Why is it Hard to Detect Placement Stage of Money Laundering

What is Placement in Money Laundering?

Placement" in money laundering refers to the first of three stages of money laundering whereby illegally acquired money, 'dirty money', or 'black money' is initially introduced into the legitimate financial system. Typically, this means physically disposing of cash or purposely transferring funds for the first time to financial institutions, such as banks.

The purpose of placement is to make illicit funds or money look legal by placing or inserting them into the financial system through various means such as deposits, exchanging currencies, or purchasing investments.

Challenges in Detecting the First Stage of Money Laundering

Detection of the placement stage in money laundering faces several challenges because of the methods that criminals apply to introduce illicit funds into the financial system. Some of the major challenges are elaborated below, followed by some real-life examples:

1. Structuring Transactions

Structuring transactions are applied at the initial stage of money laundering to avoid flagging by financial authorities, and are otherwise referred to as smurfing. This simply means breaking down huge sums of money collected from illegitimate sources into smaller portions viewed as less suspicious and below thresholds of reporting by regulators. After breaking down the bulk amount into smaller portions, deposits are then subsequently made in quick succession in different bank accounts or financial institutions.

This method avoids triggering mandatory reports for large transactions, known as CTRs in the United States. Such deposits are usually made by accomplices to further involve tracing and are referred to as "smurfs." Besides that, obscuring the origin of the money through this way, money can also be integrated into the financial system without raising any suspicion, which further supports money laundering processing.

In the early 2000s, one of the largest smurfing cases involved drug cartels in the United States depositing cash sums slightly less than $10,000 into several bank accounts to make it very hard for investigators to trace where the money came from.

It is usually difficult to find a pattern for the suspicious activity because independently, each transaction appears to be legitimate. Several small amounts of money are deposited at different branches or institutions by criminals in order to stay below the radar of the law enforcement agencies of those regions or countries.

2. Using Cash-Intensive Business As Source

Many money launderers introduce illegitimate money through cash-intensive businesses during the placement stage of the laundering cycle. These are businesses like restaurants, bars, and car washes, which would normally transact in cash, thereby providing a perfect avenue to launder illegitimate funds into clean money. Daily revenues could be easily inflated, and the combined cash deposited into the business's bank account will help to disguise the origin of the illegal money.

Such large-scale cash transactions are a characteristic feature of these types of businesses and serve as a very good camouflage for cash deposits into banks. As a result of this, it does not immediately set off alarm bells for the authorities.

Moreover, the high volume of cash flow and low record-keeping of these businesses render it difficult for authorities to distinguish between putatively clean and dirty money. If properly executed, this system fully streams dirty money into the financial system and renders it as legal income.

For example, Crown Casino in Australia has been under investigation for allegedly allowing high-roller gamblers to use its casino for money laundering. The casino grossed huge transactions in cash and was therefore tailor-made for the integration of illegitimate money into legal monetary systems.

Distinguishing between legitimate business cash flow and laundered money can be highly complex. Cash-oriented businesses naturally deal with enormous cash turnovers, thereby facilitating the integration of dirty money into their cash flow without anybody becoming suspicious.

3. Anonymity and Low Transparency

In placement processes, money launderers exploit anonymity and low transparency to receive illicit money into the financial system without being detected. These may include anonymous modes—buying prepaid cards, using mobile wallets that are not registered, or using cryptocurrency exchanges with lousy and weak KYC standards.

Furthermore, money launderers make it difficult to trace the money trail by breaking down large sums into smaller deposits, usually through numerous accounts, and using prepaid cards or cryptocurrencies. It is through these means that the risks of suspicion are reduced, and it becomes increasingly difficult to trace and understand where the illegal money started.

Part of the reason it was so popular was that it was used on the Silk Road, an underground online black market where one was able to purchase illegal goods, with many illicit transactions made with a very popular cryptocurrency at the time - Bitcoin. Their anonymity made it quite hard for the funds procured through illegal acts to be traced.

This anonymity, combined with the lack of clarity in transactions, makes it quite impossible for financial institutions and regulators to trace the source of the funds. More importantly, cryptocurrencies enjoy a very high level of pseudonymity, and because of this fact, criminals are taking advantage of them.

4. Geographical Dispersion

Money launderers deposit small sums at this stage into different bank accounts in different countries, making it problematic for law enforcers to trace the original source of the money. The money will be dispersed by international wire transfer, currency exchange, and smurfing—big sums will be broken into lesser amounts that will not be suspicious.

This approach makes very good use of the wide array of regulations and given standards of enforcements applicable in various regions to successfully create a complicated trail that is hard to follow. This sort of geographical dispersion increases the difficulties in finding a trail, giving launderers more opportunities to attempt to avoid detection and reduce the risk of suspicious activity reports.

