03. The Three Stages of Money Laundering: Stage 2 Copy

Let’s continue following Gabbar’s exploits.

Gabbar now wants to purchase an expensive asset, say, a fancy car or a posh house.

But he is worried that such a purchase may attract the attention of law enforcement officials, who could then find out about his false invoicing and, eventually, his illegal business.

He realises that he must take additional steps to safeguard himself.

Complex and opaque transactions

Gabbar then invests the money in some company – let’s call this Company A - that his friend owns in a country with an opaque banking system – say a country like the Cayman Islands – where companies don’t share financial information with the government.

He then breaks down this oRiginal investment in Company A into smaller amounts and moves these smaller amounts to several other companies in the Cayman Islands itself, ending with an investment of money in Company X in the Cayman Islands.

Since the banking system in this country is opaque, law enforcement authorities cannot trace these complex transactions that had taken place between the original investment in Company A and the many smaller transactions before the money reached Company X.

Money comes back

Gabbar then has the money transferred from Company X to somebody else’s – say, his wife’s - bank account. This money is shown as some fee, say for some vague conSultancy service provided by his wife, something like …. marketing consultancy for colonies on Mars or past-life healing consultation services for exotic pets or something…

Now, law enforcement authorities might be able to see that Gabbar invested some money in company A and that Gabbar’s wife received money from company X. However, they can’t establish a connection between the two transactions because of the invisible layers or transactions that took place between these two transactions in the Cayman Islands.

Gabbar has successfully executed the second stage in the Money Laundering process, known as the Layering stage.

What does the Layering Stage entail?

In money laundering, once the money has been placed, the Layering or Structuring stage comes into the picture.

In this stage, the large amount of money is broken down into multiple smaller transactions. This is done to avoid setting off any alarms as these small transactions fall under the threshold of anti-money laundering regulations. Layering often involves offshore banks, making it more difficult for the officials to track back to the original source.

Layering tactics might include:

• Trading in international markets
• Trading in foreign currencies
• Purchasing foreign money orders
• Buying and selling luxury assets
• Investing in offshore organisations
• Purchase of high-value Insurance policies
• Purchase of multiple DDs in cash
• Opening trust accounts and routing the funds as donations from various individuals
• Creation of multiple business entities and transferring of funds among them. And
• Over-invoicing or under-invoicing - When an exporter receives more money than the value of goods sold to an importer, it’s over-invoicing. On the other hand, when an importer receives more money while selling the goods in the local market after buying them at an unvalued price from an exporter, it’s under-invoicing. In such arrangements, the importer and exporter are both complicit in the misrepresentation, showing a higher profit or loss, as desired.

But Gabbar is still not convinced that he is entirely safe. After all the money has come to him from Company X in the Cayman Islands, he wants to add an additional layer of legitimacy to his ill-gotten wealth.

And that’s where the third stage of Money Laundering comes into play, which we’ll discuss in our next lesson.