protected] www.amlindia.in 28 About AML India
- 29. About AML India AMLIndia is a consulting firm in India assisting reporting entities to comply with the requirements of the Prevention of Money Laundering Act, 2002 and the International Financial Service Centre Authority (AML, CFT, and KYC) Guidelines, 2022. AML India is one of the leading AML consultants in India, continuously striving to improve businesses' compliance with all anti-money laundering requirements in India. We help you implement relevant controls, improve your KYC and customer onboarding processes, and assist in setting up a solid in-house AML compliance department to reduce your exposure to money laundering risks and stay compliant with PMLA and the IFSCA (AML, CFT, and KYC) Guidelines. With our years of global experience in AML/CFT compliance and understanding of regulated businesses, we offer tailored consultancy services. We conduct Enterprise-Wide Risk Assessments to identify the entity’s exposure to financial crime risk and determine the necessary controls and systems to mitigate these risks. Based on this assessment, we design a comprehensive AML compliance program where business safety against vulnerabilities seamlessly meets AML compliance. With our end-to-end AML support, you strive to master AML compliance and identify and prevent money laundering risks in a timely manner. +91 98248 84900 [email protected] www.amlindia.in 29
- 30. About AML India Pathikis a Chartered Accountant with more than 25 years of experience in compliance management, Anti-Money Laundering, tax consultancy, risk management, accounting, system audits, IT consultancy, and digital marketing. He has extensive knowledge of local and international Anti-Money Laundering rules and regulations. He helps companies with end-to-end AML compliance services, from understanding the AML business-specific risk to implementing the robust AML Compliance framework. Pathik leads the firm from the front and is responsible for giving it strategic direction. Our Team PATHIK SHAH Founder CAMS, FCA, CISA, CS, DISA (ICAI), FAFP (ICAI) Jyoti is a Chartered Accountant and Certified Anti-Money Laundering Specialist (CAMS), having around 7 years of hands-on experience in regulatory compliance, legal advisory, policy-making, tax consultation, and technology project implementation. Jyoti holds experience with Anti-Money Laundering regulations prevalent across various countries. She helps companies with risk assessment, designing and deploying adequate mitigation measures, and implementing the best international practices to combat money laundering and other financial crimes. JYOTI MAHESHWARI Partner CAMS, ACA Dipali is an Associate member of ICSI and has a Bachelor's in Commerce and a General Law degree. She has an overall experience of 7 years in the compliance domain, including Anti-Money Laundering, due diligence, secretarial audit, and managing scrutinizer functions. She currently assists clients by advising and helping them navigate through all the legal and regulatory challenges of Anti-Money Laundering Law. She helps companies develop, implement, and maintain effective AML/CFT and sanctions programs. She knows Anti-money laundering rules and regulations prevailing in GCC countries and specializes in Enterprise-wide risk assessment, Customer Due Diligence, and Risk Assessment. DIPALI VORA Senior Consultant – Compliance ACS +91 98248 84900 [email protected] www.amlindia.in 30
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