What is layering in money laundering?

Layering is the second of the three stages of money laundering, when successive layers of legitimacy are added to the ill-gotten funds, until their source is sufficiently obscured from authorities to be undetected as ever having been illegal.  

Some common methods of this stage include, but are not limited to: electronic transfers between countries, using shell companies, and moving funds between multiple banks or between multiple accounts within an institution.

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The three stages of money laundering in order are placement, layering, and integration:

1. Placement

The first stage is when the ill-gotten gains are initially introduced into the legitimate financial system, carved up into portions which do not raise alarms amongst authorities. Some common methods of placement to subvert reporting mechanisms include:

• Loan repayment schemes
• Gambling through casinos or betting agencies
• Smuggling
• Currency exchanges
• Blending funds

2. Layering

The second stage is when successive layers of legitimacy are added to the initially placed funds, until the source of the gains is adequately hidden from authorities to be undetected as ever having been illegal. Some common examples of layering, which we will return to later, include:

• Electronic transfers between countries
• Using shell companies
• Moving funds between several banks
• Moving funds between multiple accounts within an institution

3. Integration

The third and final stage of money laundering is when the criminal retrieves his or her illicit funds- often diminished in value by the layering process- which by now are so shrouded in layers of legitimacy that the source is all but untraceable. Some common methods (also seen in layering) of integration include:

• Making legitimate investments in legal financial streams
• The sale or purchase of high-value items such as fine art or luxury vehicles
• Buying or selling pricey real estate or other property

But for now, we will focus on layering:

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How can AML technology detect layering in money laundering? Some of the many methods of layering are:

• Electronic fund transfers to and from offshore bank accounts, or between countries or jurisdictions
• Shifting of funds between several different financial institutions, or between multiple accounts within a single institution
• Legitimising cash by converting it into wire transfers, shares, or value holding items such as prepaid cards
• The purchase and resale of big-ticket items like yachts, luxury cars, and jewellery
• Investment in real estate or property, or legitimate business entities
• Creation of shell companies to increase anonymity when shifting illicit funds
• Preserving anonymity by using intermediaries or proxies

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Layering – the most complicated stage in money laundering

Napier previously described how criminal sophistication and exponential advances in technology result in a greater range of layering opportunities for money laundering.

The last few years of border-free technical developments have made it easier to layer illegal funds. Technological advancements such as online multiple-player games, P2P payment platforms, and cryptoassets now also muddy the waters for anti-money laundering (AML) practitioners.

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What are the red flags pointing to layering in money laundering?

There are certain activities and types of transactions that AML practitioners deem to be indicators of possible layering in money laundering. Some of them are:

• High volumes of transactions involving precise, ‘rounded-off’ amounts
• High speeds of turnover of funds being deposited, then withdrawn from accounts
• High volumes of transfers of funds between multiple accounts within a single bank
• High frequency of wire transfers to and from accounts
• Funds being transferred to and from high-risk countries, or between high-risk accounts

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Although the focus here is on layering, it is important to understand that there are three core elements in AML regimes:

• Know your customer, or KYC, is the initial stage in AML where a new client’s identity is confirmed, and their risk level established. You can find out more about how Napier’s screening technology contributes to the KYC process here
• Transaction monitoring involves monitoring a client’s financial activities. This stage of AML is where layering such as suspicious activities or transactional anomalies will most likely be detected. To learn how Napier leads in transaction monitoring, read this
• The submission of Suspicious Activity Reports (SARs), or Suspicious Transaction Reports (STRs), is a legislative requirement of regulated institutions globally. You can learn more about how Napier’s products can improve your organisations’ SAR/STR processes here

Additionally, you can read how law enforcement combat human trafficking, drug trafficking, green crime, and modern slavery (MSHT) and Online Child Sex Abuse (CSAE) with the help of SARs.

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Napier has previously reported on the rising cost of AML globally. The challenges the sector faces are clear: the rise in money laundering through technological advances, the increased expectations put on AML practitioners, and the staggering fines being meted out for AML breaches worldwide. The challenges apply to anti-financial crime efforts, but particularly so when combatting layering, the most complex stage of money laundering.

Napier’s CEO Julian Dixon noted that the intentions of the UK’s 2019 Economic Crime Plan are noble, but hampered by the monumental scale of the task, which is further hampered by the impact of the Covid-19 pandemic.  

An example of this is SARs reporting requirements. an average of 460, 000 SARs reach UK enforcement agencies per year, a rising number which is becoming challenging to process effectively or timeously. Again, detecting complex and evolving layering methods is compromised. The joint FATF/Egmont Group publication calls for digitalisation in FIUs to address the problems.

At Napier, we believe the solution to combatting money laundering and zeroing in on layering lies in digital automation and holistic AML, using AI-driven technology. We believe our cutting-edge tech and our skilled, experienced team can show your organisation the future of fighting financial crime, and will help your business and our society to better combat layering, and money laundering in general.