Stages of Money Laundering and Ways to Combat It

Money laundering is a term that is used for describing the process of making illegal funds clean and legitimate. Today, we’re going to discuss 3 stages of money laundering as well as the ways to counter it.

Typically, there are 3 stages of money laundering and all the relevant entities must identify and eliminate money laundering and financial crimes from these stages in order to comply with the regulations of AML in UAE. These stages are as follows:  

• Placement,
• Layering; and
• Integration

1. Placement Stage

This is the stage wherein funds generated from illegal sources are placed into legitimate sources via financial instruments, financial institutions, and other safe heavens and at the same time concealing the funds original source. 

2. Layering Stage

The second stage of money laundering is layering. This stage involves making a complex web of transactions to shift money into the legal financial system so that it becomes difficult for the regulators and law enforcement agencies to find about their original source.

After the funds generated from illegal sources have been placed into legitimate places, the criminals make it difficult for the regulatory authorities to identify and detect any money laundering activity. They usually do this by concealing the money trail through strategic layering of transactions and fraudulent accounting and bookkeeping.

Layering is a significantly complicated element of the money laundering process. Its purpose is to create multiple transactions to conceal the ultimate ownership and source of the illegal funds.

3. Integration

Integration is the stage in which the criminals get return on their money from legitimate sources after it has been placed within the financial system. In other words, this is the stage wherein the criminals retrieve their illicit funds in a legal way after fully integrating them into the legitimate financial system.

How to Combat Money Laundering?

Now, we will discuss some ways which can be used for combating money laundering activities: 

AML Compliance Program: Businesses must prepare a detailed yet easily understandable AML compliance program. This manual should have detailed policies, procedures, and processes to identify suspicious transactions and combat money laundering activities. This manual should be continuously reviewed and updated based on experience and new government directives.

Improve Searches with Technology: Automate the AML compliance by using the latest technology, such as Artificial Intelligence (AI), which helps in filtering out false positives and conducting regular searches. This in return reduces the burden of the anti-money laundering (AML) officials when it comes to expanding searches and filtering out false positives.

Regular Communication: It is important to regularly communicate with regulatory authorities to discuss new ways people are using to circumvent the system. Regular communication can help in keeping all the parties updated, verifying any suspicions of fraudulent transaction, and enhancing the partnership between public and private entities.

Use Data Analytics to Detect Patterns: As more data is available nowadays, anti-money laundering officials and other regulators can detect patterns through analyzing past data/information and can also develop a client model to trace any suspicious transaction or activity.

Training: It is very important to have the right people in place when it comes to identifying and detecting fraudulent transactions. This is applicable for private employees as well as government employees. Training is essential and businesses must consider training their employees to prepare them for taking necessary steps when there is any suspicion of fraud. It’s also highly important to have somebody in charge for overseeing the process of detecting fraudulent transactions. In the UAE, this person is known as AML compliance officer who is mandatory to be appointed by all the Designated Non-Financial Businesses and Professions (DNFBPs). You can appoint someone with the relevant skills in-house or outsource this function to an independent party.

All financial institutions, from small credit unions to large banks, need to be looking for fraudulent transactions. By making use of the latest technology together with structured training and a robust partnership with regulatory authorities, financial institution can more effectively counter the money launderers, helping prevent criminal activities.