Layering
Also written Layering stage · Layering the funds
The second stage of money laundering — moving money through enough transactions, accounts and jurisdictions that the trail back to the original crime becomes impossible to follow.
In plain language
Once criminal money is inside the financial system it is traceable but not yet safe. Layering is the work of breaking the trail.
The launderer moves the money through a series of transactions whose only real purpose is distance — from the crime, from the first account, from the country. The individual steps are designed to look ordinary. It is the pattern, not any single transaction, that gives layering away, which is why monitoring rather than onboarding is the control that catches it.
How it works
The workbook describes layering as channelling funds through purchases and sales of investments, through a holding company, or simply through a series of accounts at banks around the globe — with the widely scattered accounts most likely to sit in jurisdictions that do not cooperate with AML investigations. Transfers are often disguised as payments for goods or services, or as a private loan to another company, to give them a legitimate appearance.
Three tactics are named for the digital-asset route:
- Chain-hopping — converting one digital currency into another and moving from one blockchain to another
- Mixing or tumbling — blending transactions across several exchanges so that they are harder to trace back to a specific exchange, account or owner
- Cycling — depositing fiat at one bank, buying and selling digital currency, then depositing the proceeds into a different bank or account
The securities market is attractive for layering because trades are large, frequent and ordinary-looking. The counter-control is Rule 9(12) ongoing due diligence, read with the SEBI requirement that an intermediary understand the normal activity of a client so that it can identify deviations, and pay special attention to all complex, unusually large transactions or patterns which appear to have no economic purpose. Cross-border wire transfers of more than Rs 5 lakh where the origin or destination of funds is in India are separately recordable under Rule 3(E).
A worked example
A Kolkata-based operator has already placed Rs 12 crore into nineteen bank accounts. The layering runs like this.
Step 1 — into securities. The nineteen accounts fund nine trading accounts at three different brokers, none of them holding more than Rs 1.6 crore.
Step 2 — circular trades. Over five weeks the nine accounts buy and sell a smallcap textile share among themselves at progressively higher prices, booking Rs 38 crore of turnover in a scrip whose average daily traded value is Rs 9 lakh. Six of the nine accounts end the period roughly flat; three end with large "gains" that now have a contract note behind them.
Step 3 — out of the country. Rs 2.4 crore leaves as fifty wire transfers of Rs 4.8 lakh each, each one Rs 20,000 below the Rs 5 lakh cross-border recording threshold in Rule 3(E), to a trading company in a jurisdiction that does not respond to mutual legal assistance requests.
Step 4 — back in, as a loan. Rs 1.9 crore returns as an unsecured "loan" from that trading company to an Indian private limited company the operator controls.
What catches it. Not one transaction, but the shape of all of them. One broker's surveillance flags turnover of Rs 38 crore in a scrip with Rs 9 lakh of daily volume as a complex pattern with no apparent economic purpose. Under SEBI's monitoring requirement the broker must examine the background and record its findings in writing, and those records must be available to auditors, the exchanges, SEBI and FIU-IND. The alerts that cannot be explained become an STR. In the Shreepati Holdings matter SEBI penalised a broker Rs 3,00,000 under section 15HB precisely for closing 83 BSE and 54 NSE alerts without recording any reason.
Why NISM asks about it
Chapter 1, section 1.2.1 (Stage 2) carries the definition and the chain-hopping, mixing and cycling tactics, and Chapter 6 (SEBI Guidelines on AML, CFT and PF), section 6.2.6, carries the monitoring obligation that is supposed to catch it. Expect stage-identification questions, a direct question on which tactics are layering rather than placement, and questions on the duty to examine and record the background of complex or unusually large transactions.
Common exam traps
- Layering and integration are easy to confuse. Layering hides where the money came from; integration explains where it is now. Transfers between accounts are layering; a dividend paid out to the criminal is integration.
- Chain-hopping, mixing and cycling are layering, not placement. The money is already inside the system by the time they happen.
- "Integrally connected" is not the only test. For suspicious transaction reporting the workbook says transactions remotely connected or related must also be considered — a wider net than the Rule 3 cash aggregation limb.
- Staying under a threshold is itself a pattern. Fifty transfers of Rs 4.8 lakh against a Rs 5 lakh threshold is evidence, not cover.
- Closing an alert is a decision that has to be written down. An alert closed without a recorded reason is a compliance failure in its own right, whether or not the underlying trade was innocent.
Check yourself
1.Which of these is a layering tactic?
- a)Chain-hopping — converting one digital currency into another and moving from one blockchain to another
- b)Smurfing small deposits below the reporting threshold
- c)Employing fake employees paid in cash
- d)Buying gems and gold that can be moved easily to other jurisdictions
Show the answer
Answer: (a) Chain-hopping — converting one digital currency into another and moving from one blockchain to another
Few layering tactics are: Chain-hopping — converting one digital currency into another and moving from one blockchain to another.
The other two named layering tactics: mixing or tumbling — the blending of various transactions across several exchanges, making transactions harder to trace back to a specific exchange, account, or owner and cycling — making deposits of fiat currency from one bank, purchasing and selling digital currency, and then depositing the proceeds into a different bank or account.
All three are digital-asset techniques — which is why the chapter now devotes attention to them.
