What Is Placement in Money Laundering 

The first step in the classic money-laundering cycle is placement, the point at which illegal money is introduced into the legitimate financial system. It is a critical stage as in case the criminals succeed in placing dirty money without being detected, the following process (layering and integration) becomes less challenging. The importance of learning about placement: how, why, and how institutions establish it, identify, and mitigate it is the key to successful anti-money-laundering (AML) programs.

What placement looks like

Placement refers to the conversion of cash or other products of crime into a form that can be susceptible to entering financial channels. Placement can be commonly done using:

Cash deposits: Depositing currency in bank accounts often in large or frequent amounts, and sometimes in small quantities to evade reporting limits (in what are known as smurfing or structuring).

Cash-intensive businesses: laundering illegal cash through legitimate business that receives large amounts of cash such as restaurants, retail stores, car washes, etc. This renders the illegal source more difficult to detect.

Third-party deposits: Mules or nominees deposit money in a bank account with the assistance of another individual to hide the source of the funds.

Buys and sells negotiable instruments: Purchasing cashier checks, money orders or traveler checks and depositing or transferring them.

Casino/gaming dealings: Change of money into chips, bet lowly, and withdraw money in terms of checks or transfers.

Cross-border transfer: Transfer of cash in jurisdictions with lesser controls physically or by informal systems of value transfer.

Why placement matters

 The most exposed area of detection is placement. The cash or tangible property is most simple associated with the crime before they get intertwined into the legal channels. After being subjected to several transactions or even invested in legal assets, it is exponentially difficult to trace its source. Good measures at the placement in money laundering can thus ensure that huge amounts of illegal money never get their way into the formal markets.

Red flags and indicators

Compliance officers and financial institutions seek placement patterns:

• Recurring deposits of money slightly below regulatory reporting thresholds.
• Abrupt and unaccountable cash deposits into an account that was not highly active.
• Large cash deposits that do not align with the customer’s profile or business operations.
• Cash is deposited using a number of branches, several accounts, or a number of persons.
• Repeated buying of money order or cashier checks and putting it in wire transfer.
• Companies that declare revenues that are not in line with the norms in the industry (e.g. a small cafe with an abnormally high cash turnover).
• Quick withdrawal or transfer of money after deposits particularly to foreign beneficiaries.

Placement detection and prevention controls

Effective AML systems are made up of technology, policies, and human judgment to detect suspicious placement activity:

Know Your Customer (KYC) and customer due diligence (CDD): Precise information in onboarding and periodic review will assist in raising red flags of accounts that are not what they say they have done.

Types of transaction monitoring systems: Patterns, such as structuring, large amounts, or changes in behavior of a newly created account, are detected using rule-based and machine-learning models.

Currency transaction and suspicious activity reporting: Filing of required reports (e.g., CTRs and SARs in most jurisdictions) promptly puts an audit trail in place and initiates investigations.

Enhanced due diligence (EDD): Due diligence may be increased where the risk involved with a particular customer or business is elevated or the company is cash-intensive, requiring further verification, source-of-fund documents, and increased supervision.

Cash handling policies: Shortening of cash transaction limits, training of employees and auditing of cash-intensive branches minimize weaknesses.

Cooperation with law enforcement and other banks: Distribution of typologies and red-flag indicators can assist in detecting more extensive schemes and mule networks.

Emerging challenges

Criminals adapt quickly. The use of digital payment and prepaid cards and cryptocurrencies complicate the matter: although certain crypto transactions are traceable, mixing service and privacy coins can hide trails. Similarly, COVID-related changes transformed the placement by augmenting e-commerce and other applications of payment. Financial institutions should develop a more efficient monitoring that includes the non-traditional channels and open-source intelligence and public records where needed.

Working example (exemplary)

A tiny retail shop abruptly starts to place daily cash amounts which are well beyond its past history and industry standards. The spike is noted by transaction monitoring; a follow-up review reveals inconsistencies between the amounts of invoices and POS records and the deposit volumes. The bank goes further to KYC refresh and submits a suspicious activity report. Early identification on placing prevented the large volumes to be layered in the other accounts.

Legal and ethical issues

 The requirement to report and freeze suspected illicit funds has to be in accordance with local laws and protections of customer privacy. False positives are very detrimental to legitimate users of the service, and institutions must find the right balance between being vigilant and proportional: should anomalies be verified and clarifying documentation sought before disruptive measures are taken, where feasible.

Conclusion

Placement is where illicit funds initially enter the legal economy, and this is where AML defenses stand the best opportunity to halt the laundering. Comprising a robust KYC, suspicious transaction monitoring, focused enhanced due diligence, staff training, and regulatory reporting, financial institutions may greatly mitigate the risk of dirty money flowing into the formal financial system. Remaining open to emerging payment technologies and exchanging typologies with the industry enhances security in this initial critical phase further.