🔹 Definition
Layering is the second stage of the money laundering process, where illicit funds are deliberately moved, disguised, or transformed through complex financial transactions to obscure their origin and ownership. The goal of layering is to break the audit trail between the criminal source of funds and the eventual integration of those funds into the legal economy.
This stage makes detection and investigation more difficult by introducing layers of transactions, accounts, jurisdictions, and sometimes even front companies or cryptocurrencies to confuse regulators and law enforcement.
🔹 Frequently Asked Questions (FAQs)
Q1: What are common layering techniques?
- Transferring funds through multiple bank accounts, especially across borders
- Conducting frequent, varied, or round-trip transactions
- Using shell companies or trusts to hide ownership
- Converting funds into luxury assets, cryptocurrencies, or financial instruments
- Making structured deposits (smurfing) to avoid reporting thresholds
- Engaging in trade-based money laundering (TBML) by over- or under-invoicing goods
Q2: Why is layering difficult to detect?
- Transactions often appear legitimate on the surface
- Funds may pass through multiple jurisdictions with different legal standards
- The use of intermediaries, third-party accounts, and complex structures can obscure the money trail
- Sophisticated launderers mimic normal business behavior to avoid triggering alerts
Q3: What are the red flags of layering activity?
- Unexplained transfers to or from offshore accounts
- Customers who are reluctant to explain complex transaction patterns
- Payments to unrelated third parties without clear justification
- Use of new or dormant accounts for large-volume transfers
- Transactions that are inconsistent with the customer’s profile or declared purpose
Q4: What role does layering play in AML compliance?
- Layering is the stage where effective transaction monitoring systems and risk-based alerting are most critical
- AML programs must be designed to:
- Detect unusual or suspicious transaction flows
- Monitor geographic risk and high-risk entities
- Escalate and investigate suspicious behavior for potential STR (Suspicious Transaction Report) filing
Q5: How does layering relate to the full money laundering cycle?
The money laundering process typically involves three stages:
- Placement – Introducing illicit funds into the financial system
- Layering – Obscuring the source through complex movement and transformation
- Integration – Reintroducing funds into the legal economy as seemingly legitimate assets
