To identify, understand and accurately assess the ML/FT risks to which FIs are exposed at both the enterprise and business relationship levels, FIs should be aware of the three phases of money laundering. By determining for which ML/FT phase a certain product can be misused or the FI itself can be misused, will help the FI understand its specific inherent ML/FT risks. The paragraphs below describe the crime of money laundering as consisting of three distinct (though sometimes overlapping) phases:

Placement. In this phase, criminals attempt to introduce Funds or the Proceeds of Crime into the financial system using a variety of techniques or typologies (see Section 3.10, ML/FT Typologies).

Layering. Once the Funds or Proceeds are introduced, or placed, into the financial system, they can proceed to the next phase of the process; often, this is accomplished by placing the funds into circulation through formal financial institutions, and other legitimate businesses, both domestic and international.” In this layering phase, criminals attempt to disguise the illicit nature of the Funds or Proceeds of Crime by engaging in transactions, or layers of transactions, which aim to conceal their origin.

Examples of layering transactions include:

Integration. In this phase, criminals attempt to return, or integrate, their “laundered” Funds or the Proceeds of Crime back into the economy, or to use it to commit new criminal offences, through transactions or activities that appear to be legitimate.

A key objective for criminals engaged in money laundering—and therefore a key generic risk underlying the specific risks faced by FIs—is the exploitation of situations and factors (including products, services, structures, transactions, and geographic locations) which favour anonymity and complexity, thereby facilitating a break in the “paper trail” and concealment of the illicit source of the Funds.

Although the sizes of transactions related to the financing of terrorism and illegal organisations can be (much) smaller than those involved in money laundering operations, and some of the typologies and specific techniques used may differ, the overall principles and generic risks are the same. The terrorists and criminals involved in these acts attempt to exploit situations and factors favouring anonymity and complexity, in order to obscure and conceal the illicit source of the Funds, or the illicit destination or purpose for which they are intended, or both. FIs should remain careful that their services are not being used either directly or indirectly to facilitate Money Laundering or the Financing of Terrorism or Illegal Organisations in any of the three stages described above.