Money laundering fuels corruption, organized crime, and global instability. In this article, we break down how laundering actually works by exploring its three key stages, examining real-world techniques used to disguise illicit funds, and highlighting red flags that help institutions spot suspicious behavior. Whether you work in compliance, banking, or just want to understand how dirty money moves through clean systems, this guide offers a clear and current look into the world of financial crime and money laundering activities.
What Are the Three Stages of Money Laundering?
The money laundering process doesn’t happen in a single move. It unfolds through a methodical, often well-orchestrated process designed to hide illegally obtained money and integrate them into the legitimate economy. Experts typically divide this into three distinct stages: Placement, Layering, and Integration. Each stage plays a specific role in disguising illicit wealth, and together they form the backbone of most laundering operations.
Let’s take a closer look at each stage, with practical examples to illustrate how they work in the real world.
Placement
Placement is the initial stage, where dirty money, often in large amounts of cash, is introduced into the financial system. The aim here is to move illicit funds away from their source without drawing attention and later use that money for legitimate transactions. Because this step usually involves physical cash, it’s also the riskiest for criminals, as it’s the most visible to law enforcement and bank compliance teams.
Common methods:
- Breaking up large cash sums into smaller deposits (known as structuring or smurfing)
- Depositing money into casino accounts or buying chips
- Using cash-intensive businesses like restaurants or car washes to mix illegal funds with legitimate sales
Example: A drug trafficking ring breaks down €200,000 into multiple deposits under €10,000 and funnels them through dozens of small local bank branches, avoiding mandatory reporting thresholds.
Layering
Layering is the second stage, where criminals create distance between the money and its original criminal source. This stage involves a series of complex transactions — often across borders — to make tracing the funds increasingly difficult. Layering disguises the audit trail through multiple movements, conversions, and asset purchases.
Common methods:
- Transferring funds between multiple bank accounts in different countries
- Purchasing luxury goods, art, or cryptocurrencies
- Falsifying invoices and manipulating trade transactions
Example: A corrupt official transfers funds through shell companies in multiple jurisdictions, purchases digital artwork via NFTs, and resells it to another entity he secretly controls.
Integration
Integration is the final stage, where laundered money re-enters the mainstream economy appearing clean and legitimate. At this point, the criminal can enjoy the proceeds with minimal suspicion, using the money for investments, business ventures, or high-value assets.
Common methods:
- Investing in real estate or legitimate businesses
- Issuing loans to oneself via offshore shell companies
- Purchasing vehicles, yachts, or commercial properties
Example: An organized crime syndicate invests €1 million of laundered funds into a luxury apartment complex in a major European capital, listed under a front company with legitimate tax filings.
Note: In practice, these stages can overlap, repeat, or occur out of sequence. Modern money laundering operations often blur the lines between stages to stay ahead of detection technologies and compliance controls.
Common Money Laundering Techniques
Criminals use a wide variety of techniques to obscure the origins of illicit funds. These methods range from traditional cash schemes to sophisticated digital tactics, often combining multiple strategies to evade detection. Below are the most common money laundering schemes.
Structuring and Smurfing
Structuring involves breaking down large sums of money into smaller transactions to avoid detection by authorities. When this is done using multiple individuals (or “smurfs”), the technique becomes more scalable and harder to trace.
Example: A group money launderers deposits €9,000 each into different accounts at various banks over several days, staying below the €10,000 threshold that would trigger automatic reporting.
Cash-Intensive Businesses
Cash-heavy operations like bars, car washes, vending services, or convenience stores offer an ideal cover for laundering. Criminals commingle dirty cash with legitimate daily revenue, making it seem like normal business income.
Example: A small chain of laundromats reports inflated daily earnings by blending illicit cash with real sales, all processed through standard bank deposits and tax filings.
Real Estate Money Laundering
Real estate is a favored method for integrating illicit funds due to the high value of transactions, the use of intermediaries, and the opportunity to hold assets long term. It also offers capital appreciation, making it both practical and profitable.
Example: A front company buys a property using illicit funds, then sells it years later at a profit. The gains appear clean and taxable — the original dirty money becomes legitimate capital.
