Money laundering is hiding the origins of money obtained through criminal activity. This is to ”launder” money and use it without raising suspicion. The money laundering explained process is generally considered to have three stages: placement, layering, and integration. So, let’s break down each of these stages and define them in simple terms.

Stage 1: Placement (Initial Step in Money Laundering)

Placement is the first stage of the three stages of money laundering. At this stage, criminals attempt to enter the ‘dirty’ money into the financial system. This process can be dangerous because large amounts of cash with a suspicious origin can easily raise red flags. So, criminals try to hide the money so it does not get detected.

What Goes On at the Placement Stage?

At this stage, the aim is to separate the dirty money from its unlawful source. It may even be deposited in small amounts to escape detection by authorities. The criminals can use that money to purchase other valuables, including jewellery, art, or real estate, which may then be resold. These transactions make it harder for authorities to track where the money has come from.

• Examples of Placement: For instance, a criminal could walk into a bank and deposit several smaller amounts of cash in different accounts, a tactic often adopted to trigger bank governmental regulations about cash deposits. Instead, they might spend the money on expensive goods and services that can be resold later.
• Importance of Placement Stage: The placement stage is important because that is the beginning of the laundering process. When they transfer the dirty money into the financial system, they can start to obscure its true origin. This stage is also dangerous because, if not performed cautiously, it can attract the attention of authorities.

Stage 2: Layering that Covers the Trace of Dirty Money

After illegal money is deposited into the system, criminals now strive to create a more difficult tracing path for authorities. That’s where the layering stage comes into play. In this stage, criminals attempt to conceal the source of the money by moving it through a series of transactions.

What goes on in the Layering Stage?

Layering is the process of making the funds seem less suspicious by weaving a complex series of transactions. This may include moving the money around to different accounts, using shell companies, or just buying something and selling it and then repeating. The concept is to deceive authorities and make it more difficult for them to track the money back to its illegal source.

• Examples of Layering: Layering, for instance, occurs when a criminal moves funds from one account to another, from that one to a third, then a fourth in different countries. 
• Importance of Layering: Layering is important because it obscures the link between the dirty money and the crime. Without layering, money would be easy to trace back to the criminals who created it. This is often the stage at which criminals get creative in trying to conceal the origins of the funds.

Stage 3: Integration that Makes the Money Look Legit

After layers of money and obscured trails come the final stage, which is integration. During this phase, criminals try to make the money look like it came from a legitimate source. Essentially, it is money that can be used without suspicion.

• Examples of Integration: One of the best examples of integration could be a criminal with laundered money who buys a house and sells it for a profit. The money has been laundered that way afterwards, so it appears to be legitimate. Now, the criminal can spend those profits for both personal and commercial use without setting off any alarms.
• Why the Final Step Is the Integration Stage: The integration stage is the final hurdle for criminals. When the money has fully entered the economy, it is almost impossible to tell it apart from legally earned funds. This ending part is the closure of the process of money laundering, making it hard for the authority to trace the money source.

Trade-based money laundering (TBML)

In this approach, criminals mask the illegal source of the funds through international trade transactions. Trade-based money laundering refers to the use of trade transactions to disguise the transfer of illegal funds. Criminals may also over- or under-invoice goods or use fake company names or shipments to transfer money across international borders in an unremarkable manner. 

• Example of trade-based money laundering: For instance, a company imports goods worth $100,000 but declares them as being worth $150,000, transmitting the additional $50,000 to a foreign account. They use over-invoicing to make it appear to be a legitimate transaction while moving illegal funds. Since this type of fraud involves actual businesses and genuine trade transactions, it is particularly challenging to detect; it is much harder for the authorities to spot a red flag when potentially there is none.

In the end:

Recognizing how money laundering is accomplished requires an understanding of the three fundamental stages: placement, layering, and integration. Every stage is important for hiding the source of funds acquired through criminal activities. When people and organizations understand these approaches, they can take steps to safeguard themselves and join in wider anti-money laundering activities. Financial integrity and compliance start with making sure you stay informed.