Money Laundering: Stages & Methods

Instructor: Scott Tuning

Scott has been a faculty member in higher education for over 10 years. He holds an MBA in Management, an MA in counseling, and an M.Div. in Academic Biblical Studies.

Money laundering is the process of concealing or destroying the paper trail associated with money obtained through illicit means. This lesson explores the three stages of money laundering and gives examples that characterize each stage.

Washing the Stains Out of Dirty Money

A businessman opens more than 40 bank accounts under fictitious names. He and the people working with him make numerous transactions using these various bank accounts with each transaction totaling less than $10,000.

Over the airwaves, a larger-than-life televangelist is becoming a minor celebrity for his growing fleet of luxury cars, augmented by a 75-foot private yacht and his very own Cessna Citation private jet.

In yet another locale, the owner of a furniture store seems to be doing quite a bit of business, but a closer look at his operation reveals that many so-called 'buyers' are paying for furniture that never actually leaves the warehouse.

These examples are fictitious, but they all reflect various characteristics of the stages in money laundering operations.

Money Laundering is the process of taking money that was obtained from an illicit source, placing it into various financial instruments, and using these instruments to confuse or erase any ties to its origins.

The purpose of money laundering is almost always to meet a criminal's need to acquire assets without revealing the criminal behavior that generated the funds used to purchase those assets.

Although people launder money for a variety of reasons, drug trafficking is the most common reason for engaging in the practice. The amount of money laundered in the United States alone exceeds $1 billion annually.

Money laundering is the act of introducing illicit money into the legitimate marketplace by using a series of transactions designed to erase or obscure the paper trail.
Money Laundering #1

Three Stages

The process of money laundering involves three stages. Although these components are distinct from each other, the timeline for their execution is varied. In more rudimentary money laundering operations, the three stages can occur simultaneously.

When the operation is large and complex, there may be numerous variances in the people, time, and money involved.

Regardless of the details that characterize the individual stages of a money laundering, the final objective is always to introduce the illicit funds into the legitimate marketplace by 'cleaning' dirty money and destroying the paper trail that could lead to the criminal enterprise.

Placement and $10,000

Placement is the act of placing the dirty money into a bank, credit union, or other financial institution or instrument. Transactions exceeding $10,000 are subject to greater scrutiny -- a fact that is understood well by those who engage in money laundering.

The act of opening several bank accounts and using them to make multiple transactions under the $10,000 limit is a technique known as smurfing or structuring. This technique is most common in schemes involving a solo criminal effort or a relatively small group of conspirators.

Layering: Keep It Moving

The layering stage is marked by the repetitious movement of funds between financial entities or instruments. As the name applies, each of the numerous transactions creates an additional barrier to identifying the origin of the dirty money.

Consistent with the overall goal of money laundering, these numerous transactions ultimately result in the ability to procure legitimate assets without directly using illicit funds.

Layering is extremely effective in countries that do not require an individual to prove their identity during the purchasing process because law enforcement agencies are not immediately able to link the purchases or transactions to one another. It would be accurate to think of layering as preparation for the integration phase.

Integration: The Man Who Didn't Want His Own Money

Operation Polar Cap

In an investigation that eventually led to the arrest of 127 people and the recovery of $1.2 billion dollars, the IRS sting dubbed 'Operation Polar Cap' began when a bank became suspicious of transactions carried out by one of its customers.

Integration is the third stage of money laundering. In terms of money laundering, integration marks the transition from dealing exclusively in illicit funds to a state in which dirty money and clean money begin to mix. This blending together is often accomplished with creation of legitimate entities that will be used by the money laundering operation on an ongoing basis. This is often characterized by the purchase high-value assets that are difficult to track or seize. These assets often include things like high-value automobiles, airplanes, boats, or real estate purchases.

In the case of Operation Polar Cap, a bank notified the IRS of unusual activity when a jewelry broker began depositing excessive amounts of cash inconsistent with his business -- $25 million in three months. Unbeknownst to the jeweler's bank, another individual who owned a grocery store and a check-cashing business was also acting strangely at his banking institution. This bank notified the IRS when the grocery proprietor was observed taking great care to ensure the cash he deposited in the bank was never given back to him.

A Reverse Clearance Sale

When retailers are looking to unload goods from their inventory, they often dramatically lower prices to entice consumers to buy. Several money laundering schemes in the integration stage have a process that works just like a clearance sale -- in reverse.

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