Such is the case of the "Russian Laundromat", where more than $20 billion was laundered out of Russia through worldwide banks and shell companies located in several jurisdictions, taking advantage of these very differential provisions regarding regulatory oversight.

5. Shell Companies and Front Organizations

Shell companies, which exist as a paper company with no active business operations, are formed to conceal the ownership and origin of the money. These companies can be established, have bank accounts, receive huge deposits, and raise very little suspicion, as all these steps are legal company actions.

The other involves actual businesses, called front organizations, which mix illegal funds with legal business revenues. By laundering the illicit money through the regular transactions of those supposedly legitimate businesses, the dirty money is thus cloaked as part of their normal business income. In this case, the origin of the money is disguised to render it impossible to trace the funds back to criminal activities.

The 2016 Panama Papers leak embarrassed many high-profile individuals and businesses that used the complex shell-company structures of offshore jurisdictions to hide assets and wash money. Additionally, tracking down the illicit origins of funds was quite tricky.

The identifiability of real owners of such companies and their true purposes becomes a challenge since they are often located in secrecy jurisdictions or have complex ownership structures designed to disguise real nature.

6. Insufficient Training and Resources

Money launderers exploit the lack of enough resources and lack of training while placing illegal cash by infiltrating financial institutions and businesses whose anti-money laundering measures are weak. Employees at such places may not be familiar with the necessary processes for identifying suspicious activities, and therefore, they may not take heed of any red flags, including large cash deposits, structured transactions, or huge account activities that may seem suspicious.

Moreover, in under-resourced financial institutions, advanced monitoring systems cannot be established with proper internal controls, allowing the launderers easily to introduce illicit funds into the financial system.

Many of these banks, particularly those in developing nations, lack the level of AML compliance and technological development found in banking systems of developed countries. This gap allows money launderers to take advantage of such institutions with far less concern for detection.

Without the proper systems and expertise in place, even obvious signs of money laundering may go undetected or unreported. Small institutions, especially, might be thus taken advantage of by the lack of rigorous AML programs.

The Second Stage of Money Laundering

Following the entry of illegal money into the financial system, there is a large volume of transactions involving launderers' efforts to disguise the source of their illegal funds, called layering. This takes the form of breaking down big pieces of money into smaller and less notifiable amounts, depositing them in various accounts, or moving them multiple times, making volumes of financial transactions.

Through these numerous transactions, a launderer tries to avoid detection by mingling dirty money with clean money, making it difficult for the authorities to trace the illegal source. As mentioned, they open several bank accounts in different banks or even across borders to complicate tracking.

As such, these high volumes of transactions may present a challenge for monitoring systems that flag suspicious activity with an overload of information, exploiting current monitoring technologies and human surveillance limitations.

Monitoring the transaction volumes in large banks, like HSBC, has been extremely challenging. In 2012, HSBC was fined for not being able to handle money laundering activities and failing to monitor financial transactions due to inadequacies in its monitoring systems. Inferring from large volumes and isolating information for potential money laundering activities require extremely sophisticated tools and processes that not many institutions have.

How to Detect Money Laundering During Placement?

Transaction Monitoring Systems

These systems review transactions in real-time or retrospectively for the identification of unusual patterns or behaviors that may indicate money laundering activities at the stage of placement. They flag transactions inconsistent with the customer's profile or out of character, compared to their usual behavior, for large cash deposits, rapid movements of funds between accounts, or transactions involving high-risk jurisdictions.

KYC Procedures

KYC is the identification of customers by financial institutions and the understanding of the nature of their business. Institutions are in a position to establish suspicious activities concerning the placement of illicit funds with obtained information on customers, source of funds, purpose of transaction, and business relationship.

This is complemented by enhanced due diligence for those higher-risk customers or transactions that add an extra layer of scrutiny in detecting activities related to money laundering. The use of a restricted party screening solution helps reduce this risk with KYC requirements, and also screening entities involved in transactions.

Information Sharing:

Information sharing among financial institutions, regulatory bodies, and law enforcement agencies enhances the possibility of identifying and investigating money laundering activities. It can identify a pattern or trend across more than one institution or regime that may indicate the presence of the 'placement' activities.

Intelligence on established money laundering methodologies, typologies, and persons engaged in illicit financing activities may be shared through this collaboration, enhancing general detection effectiveness.

In that respect, the detection of this placement stage is important since it puts a base for the consequent stages of money laundering. Indeed, this can only be achieved through a combination of robust regulatory frameworks, advanced technology, and international cooperation.

The three measures together thus improve the framework to identify and prevent money laundering at the placement stage by providing more visibility regarding financial transactions, extra due diligence with reference to customers, and information sharing, exploiting collective knowledge and resources.