What is Placement in Money Laundering?
What is Placement in Money Laundering?
A person who has received some ill-gotten gains will surely be on the lookout for measures to clean them in order to use them freely without any stipulations from regulators. So in order to use the funds, the criminal needs to disguise the source of proceeds to appear as the funds to be legitimate.
Money laundering involves a series of transactions to make its detection as difficult as possible. However, money laundering can broadly be classified into three stages. 1. Placement, 2. Layering, and 3. Integration. The placement stage of money laundering involves the physical introduction of cash or other assets derived from criminal activity into the financial system.
The crimes like corruption, fraud, bribery, kidnapping, illegal arms trade, drug trafficking, smuggling, etc., are committed for money. Criminals obtain illegal proceeds, and then they try to find a way for their disposal without attracting the eyes of law enforcement.
Placement stage in Money Laundering
The money launderer puts unlawful funds into circulation by depositing cash into the bank, casinos, and other legitimate businesses. This is the stage where the money launderer gets rid of illegal proceeds by placing them into the legitimate financial system.
The placement stage of money laundering is the most challenging for the launderer as the disposal of illegal proceeds by introducing them into the financial system causes suspicion
Examples of placement in money laundering:
- Smuggling illegitimate cash or liquid monetary instruments.
- Blending unlawful proceeds with legitimate proceeds, such as illegitimate funds introduced into the cash-intensive grocery business.
- Repayment of debt using illegal proceeds.
- Buying stored value cards with illegitimate money.
- Depositing small amounts into several bank accounts to evade reporting threshold. It is also called smurfing, one of the most common money laundering techniques.
- Buying foreign currency with illegitimate funds.
- Cash purchase of a security or insurance.
- Invoice fraud – over-invoicing or under-invoicing.
However, it is not always the case that criminals resort to the placement stage of money laundering. Criminals can use illegal proceeds for various purposes without resorting to money laundering. Black money can be used to pay salaries to partners in crime, bribery, etc.
The placement stage of money laundering is only relevant if the criminals have to introduce money to the legitimate financial system. If the black money is going to be utilized for other criminal activities, then the placement of funds will not occur.
Businesses prone to the placement of illegal proceeds:
- Banks and Financial Institutions
- Insurance Companies
- Money Exchanges
- Capital Market
- Accountants
- Auditors
- Trust and Company Service Providers
- Lawyers
- Dealers in Precious Metals and Stones
- Virtual Asset Service Providers
- Casinos
- Art and antique dealers
- Restaurants
- Hotels
- Bars
- Nightclubs
- Vending machine operators
- Retail Businesses
- Luxury goods traders
Strategies for detecting and preventing placement in money laundering
Law enforcement agencies must keep themselves updated with the new money laundering typologies used by criminals to fight money laundering. The AML authorities need to detect money laundering crimes early to prevent them from getting too complex for their detection. The early detection of money laundering at the placement stage would save a country from harmful socio-economic impact.
AI helps institutions detect money laundering activities at the transactional level. AI systems tend to be simplistic and rule-based; a transaction will be flagged as suspicious and require a human-conducted review to determine if it fails to pass a set of rules outlined by the governing authorities. A proper set of AI tools can also minimize the rate of false positives.
The UAE government has significantly tightened measures for money laundering and financing of terrorism. Since it entered countries under increased monitoring set by global watchdog FATF, they have developed enhanced policies and guidelines for different sectors, especially where financial crime rates are relatively high.
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FAQs About Placement in Money Laundering
Placement is the first stage in which illegal proceeds are introduced into the legitimate financial system.
- Structuring and smurfing
- Wire transfer
- Insurance purchase
- Gambling
- Currency smuggling
- Currency exchange
- Blending funds
- Loan repayment
Structuring involves the execution of financial transactions in such a way that the placement of illegal proceeds from a crime does not trigger scrutiny by regulators and law enforcement agencies. Criminals deposit a small sum of cash into a bank to avoid the monetary threshold prescribed by the regulatory bodies.
Structuring and Smurfing are the terms used interchangeably, but they differ from each other. Structuring involves intentionally splitting a large financial transaction into a series of smaller transactions to avoid catching the eyeballs of regulators. Smurfing, however, includes structuring and using different accounts to deposit money into one or multiple financial institutions.
Placement is the first stage of money laundering. Here the black money from a crime is entered into a legitimate financial system.
Placement is the first stage of money laundering, where dirty money gets injected into the legitimate financial system. Layering is the second stage of money laundering, where the source of illegal money is concealed through a series of transactions.
Placement is the most vulnerable stage of money laundering for criminals, as placing large amounts of cash into the legitimate financial system may catch the eyeballs of law enforcement agencies.
Placement is the most vulnerable stage for money launderers as it’s the introduction of illicit funds for the first time into the system. So having an effective red flag indicators list will help mitigate the risks of money laundering in the initial stages itself.
The penalty for money laundering, if found guilty, is: Not more than 10 years and a fine between 100,000 AED to 5,000,000 AED or either one of these.
About the Author
Pathik Shah
CISA, FCA, CS, DISA (ICAI), FAFP (ICAI)
Pathik is a multi-disciplinary professional with more than 22 years of experience in compliance, risk management, accounting, system audits, IT consultancy, and digital marketing. He has extensive knowledge of Anti-Money Laundering rules and regulations, and he helps companies comply with legal requirements. Pathik also helps companies generate value from their IT investments.