Placement
Also written Placement stage · Placement in the financial system
The 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.
In plain language
Physical cash is the hardest form of criminal wealth to use and the easiest to lose. It has to be stored, counted, guarded and moved, and every rupee of it is evidence.
Placement is the stage at which the launderer converts that problem into a bank balance, a demat holding or a monetary instrument. The workbook calls it the stage full of challenges for the criminal, and that is the point worth remembering: it is where the money is closest to the crime and therefore where an intermediary has the best chance of catching it.
How it works
The workbook lists the standard placement methods:
- Adding illicit cash to the legitimate takings of a business, particularly one with little or no variable cost
- Smurfing — inserting small amounts, each below the AML reporting threshold, into bank accounts or credit cards and using them to pay expenses
- Mules or cash smugglers — cash carried across a border and deposited into foreign accounts
- Hiding identity through trusts and offshore companies
- Investing in commodities such as gems and gold, which move easily between jurisdictions
- Buying and selling assets for quick turnaround — real estate, cars, boats
- Gambling — running the money through casino transactions
- Shell companies — inactive companies that exist only on paper
What all of them are working around is a reporting figure. Under Rule 3 of the PML Rules, a reporting entity must record every cash transaction of more than Rs 10 lakh, and also every series of integrally connected cash transactions individually below Rs 10 lakh where the monthly aggregate exceeds Rs 10 lakh. That second limb is aimed squarely at smurfing, and it is why splitting a deposit does not work as cleanly as it looks on paper.
The other defence is the account itself. Rule 9(11) bars a reporting entity from opening or keeping any anonymous account, any account in a fictitious name, and any account on behalf of a person whose identity has not been disclosed or cannot be verified.
A worked example
A Surat gems dealer is approached to place Rs 6 crore in cash generated by a smuggling ring.
The plan. Sixty-five separate current accounts are opened in the names of relatives and employees. Each takes deposits of Rs 9.2 lakh, spread across four branches, all inside the month of July. Total placed: Rs 5.98 crore. No single deposit crosses Rs 10 lakh, so on the launderer's reading nothing is reportable.
Why it fails. Rule 3(B) does not look at single deposits. It looks at a series of integrally connected cash transactions within a month whose aggregate exceeds Rs 10 lakh — and each of the sixty-five accounts crosses that on its second deposit. Forty-one of the accounts are also connected by a common mobile number and a common introducer, which the bank's monitoring picks up.
What it costs. The reports go to FIU-IND by the 15th of the succeeding month for the cash limb. The alerts that cannot be explained become a Suspicious Transaction Report, due within seven working days of the Principal Officer concluding that the transactions are suspicious. The account holders — none of whom kept a rupee — become witnesses at best and accused at worst, because section 3 catches anyone who is knowingly a party to a process connected with proceeds of crime.
On the securities side the same money would have had to pass client due diligence first, and Rule 9(1) bites at an occasional transaction of Rs 50,000 or more, single or connected.
Why NISM asks about it
Chapter 1 (Introduction to AML, CFT and PF), section 1.2.1, sets out the three stages and gives the placement methods in a list — which is exactly the form the questions take. Expect "which of the following is a placement technique?", a one-line scenario asking you to name the stage, and a recall question on the Rs 10 lakh cash record threshold in Rule 3, which is where Chapter 3 picks the thread up.
Common exam traps
- Placement is about entry, not disguise. The moment the money is inside the system, the launderer has moved on to layering. Deposits are placement; the sixteen transfers that follow are not.
- Smurfing is a placement technique, not a separate stage. So are mules, gambling and shell companies. The exam lists them under placement.
- Rs 10 lakh is a record-and-report threshold, not a licence. Staying under it does nothing about the monthly aggregation limb of Rule 3, and nothing at all about suspicious transaction reporting, which has no threshold — an attempted transaction of any size is reportable.
- Not all placement is cash. Purchasing monetary instruments such as cheques or money orders, collected and deposited elsewhere, is placement too.
- Buying gold is placement, buying a flat is usually integration. The same act can look like either; ask whether the money is entering the system or coming back out of it looking earned.
Check yourself
1.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.
2.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.
3.Under Rule 3 of the PML Rules, what is the threshold for reporting a cross-border wire transfer?
- a)More than five lakh rupees, where either the origin or destination of the funds is in India
- b)More than ten lakh rupees
- c)More than fifty lakh rupees
- d)Any amount, without threshold
Show the answer
Answer: (a) More than five lakh rupees, where either the origin or destination of the funds is in India
All cross-border wire transfers of the value of more than five lakh rupees or its equivalent in foreign currency where either the origin or destination of fund is in India.
Five lakh is the lowest of the three value thresholds, reflecting the extra risk in cross-border movement.
Option B gives the cash threshold: all cash transactions of the value of more than rupees 10 lakh or its equivalent in foreign currency — the same figure applying to receipts by non-profit organisations of value more than rupees ten lakh.
Option C gives the property threshold: all purchase and sale by any person of immovable property valued at fifty lakh rupees or more that is registered by the reporting entity.
Two reportable categories carry no threshold at all. All cash transactions where forged or counterfeit currency notes or bank notes have been used as genuine or where any forgery of a valuable security or a document has taken place facilitating the transactions, and all suspicious transactions, whether or not made in cash, including attempted transactions.
And one category defeats thresholds by design: all series of cash transactions integrally connected to each other which have been individually valued below rupees ten lakhs... where such series of transactions have taken place within a month and the monthly aggregate exceeds an amount of ten lakh rupees.
That limb exists to catch smurfing — the placement tactic of inserting small amounts of money below the AML reporting threshold.
Note that "either the origin or destination" means inward and outward transfers alike are caught, which aligns with the definition of an offence of cross border implications covering both proceeds brought to India and proceeds transferred to a place outside India.
The deadline for this report is the general one: all other reports need to be furnished on a monthly basis by the 15th day of the succeeding month — as against seven working days for an STR and every quarter by the 15th day of the month succeeding the quarter for property.
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.
- 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.
- LayeringThe 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.
- Mule accountAn account held in one person's name but effectively controlled by another — defined in the SEBI PFUTP Regulations and used to place criminal money without exposing whoever actually owns it.
- Shell companyAn inactive company or corporation that exists only on paper, used as a placement vehicle for laundered funds.
- SmurfingA placement tactic in which small amounts of money below the AML reporting threshold are inserted into bank accounts or credit cards and used to pay expenses.