Options B and D are placement tactics: smurfing is where small amounts of money below the AML reporting threshold are inserted into bank accounts or credit cards, and investing in commodities: Using gems and gold that can be moved easily to other jurisdictions.
Option C is an integration tactic: fake employees – a way of getting the money back out. Usually paid in cash and collected.
What layering is for: the layering stage is when the launderer moves the money through a series of financial transactions with the goal of making it difficult to trace the original source.
The vehicles it uses: the funds could be channeled through the purchase and sales of investments, a holding company, or simply moved through a series of accounts at banks around the globe.
And the geography is deliberate: widely scattered accounts are most likely to be found in jurisdictions that do not cooperate with AML investigations.
Plus a disguise: in some instances, the launderer could disguise the transfers as payments for goods or services or as a private loan to another company, giving them a legitimate appearance.
That last point connects layering to integration. A private loan to another company used to move money is layering; a loan – to directors or shareholders, which will never be repaid that brings the money back to the criminal is integration. The same instrument serves both stages depending on direction and purpose.
2.What is the stage of money laundering at which illegally obtained funds are introduced into the financial system called?
- a)Placement
- b)Extraction
- c)Layering
- d)Integration
Show the answer
Answer: (a) Placement
The placement stage in money laundering is when the illegally obtained funds are introduced in the financial system.
This is often done by breaking up large amounts of cash into less conspicuous smaller sums to deposit directly into a bank account or by purchasing monetary instruments such as checks or money orders that are collected and deposited into accounts at other locations.
And it is the hardest step for the criminal: the placement stage of money laundering is full of challenges for the criminals as it involves placing money into the legal system without causing any suspicion.
The other two stages come later. The layering stage is when the launderer moves the money through a series of financial transactions with the goal of making it difficult to trace the original source, and the integration stage of money laundering is the final step... when the launderer attempts to integrate illicitly obtained funds into the legitimate financial system.
Option B is a variant name for the third stage. The workbook lists the three as Placement · Layering · Integration/extraction.
The placement tactics: adding illicit cash from a crime to the legitimate takings of a business · smurfing — small amounts of money below the AML reporting threshold... inserted into bank accounts or credit cards · mules or cash smugglers — cash smuggled across borders and deposited into foreign accounts · hiding the beneficial owner's identity through trusts and offshore companies · using gems and gold that can be moved easily to other jurisdictions · quick turnaround in real estate, cars, and boats · using casino transactions to launder money · and shell companies — inactive companies or corporations that exist only on paper.
One caution on the model: not all money laundering cases will use all the three-stage process – they could be combined or stages repeated several times, thus the rule of three stages of money laundering frames the thinking of many compliance teams.
3.What principle did the Vienna Convention of 1988 establish regarding bank secrecy?
- a)That domestic bank secrecy provisions should not interfere with international criminal investigations
- b)That bank secrecy is absolute and inviolable
- c)That bank secrecy applies only to domestic accounts
- d)That banks may disclose customer information only with the customer's consent
Show the answer
Answer: (a) That domestic bank secrecy provisions should not interfere with international criminal investigations
It establishes the principle that domestic bank secrecy provisions should not interfere with international criminal investigations.
This is the Convention's most consequential contribution — without it, an investigation could be defeated simply by moving money to a jurisdiction with strong secrecy laws, which is precisely the layering tactic of using jurisdictions that do not cooperate with AML investigations.
Options B, C and D all preserve secrecy in some form, and so run against the principle.
The Convention also supplied the classic definition. Money laundering has been addressed in the UN Vienna 1988 Convention Article 3.1, describing Money Laundering as: "the conversion or transfer of property, knowing that such property is derived from any offense(s), for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in such offense(s) to evade the legal consequences of his actions".
Note the two purposes in that definition — concealing the origin, or helping an offender escape consequences. Either suffices.
And note the knowledge element — knowing that such property is derived from any offense(s).
Its other contributions: the Vienna Convention, adopted in December 1988, lays the groundwork for efforts to combat money laundering by creating an obligation for signatory states to criminalize the laundering of money from drug trafficking. It promotes: International cooperation in investigations and Makes extradition between signatory states applicable to money laundering.
Note the original scope was drug trafficking. The obligation to criminalise laundering covered money from drug trafficking; the widening to other predicate offences came later, through FATF standards and national laws such as the PMLA with its schedule of offences.
And the timing matters. The Convention was adopted in December 1988; FATF was founded in 1989, the year after. The international framework built on the Convention's foundation.
Where this is taught
Free preparation for NISM Series XXIVRelated terms
- Money launderingTurning the proceeds of a crime into money that looks legitimate — classically in three stages, placement, layering and integration — and a standalone offence under section 3 of the PMLA.
- Suspicious Transaction ReportA report a SEBI intermediary must file with FIU-IND within 7 days of concluding that a transaction or connected series of transactions is suspicious — and must never disclose to the client.
- IntegrationThe final stage of money laundering — bringing the funds back out into the legitimate economy as property, business income or dividends that can be spent without attracting attention.
- PlacementThe first stage of money laundering — getting criminal cash into the financial system, where it stops being a bag of notes and becomes a balance that can be moved.
- Risk Based ApproachApplying each due diligence measure in proportion to the money-laundering risk a client poses — enhanced diligence for higher-risk clients, simplified for lower-risk, never simplified where suspicion exists.