Money laundering refers to activities aimed at concealing the criminal origin of money or other assets and making it more difficult to establish their connection with a prohibited act. In practice, the objective is to create a situation in which assets derived from crime can be used in economic transactions without an obvious link to their actual source.
Money laundering does not consist solely of depositing illegally obtained cash into a bank account. It may involve various types of transfers, conversions, purchases of assets, the use of business entities or other activities that make it more difficult to trace the path of the assets. The process is often described using three classic stages: placement, layering and integration. In reality, these stages do not always occur separately or in the same order.
What is money laundering?
In the Polish legal system, the concept of money laundering is linked to the offence defined in Article 299 of the Polish Criminal Code. In simplified terms, it concerns activities involving means of payment, financial instruments, securities, foreign exchange values, property rights, real estate, movable property or other assets derived from benefits connected with the commission of a prohibited act.
These activities may include, among other things:
- accepting,
- possessing,
- using,
- transferring,
- taking abroad,
- concealing,
- carrying out transfers or conversions,
- undertaking other activities that may make it more difficult to determine their criminal origin or place of storage.
In practice, money laundering can therefore be understood as a process aimed at making it more difficult to link assets to the crime from which they originate. It does not have to involve money only in the everyday meaning of the word. Other assets may also be involved.
What does money laundering involve?
For money laundering to occur, there must first be assets connected with earlier criminal activity. They may originate, for example, from fraud, corruption, drug trafficking, tax offences, cybercrime or other prohibited acts. Activities are then undertaken to make it more difficult to answer questions such as:
- where the assets came from,
- who actually owns them,
- which entities and accounts they passed through,
- where they are currently located,
- whether they are connected with an earlier crime.
The objective is therefore not simply to carry out a large number of transactions. What matters is concealing or obscuring the actual origin of assets or creating the appearance that they come from a legitimate source. From an AML perspective, this means that not only an individual transaction matters, but also the entire context of the customer relationship: the customer’s business profile, ownership structure, source of wealth, geographical activity and the way products and services are used.
What are the stages of money laundering?
The classic money laundering model consists of three stages:
- placement,
- layering,
- integration.
This model helps explain the mechanism of money laundering, but it does not mean that every real-life case must follow exactly the same pattern.
1. Placement
Placement is the stage at which assets derived from criminal activity are first introduced into the financial system or legitimate economic circulation. In the case of cash, this may involve converting it into another form of asset or introducing it into circulation in a way intended to make it more difficult to link the funds to their actual source.
Placement may involve, among other things, the use of:
- accounts and financial services,
- business activity,
- purchases of specific assets,
- exchanges of one form of asset for another.
From the perspective of an obliged institution, situations in which the way a product or service is used does not correspond to the customer’s declared profile may be particularly relevant.
Example: a customer operating a business that, according to available information, generates relatively low turnover suddenly begins carrying out transactions with a value significantly exceeding the usual level of activity. Such a situation does not in itself mean money laundering, but it may require additional analysis.
2. Layering
The next stage is layering. Its purpose is to make it more difficult to trace the path of assets and link them to their original source. Assets may move through successive transactions, accounts, entities, products or jurisdictions. The more complex the chain of transactions, the more difficult it may be to reconstruct the original source of the funds.
From an AML perspective, relevant factors may include, among other things:
- complex flows without an obvious economic justification,
- frequent movement of funds between different entities,
- transactions inconsistent with the customer’s profile,
- use of structures whose economic purpose is difficult to explain,
- unexpected geographical connections.
The overall pattern of activity is important. A single transfer between two accounts may be entirely legitimate. However, if it is one of many elements in a complex chain of transactions that the customer cannot reasonably explain, it may require enhanced analysis.
3. Integration
Integration is the stage at which assets, after passing through the earlier stages, return to legitimate economic circulation in a way that is intended to make them appear to come from a legitimate source. The assets may then be used, for example, in business activity, investments or to purchase assets.
At this stage, the connection between the assets and the original crime may already be much more difficult to identify, because the funds may appear to be revenue, investment returns or other legitimate income. For this reason, AML activities cannot be limited solely to the initial point of contact with the customer. Ongoing monitoring of relationships and transactions and comparing them with the information held about the customer are also important.
Does money laundering always occur in three stages?
No. Placement, layering and integration are primarily a model describing the typical mechanism of money laundering. In a specific case, the stages may:
- overlap,
- occur simultaneously,
- repeat,
- be difficult to distinguish clearly,
- occur in a different order.
In some situations, there may also be no distinct placement stage because the assets are already within the financial system from the outset, for example where the proceeds originate from a crime committed using transfers or other forms of electronic payment. Therefore, an obliged institution should not focus solely on determining “which stage of money laundering the customer is at”. It is more important to identify unusual activity, analyse its context and assess the risk.
