What are the stages of the money laundering lifecycle?

Money laundering is often a carefully orchestrated process where illicit funds are given a new, respectable facade. 

Understanding how dirty money moves through the system and eventually appears as legitimate assets is crucial for detecting and stopping financial crime in time. 

In this article, we walk you through the three main stages of the money laundering lifecycle and how to recognise them.

1. Placement – the first step in money laundering

Placement is the first step in the money laundering process. This stage involves introducing illegally obtained money into the financial system, with the goal of beginning to conceal its criminal origins.

Typical placement methods include:

• Depositing small, recurring amounts of cash into bank accounts.
• Using cash-intensive businesses (such as restaurants or laundromats) to disguise illegal proceeds as legitimate income.
• Purchasing assets like real estate, luxury goods, or vehicles with cash payments.
• Smurfing – breaking up large sums into smaller transactions to stay below reporting thresholds.

Placement is often the riskiest phase for the launderer, as the funds can still be directly traced back to criminal activities.

2. Layering – creating distance between money and crime

Once the illicit funds are placed into the financial system, the next stage begins: layering. This step involves complex transactions designed to obscure the money's illegal origin and create distance between the funds and the crime.

Typical layering techniques include:

• Rapid transfers between multiple bank accounts, often across different countries.
• Investments in complex financial products, funds, or securities.
• Use of shell companies and offshore entities to create anonymous ownership structures.
• Currency conversions and switches between different asset types to confuse tracking efforts.

The purpose of layering is to create confusion, break the money trail, and make it as difficult as possible for banks and authorities to trace the source of funds.

3. Integration – making illicit money appear legitimate

The final stage of the money laundering lifecycle is integration. This phase sees the illicit funds re-entering the economy in a way that makes them look like legitimate earnings or investments.

Examples of integration methods include:

• Investing in real estate, businesses, or stock markets.
• Funding new businesses as fronts for illicit profits.
• Using the illicit money as collateral for loans and credit arrangements.
• Opening new bank accounts and making investments in low-regulation environments.

Once funds are integrated, tracing their criminal origin becomes significantly more difficult, making this stage especially dangerous from an AML perspective.

Read more: 22 red flags for money laundering - with examples

Example of a full money laundering lifecycle

Imagine a drug trafficking network generating millions in illicit cash. 

To place the funds, the traffickers buy a chain of small restaurants and report inflated daily sales, mixing dirty money with legitimate revenue. 

During layering, the funds are broken into smaller amounts, transferred across multiple accounts and countries, invested through offshore shell companies, and partly converted into cryptocurrencies and high-value assets. 

Finally, in the integration phase, the money is used to invest in luxury real estate and legitimate businesses, appearing as lawful profits. Without strong detection measures, the illicit funds are successfully embedded into the legal economy.

Summary: breaking the money laundering chain

By understanding the three stages, placement, layering, and integration, your organisation can better detect suspicious activities early and minimise the risk of being exploited in money laundering schemes.

Want to learn how Trapets can help you build an effective defence against every stage of money laundering? Read more about our solution for transaction monitoring.