Trade-Based Money Laundering
In this method, trade is used to obscure money movement by manipulating the price, quantity, or quality of goods in cross-border transactions. It can involve falsified invoices, phantom shipments, or deliberate over- or under-invoicing.
Example: A company overstates the value of a textile shipment from €100,000 to €500,000. The excess value justifies the transfer of laundered funds between jurisdictions under the guise of a legitimate business expense.
Shell Companies and Fronts
Shell companies are legal entities without real business operations. They can be used to obscure ownership, hold assets, facilitate phony transactions, or otherwise exploit the legitimate financial system. When combined with fronts (businesses that do operate but mix illicit and legitimate activity), they form a potent laundering vehicle. Money laundering investigations also often uncover shell companies as methods to hide beneficial ownership.
Example: A shell company in the British Virgin Islands is listed as the exporter in a trade deal. The company doesn’t physically exist, but it issues invoices to justify international wire transfers between criminal networks.
Cybercrime and Digital Channels
Money laundering has adapted to the digital age, using tools like cryptocurrency, online banking, and anonymous payment services. Techniques range from using mixers and tumblers to obscure crypto transactions, to layering through online casinos and peer-to-peer platforms.
Example: A ransomware gang collects payments in Bitcoin, moves the funds through a mixing service, then converts them to Monero before cashing out through a decentralized exchange.
Each of these methods presents unique challenges for detection and enforcement. As financial systems evolve, so too do the techniques used by those seeking to exploit them. That’s why robust AML frameworks must anticipate both old and emerging threats.
AML Compliance and Regulatory Measures
To combat the growing sophistication of money laundering schemes, countries and industries around the world enforce Anti-Money Laundering (AML) compliance standards. These regulations not only help detect and prevent financial crime but also hold businesses and individuals accountable for enabling illicit financial flows — whether knowingly or through negligence.
Global AML Regulations and FATF Recommendations
At the global level, the Financial Action Task Force (FATF) sets the standard for AML regulations. As an intergovernmental body, the FATF establishes 40 Recommendations that outline a comprehensive framework for AML, combating terrorist financing, and addressing emerging threats like virtual assets.
Key FATF principles include:
- Risk-based approach to AML
- Customer Due Diligence (CDD)
- Record-keeping and reporting of suspicious transactions
- Regulation of virtual assets and service providers
- Beneficial ownership transparency
FATF conducts mutual evaluations of countries to assess compliance and publishes “grey lists” and “blacklists” identifying high-risk jurisdictions with strategic AML deficiencies.
Example: Countries like North Korea and Iran remain on the FATF blacklist, while jurisdictions like the UAE or South Africa may be subject to enhanced monitoring when grey-listed.
National Laws and Industry-Specific Rules
While FATF provides the foundation, each country implements its own AML regulations tailored to local risks and legal systems. These national laws often impose stricter compliance obligations on certain industries, especially financial institutions, real estate, crypto exchanges, and accountants or legal professionals.
Examples by country:
- EU: Enforces AMLDs (Anti-Money Laundering Directives), including the 6th AMLD, focusing on harmonization and criminal liability
- US: Applies the Bank Secrecy Act (BSA), USA PATRIOT Act, and the Corporate Transparency Act (2024)
- UK: Applies the Proceeds of Crime Act (POCA) and Money Laundering Regulations 2017
- Lithuania: AML laws enforced by the Financial Crime Investigation Service (FCIS), with additional requirements for virtual asset service providers (VASPs)
Financial institutions are often required to register with regulators, submit Suspicious Transaction Reports (STRs), maintain internal controls, and conduct regular audits.
Penalties for Non-Compliance
AML compliance is not optional. Regulatory agencies can impose severe penalties on companies and individuals who fail to uphold AML obligations — regardless of intent.
