Decoding the Three Stages of Money Laundering Crimes and the 27 Common Techniques

2026-02-02 14:04:03

Criminals use the financial system to launder illicit gains, which is known as money laundering. Money laundering activities not only threaten financial security but also provide funding for organized crime, making them a key target for global regulators. How exactly does money laundering work? What are the mechanisms behind it?

How is money laundering defined? What are the harms?

Money laundering refers to the act of disguising and concealing the source and nature of illegal proceeds and earnings from crimes such as drug trafficking, organized crime, terrorism, smuggling, or other criminal activities, through various means to make them appear legitimate in form.

Internationally, the definition of money laundering is not entirely uniform. The Basel Committee on Banking Supervision describes money laundering from a financial transaction perspective as: criminals and their accomplices transferring funds from one account to another through the financial system to obscure the true source and beneficial ownership; or using financial institutions’ custody services to deposit funds.

The main subjects of money laundering are financial institutions or individuals, involving five primary methods: providing accounts, assisting in converting assets into cash or financial instruments, transferring funds via bank transfers or settlement methods, helping transfer funds abroad, and other methods to disguise the source and nature of illegal proceeds.

From a harm perspective, money laundering has two serious consequences: on one hand, organized crime uses laundering to hide traces of their activities and enjoy their criminal gains “legitimately”; on the other hand, laundering provides criminal groups with funds to infiltrate legitimate businesses, allowing them to expand their criminal influence under the guise of legality.

Sources of black money are diverse, including income from drug trafficking, smuggling, arms sales, fraud, theft, robbery, corruption, tax evasion, and more. Every black money transaction represents a crime, and each act of laundering helps perpetuate evil.

The three stages of money laundering: from concealment to cleaning

A complete money laundering process is divided into three closely connected stages, none of which can be skipped. Understanding these stages reveals the operational logic behind money laundering crimes.

Stage 1: Placement

The placement stage is the beginning of money laundering and also the riskiest. Criminals need to convert cash from illegal activities into forms that are easier to control and hide.

Common methods include: criminals obtaining large amounts of small cash through street transactions. These scattered bills are inconvenient to carry and easy to target if accumulated in large quantities. They then deposit small amounts into banks, convert them into securities or other financial instruments. Once large sums of small cash are transformed into bank accounts or portable securities, the placement stage is complete.

Advances in modern finance facilitate this process. From traditional bank teller transactions, remittances, credit cards, to emerging phone banking, online banking, and digital finance, criminals have more and more means to utilize. This stage lays the foundation for subsequent concealment.

Stage 2: Layering — the most covert stage

Layering is the key and most complex stage of money laundering. The goal is to use multiple transactions or transfers to disconnect the illegal proceeds from their original source, gradually blurring their true nature and origin to evade regulation.

Criminals exploit modern complex and comprehensive markets—banks, insurance companies, securities firms, gold markets, car markets, and even street retail—to create layered, intricate transactions. They transfer funds multiple times, sometimes even using anonymous transactions, deliberately obscuring or circumventing audits, to artificially sever the link between illegal funds and their source.

Common practices include: opening bank accounts under pseudonyms or trustees, engaging in virtual trade transactions, buying and selling bearer securities, and other complex financial operations. These methods are labyrinthine and difficult to trace, especially when conducted in so-called “secrecy havens,” “tax havens,” or other regulatory blind spots, further shrouding the nature, source, and destination of criminal proceeds.

Stage 3: Integration — the final cleaning

The integration stage is the completion of the laundering process. After the first two stages, the illegal proceeds have been mixed with normal income, making it difficult for ordinary people to detect their illicit origin.

In this stage, criminals transfer the layered assets into legitimate accounts or entities under the guise of lawful assets, often with no obvious connection to the criminal group or individual. These funds are then injected into normal social and economic activities. Criminals can freely use and transfer the “legitimized” proceeds, moving funds into legitimate organizations or personal accounts, just like regular business transactions, completing the transformation from black money to white money.

An overview of modern money laundering techniques: from traditional methods to digital innovations

With societal development and financial innovation, laundering methods are constantly evolving. Based on the fields and tools used, modern techniques can be categorized into several major types:

Financial system methods

Cash smuggling: Many countries lack strict cash transaction reporting systems. Criminals smuggle cash into the country and deposit it into banks. This is a key reason for strict restrictions on cash carry-in and carry-out.
Structuring (smurfing): Dividing large sums into smaller deposits below reporting thresholds across multiple banks to evade scrutiny.
Using financial institutions: Laundering through banks or non-bank financial institutions, especially when suspects open multiple accounts under false identities for transferring and hiding illicit funds.
Front accounts: Criminals often open accounts under unaware third parties or in foreign countries to transfer funds, employing “muling” strategies (multiple small deposits and withdrawals), making detection harder.
Foreign currency accounts: Using multiple small deposits domestically, then withdrawing foreign currency abroad, known as “muling.”

