MSA Investigations Blog

Erasing the Money Trail via Layering

Posted by John Maguire on Mon, Sep 15, 2014 @ 10:00 AM

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There are three steps that each criminal takes in order to successfully launder his or her money. First, the schemer must go through the placement process. This is the point in which the dirty money is introduced to the financial system; for instance, a bank deposit. The second step in the process is the structuring of the tainted funds so that it is difficult to ascertain the  point of placement, commonly called layering. More on this to follow. Finally, integration is the conversion of the illegally obtained funds into legitimate assets, i.e. real estate, art, diamonds, etc.

The focus of this blog is the middle stage in the laundering process or better known as layering. Layering is probably the most complicated step in the money laundering process because it consists of multiple transactions and money movements between accounts. It is designed to befuddle investigators researching the trail of illicit funds. The reselling of high valued goods, buying and selling stocks and bonds, and converting account holdings into money instruments are a few other examples of layering.

However, wiring funds to and from different institutions and jurisdictions may be the most common method of layering. Although, banks have many controls in place to trace funds and prevent wires from transferring to certain suspicious accounts, wires are still a fast and easy way for launderers to move their money. Structuring is a highly popular form of layering. It is the processing of financial transactions just under the threshold which jurisdictions set for reporting purposes. These thresholds vary depending on the jurisdiction.

Criminals regularly probe the regulatory landscape for new and undetectable ways to hide their money. Broker-dealers are vulnerable to money laundering due to the high volume of trades conducted and the variety of financial products offered to clients. Wash trading and spoofing are two methods of layering in a broker-dealer setting. Wash trading consists of the launderer using illicit funds and taking a long position in one stock and a short position in that same stock, usually at a different broker-dealer. Aside from the cost of the trades, the launderer normally breaks even and receives a clean check once the position closes. Spoofing is the practice of placing limit orders and cancelling them just before the stock reaches the strike price. The cancellation would have an adverse effect on the stock and the launderer could place an order to benefit.

Cuckoo smurfing is another form of layering. This technique requires the work of an “insider” at a money remitter, an innocent bank customer and a transfer of funds. The “insider” receives an order to send money to an overseas account. The account information of the beneficiary is supplied to the launderer by the “insider.” The initial “clean” funds being sent are redirected into the launderer's account giving he or she a legit source of cash and the illicit money provided by the launderer is deposited into the innocent beneficiary’s account. Cuckoo smurfing has been predominantly a European practice, however, U.S. regulators have seen an increase in third party deposits in recent years.

As newer, faster and easier ways to transfer money are introduced, criminals will be looking for loopholes to exploit them. Venmo is one such product. It is a mobile app which allows peers to transfer funds freely among each other in amounts up to $2,999.99 per week. There have already been issues with these payment systems however, there are ways to prevent launderers and other criminals from exploiting systems and their users. Knowing your customer is paramount in any anti-money laundering initiative. The more information gathered and verified by these pay sites, the easier it is to identify a culprit.

For more information please contact MSA Investigations.

Tags: Fraud, investigator, laundering