Consequences include:
- Hefty fines: Financial institutions such as banks and crypto platforms have paid billions in penalties for AML failures
- License revocation: Authorities can suspend or revoke the operating licenses of non-compliant businesses
- Criminal charges: Company executives and compliance officers can face jail time for willful neglect or enabling laundering
- Reputational damage: Firms associated with money laundering may lose customers, investors, and partnerships
Example: In 2020, Deutsche Bank was fined over $130 million for failing to implement proper AML controls and facilitating payments connected to a foreign bribery scheme.
Effective AML compliance demands awareness, adaptability, and investment. As regulations evolve in response to global threats, organizations must treat AML not as a checkbox exercise, but as a core pillar of operational integrity.
Best Practices to Prevent Money Laundering
Financial institutions require more than regulatory compliance, and in order to detect illegal cash and prevent money laundering in general, they must use proactive strategies, smart technology, and a culture of vigilance. Below are the key best practices organizations should implement to effectively prevent, detect, and respond to money laundering risks.
Customer Due Diligence (CDD)
Customer Due Diligence is the foundation of AML risk management. It involves assessing the risk level of each customer based on their background, industry, transaction behavior, and geographic connections.
Key elements include:
- Identifying the nature and purpose of the business relationship
- Conducting background checks on corporate and individual clients
- Performing ongoing monitoring for changes in risk level
Enhanced Due Diligence (EDD) is required for high-risk customers, such as Politically Exposed Persons (PEPs), offshore entities, or clients from high-risk jurisdictions.
Know Your Customer (KYC) Procedures
KYC is a legal and procedural obligation to verify the identity of customers before establishing a business relationship. It ensures organizations are not unknowingly onboarding criminals or entities acting on their behalf.
Effective KYC includes:
- Collecting and validating personal or corporate ID documents
- Verifying proof of address and ownership
- Screening names against PEP and sanctions lists
KYC is not a one-time task — it must be updated regularly and revalidated in the case of suspicious activity.
Transaction Monitoring
Modern money laundering often hides in transactional behavior. Transaction monitoring systems use rules and machine learning to detect patterns that may signal suspicious activity.
Examples of red flags include:
- Transactions that don’t match a customer’s profile
- Frequent international transfers to secrecy havens
- Structuring patterns (e.g., multiple just-under-threshold deposits)
Effective systems offer real-time alerts, risk scoring, and case management workflows for investigation and reporting.
Employee Training and Awareness
An AML program is only as strong as the people who operate it. Employees must be trained to recognize red flags, understand regulatory obligations, and respond appropriately to suspicious activity.
Best practices:
- Conduct regular, role-specific training sessions
- Use case studies and scenario testing to simulate risk
- Train frontline staff to detect anomalies during onboarding or transactions
Beneficial Ownership Transparency
Criminals often hide behind layers of ownership in complex legal structures. AML programs must identify the Ultimate Beneficial Owners (UBOs) — the natural persons who ultimately own or control a customer.
What to collect:
- Ownership structure documents
- Verified identity of UBOs (usually over 25% ownership threshold)
- Ongoing updates if corporate control changes
Transparency helps prevent abuse of legal entities like shell companies or trusts.
Sanctions Screening and Watchlist Screening
Organizations must screen customers and transactions against various watchlists, including:
- UN and EU sanctions
- OFAC (Office of Foreign Assets Control)
- Local and international terrorist financing lists
- PEP databases
Sanctions screening should be conducted during onboarding and continuously thereafter, especially in regions with dynamic sanctions regimes.
Leveraging Technology and AI
Manual processes can’t keep up with the speed and scale of modern financial crime. AML automation and AI-powered systems help organizations scale compliance without compromising accuracy.
Key tools:
- AI-driven transaction monitoring and anomaly detection
- Natural language processing (NLP) for document analysis
- AML workflow automation (alerts, escalations, reporting)
- Behavioral analytics for real-time risk scoring
Example: A neobank uses AI to analyze transaction sequences and detect layering attempts across customer accounts — catching suspicious behavior within minutes, not weeks.
Collaboration and Information Sharing
Money laundering networks often span multiple industries and borders. Collaboration across sectors helps close gaps in oversight.
