Layering in AML: Hiding Illicit Transactions

Layering in AML (Anti-Money Laundering) refers to the second stage in the money laundering process, in which illicit funds are disguised and their origins obscured through a series of complex financial transactions. It aims to create a tangled web of monetary transfers, making it incredibly challenging for authorities to trace back to the funds' criminal source. This meticulous process exploits gaps in legal, financial, and technological systems globally, rendering dirty money nearly untraceable.

Layering forms part of the broader money laundering cycle, which includes three stages: placement, layering, and integration. It is known as the most intricate and resource-demanding phase, involving a deliberate strategy to "layer" transactions that confuse or camouflage any direct audit trail.

Key characteristics:

• The main goal is to complicate tracking efforts.
• Layering involves moving money repeatedly, often across different geographical and regulatory jurisdictions.
• Techniques often include the use of complex networks like offshore accounts, shell corporations, and currency conversions.

Illustration in Practical Terms:

Imagine individual deposits funds derived from illicit activity into a financial system, such as a bank. To 'layer' these funds, the individual might wire the money to an account in another country, invest it in cryptocurrency, use it to purchase high-value assets (like art), and later sell these items through legitimate auction houses.

Layering utilises sophisticated mechanisms and structures to ensure the origin of funds remains undetected. Here are commonly used techniques within the layering stage:

The movement of money across different banks and countries, often in small increments, impedes tracking. For instance, an illicit $1 million might be broken up and wired to accounts in several countries with lax regulatory scrutiny.

Money launderers establish shell companies to simulate legitimate business operations and transfer money through these corporate entities. Offshore financial hubs exacerbate this process due to their jurisdictional opacity, making regulation more difficult to enforce.

Buying significant assets like real estate, rare art collections, or even cryptocurrency enables criminals to achieve monetary "blending". These assets may be sold later on, presenting the funds as "clean" proceeds from a legitimate sale.

Frequent conversion of cash into different currencies offers yet another layer of obfuscation. An example could include converting dollars into euros, then Japanese yen, and later reintroducing the funds into digital payment platforms.

Criminals often channel laundered assets into legitimate businesses, where transactions with innocent customers help disguise the trail.

Each method increases the difficulty of tracing the money—especially when used in combination. By leveraging these tactics, the layering phase successfully disrupts and challenges conventional AML practices.

To understand layering in its entirety, it’s essential to differentiate it from the other phases of money laundering:

Layering represents a profound obstacle to financial compliance and global security. Here’s why:

• Difficult Tracing and Auditing: Once transactions become overly convoluted, the ability to retrace them diminishes quickly, confounding investigators.
• Exploitation of Regulatory Loopholes: Criminal groups often leverage inconsistencies between international regulations to move funds undetected.
• Weak Beneficial Ownership Detection: As funds funnel through various corporate and individual accounts, identifying the true beneficiary becomes arduous.
  

AML frameworks enforce monitoring strategies and controls designed to address layering. Various methods include:

• Automated Transaction Monitoring: Advanced systems establish "red flags" for unusually high transactions, multiple account transfers, or suspicious geographic movements.
• Machine Learning (ML) and Artificial Intelligence (AI): Predictive algorithms help identify patterns indicative of layering.
• Enhanced Due Diligence (EDD): For high-net-worth transfers or companies, robust due diligence processes uncover complex patterns.
• Reporting Systems and SARs: Filing Suspicious Activity Reports (SARs) is mandatory where layering activity is detected, aiding central investigative bodies. Through SARs, weak layering indicators can be flagged to authorities.

How LSEG Risk Intelligence Solutions Can Help:

During the layering stage, when illicit funds are intentionally concealed through intricate transaction networks, tools such as LSEG World-Check help support organisations by delivering robust screening capabilities. These tools help identify hidden connections, politically exposed persons (PEPs), adverse media, sanctions, and ultimate beneficial owners (UBOs), cutting through complexity to highlight potential risks. Complementing this, Account Verification services, including both global and US-specific solutions, help verify account ownership and flag irregular structures or transactions often associated with layering attempts. Together, these solutions enable organisations to enhance their vigilance and maintain compliance within increasingly sophisticated financial crime environments.

Example 1: Trade-Based Money Laundering (TBML)

A criminal network uses trade mispricing to move funds internationally. For instance, over-invoicing the export of low-value goods disguises illegal fund transfers.

Example 2: Real Estate and Cryptocurrency

In several cases, large sums are used to purchase properties to legitimise money. Cryptocurrencies, with their anonymity benefits, are another growing avenue of layering.