What can the money laundering process look like – an example
The process can be presented in simplified form:
assets derived from crime → introduction into circulation → a series of activities making it more difficult to determine the source → use of the assets in a way that appears legitimate
The individual elements correspond approximately to:
placement → layering → integration
Example: assets derived from criminal activity are introduced into legitimate economic circulation. They then pass through a series of transactions and entities, making it more difficult to reconstruct their source. After some time, they reappear as funds apparently connected with legitimate business activity or an investment.
In practice, the process may be much more complex. From the perspective of an obliged institution, the most important issue is therefore not reconstructing the textbook three-stage model, but identifying behaviour that does not correspond to the information held about the customer or lacks an obvious economic justification.
What signals may indicate a risk of money laundering?
There is no single universal signal that automatically means money laundering. In practice, what matters is the combination of circumstances and whether they are consistent with the profile of a particular customer. Indicators that may require additional analysis include, among other things:
- transactions that significantly deviate from the customer’s previous activity,
- a sudden increase in the value or number of transactions without an obvious justification,
- complex flows of funds without a visible economic purpose,
- frequent transactions with entities whose connection to the customer’s business is unclear,
- unusual links to particular countries or geographical areas,
- difficulties in identifying the beneficial owner,
- an opaque or excessively complex ownership structure,
- inconsistency between the declared source of funds and actual activity,
- frequent changes in the way a product or service is used,
- transactions that do not correspond to the declared purpose of the business relationship.
A single red flag does not automatically mean that the customer is laundering money. It may, however, create a need for additional analysis, an update of KYC data, a reassessment of risk or the application of more intensive customer due diligence measures. The AML system should therefore enable not only the identification of deviations, but also their proper explanation and documentation.
How do obliged institutions counteract money laundering?
Entities subject to the Polish AML Act are required to apply solutions intended to reduce the risk of their activities being used for money laundering and terrorist financing. In practice, this includes, among other things:
- identifying and verifying customers as part of KYC,
- identifying and verifying beneficial owners,
- understanding the purpose and nature of the relationship,
- AML risk assessment,
- applying customer due diligence measures,
- checking PEP status,
- sanctions screening,
- ongoing monitoring of relationships,
- transaction analysis,
- updating customer data,
- analysing unusual cases,
- escalating situations requiring an additional decision,
- fulfilling information obligations towards the General Inspector of Financial Information.
The objective is not to create a system that blocks every unusual transaction. The purpose is to have a process that allows the institution to answer the question: “Is the customer’s activity consistent with what we know about them, or have circumstances arisen that require additional explanation?” The AML process therefore begins when the customer is first being assessed, but continues throughout the entire relationship.
Does every unusual transaction mean money laundering?
No. An unusual transaction may have a completely legitimate explanation. A customer may, for example, sell an asset, obtain financing, enter a new market or carry out a one-off transaction with a value significantly higher than usual. From an AML perspective, unusual activity primarily means that the context should be examined. The institution should analyse, among other things:
- who the customer is,
- the nature of their business activity,
- what source of funds they indicate,
- whether the transaction is consistent with the declared purpose of the relationship,
- whether similar activity has occurred before,
- what level of risk has been assigned to the customer,
- whether other factors increasing the risk are present.
Only after considering this information together can the institution assess whether the situation has been reasonably explained or requires further action. Automatically treating every unusual transaction as money laundering would be a mistake. However, it would also be a mistake to ignore deviations simply because an individual transaction does not appear suspicious on its own.
Money laundering and AML – what is the relationship?
Money laundering and AML do not mean the same thing. Money laundering is a phenomenon and a criminal offence involving specific activities relating to assets connected with criminal activity. AML (Anti-Money Laundering), on the other hand, is a system of regulations, procedures and activities designed to counteract money laundering and reduce the risk of legitimate entities being used for such activities.
AML therefore includes, among other things:
- understanding the customer,
- risk analysis,
- monitoring,
- detecting unusual activity,
- documenting analyses performed,
- responding to identified risks.
We discuss the entire system in more detail in the article AML – What Is It and How Does It Work?.
How does AML outsourcing support the detection of money laundering risk?
Detecting the risk of money laundering is not limited to a one-off customer check. An obliged institution must have processes in place that allow it to continuously analyse data, update information, monitor relationships and respond to cases that deviate from the customer’s expected profile. Depending on the organisational model, some of these activities may be performed by an external AML team.
Support may include, among other things:
- KYC and KYB,
- customer verification,
- beneficial ownership analysis,
- customer risk assessment,
- PEP and sanctions screening,
- updating KYC data,
- transaction monitoring,
- alert analysis,
- analysis of unusual activity,
- documenting the activities performed,
- preparing materials for internal escalation.
AML outsourcing does not mean that an external team “determines” whether money laundering has occurred. Its role may be to perform operational analyses, organise information, document findings and identify cases requiring further decisions in accordance with the obliged institution’s procedures.
This allows an organisation to scale customer servicing and monitoring without having to build the entire operational team internally. If your organisation needs additional resources for KYC, transaction monitoring, risk assessment or alert analysis, we can take over an agreed part of ongoing AML processes and perform them in accordance with your organisation’s procedures and operating model.
Learn more about AML outsourcing