How to strengthen cooperation:
- Participate in public-private partnerships (PPPs)
- Share typologies and threat intelligence with peers
- Align with initiatives like the Egmont Group and FIUs (Financial Intelligence Units)
A collective approach increases visibility across financial ecosystems and strengthens systemic resilience.
Key Money Laundering Red Flags
Detecting money laundering often comes down to recognizing anomalies — behavior or transactions that don’t make sense in a legitimate financial context. Below are some of the most critical red flags, organized into common categories and written to provide both clarity and context.
Unusual Transaction Patterns
Unexpected volume or frequency – A sudden spike in transactions, either in volume or value, especially when inconsistent with the customer’s known profile or historical behavior, can be a major warning sign.
Structured transactions – Multiple transactions just under regulatory thresholds (e.g., €9,900 deposits to avoid a €10,000 reporting requirement) may indicate deliberate structuring or “smurfing.”
Round-dollar amounts or repeated figures – Transfers involving perfectly rounded numbers or repeated payment sizes over time may reflect attempts to mask illicit activity under a consistent pattern.
Rapid movement of funds – Money that enters and exits an account within a short timeframe — especially across borders — may point to layering tactics.
Use of Shell Entities or Third Parties
Obscured ownership – Clients who operate through layers of shell companies, trusts, or nominee directors — particularly without clear business justification — may be seeking to mask the true origin or destination of funds.
Third-party involvement – Payments made or received through unrelated individuals or businesses, especially when not disclosed upfront, can suggest attempts to avoid scrutiny or accountability.
Reluctance to disclose control – A refusal or delay in identifying beneficial owners during onboarding is a strong indicator that further investigation is needed.
High-Risk Jurisdictions and Secrecy Havens
Cross-border activity involving secrecy jurisdictions – Transactions that involve countries known for bank secrecy, lax AML enforcement, or presence on FATF grey/blacklists may be used to exploit regulatory blind spots.
Clients with complex international links – A business or individual with tenuous ties to high-risk regions (e.g. legal incorporation in one country, bank account in another, operations in a third) may warrant enhanced due diligence.
Unusual geographic flow of funds – Transfers that pass through multiple unrelated jurisdictions without clear purpose are often used in the layering stage of laundering.
Repetitive Transfers and Structuring
Patterned activity just under reporting thresholds – Consistent transactions that fall narrowly below standard reporting requirements — whether deposits, withdrawals, or wire transfers — are often designed to evade detection.
Use of multiple accounts for small-value transfers – Funds distributed across a wide network of accounts, only to be re-consolidated elsewhere, can suggest deliberate structuring or use of money mules.
Inconsistent or Suspicious Customer Behavior
Reluctance or evasion during onboarding – Clients who avoid sharing standard documentation, provide vague responses, or pressure staff to skip due diligence steps may be attempting to conceal risk factors.
Overly complex corporate structures – Businesses with layers of unrelated owners, no physical operations, or no verifiable revenue often serve as laundering vehicles.
Behavior that contradicts the declared profile – A low-income individual buying luxury assets in cash or a tech startup receiving payments from unrelated offshore sources may raise immediate questions.
Unusual Asset Purchases or Investments
High-value purchases inconsistent with profile – Acquisitions like luxury cars, art, jewelry, or real estate — especially when paid in full or with minimal financing — should be examined for legitimacy.
Investments in non-transparent ventures – Sudden capital injections into underperforming businesses, especially through offshore vehicles or anonymous loans, can signal an attempt to integrate illicit funds.
Final Thoughts
Money laundering is a mechanism that enables corruption, organized crime, human trafficking, and terrorism to thrive. Understanding how it works, recognizing its red flags, and implementing effective prevention strategies is essential for anyone involved in the global financial ecosystem.
While criminals are constantly evolving their methods, so too are regulators, institutions, and compliance professionals. From AI-powered detection systems to strengthened global cooperation, the tools to fight money laundering have never been more advanced — but they must be used proactively, not reactively.
Whether you’re a compliance officer, business leader, or simply curious about how illicit finance operates, awareness is the first line of defense. The more we know, the harder it becomes for dirty money to move unnoticed.
FAQ