Cash-intensive industry methods

Using cash-intensive businesses: Casinos, entertainment venues, bars, jewelry stores, etc., to declare criminal proceeds as legitimate income through false transactions.
Casino chip exchange: Converting illicit funds into chips, then handing them to launderers. The launderer exchanges chips back into cash (with about 5% fee), claiming winnings, avoiding direct serial number tracking of cash.
Traveler’s checks: Customs do not limit the amount carried; transferring checks via endorsement to third parties, then cashing them at banks, eventually returning to the original issuer.
Gift cards: Exploiting the high liquidity but difficulty in cashing out, selling gift cards to company employee benefit agencies, and ultimately transferring them to third parties, with the original holder retrieving nearly equivalent cash.

Asset purchase methods

Direct asset purchases: Buying real estate, high-value vehicles, antiques, artworks, securities, etc., then reselling to deposit cash into banks, gradually converting into legitimate funds.
Straw buyers: Using third parties to buy property at 50-70% of market value with cash, then quickly reselling (e.g., pre-sale properties before handover), earning 50%-100% profit.
Antiques, jewelry, collectibles: Buying low and selling high through legitimate transactions, depositing funds into designated accounts. Usually involves purchasing unmarked items like artifacts, stamps, or vintage instruments, then falsely claiming they are personal collections for sale.
Private transactions of high-value items: Buying luxury cars, private jets, jewelry, and reselling for cash.

Securities and insurance methods

Using securities industry: Due to large transaction volumes and complex financial instruments, global capital markets provide excellent cover for laundering. Many crimes involve stocks, bonds, futures, etc.
Using bearer bonds or futures: Nominally anonymous financial instruments that facilitate concealment of true ownership.
Using insurance: Purchasing high-value policies and then claiming refunds or surrendering policies to return funds to criminals, disguising the true source of income.

Trade and corporate methods

False import/export: Overstating import prices or understating export prices, forging trade documents, to transfer illicit funds across borders.
Shell companies: Registering fake companies to conduct virtual transactions, turning criminal income into legitimate business revenue through fabricated performance.
Cross-border transaction fraud: Common in industries without physical goods. Inflating transaction amounts to transfer money to foreign accounts, then splitting funds or paying inflated prices for ordinary goods to foreign accounts, simulating legitimate payments.
Capital movement of multinational corporations: In finance, banking, or insurance sectors, large cash movements across borders.

Methods used by officials and businessmen

“Pulling first, laundering later”: Corrupt officials accumulate money while in office, then start businesses or companies. They often do not “wash” their money immediately but claim to have “made a fortune” to justify their illicit gains.
“Pulling and laundering simultaneously”: Officials use power to amass wealth, while relatives open entertainment venues, restaurants, or businesses. Opaque relationships make laundering easier.
“Pulling and laundering together”: Government officials or state enterprise leaders establish private companies but delegate management, controlling the funds. They transfer black money into their own accounts or profit through normal taxation.
Fake loans: Common in bribery or corruption. The payer holds promissory notes or checks issued by the recipient, claiming a loan relationship if investigated. After the heat subsides, when no clear consideration exists, they transfer or cash the notes or checks.

Cross-border and financial center methods

Offshore transfer: The most common laundering method. Includes non-trade methods (paying for education, insurance, commissions, etc., to buy foreign exchange), trade methods (overstated import, understated export, paying commissions to foreign traders for rebates), shell companies investing abroad (setting up offshore shells and using authority to transfer illicit proceeds as investments).
Underground banking transfers: As in the Yu Hua case, 12 billion RMB was moved via underground banks linked to financial officials, with personnel transporting cash to underground banks, then notifying Hong Kong partners to pay foreign exchange to related Hong Kong companies.
Offshore financial centers and secrecy havens: Some countries and regions allow anonymous companies or have excessive confidentiality measures on assets, making it easy to hide the true source of illicit income.
Bribing financial regulators: Usually drug trafficking groups bribe high-level officials to relax scrutiny of fund settlements. In the 2001 Hong Kong ICAC bust of the largest cross-border laundering syndicate, laundering amounted to HKD 50 billion. Criminals opened accounts at BOC Group’s Po Sang Bank, bribed a senior manager to transfer black money via regular transfers instead of remittances, moving funds into different accounts in Hong Kong and overseas.

Internet and new technology methods

Internet laundering: Transferring illicit funds via online banking, sometimes even “whitening” black money through online gambling.
Cryptocurrency laundering: With the rise of digital assets, cryptocurrencies, due to their decentralization and anonymity, have become new laundering tools, drawing increasing regulatory attention.
Direct transport: Using private jets or individuals with customs exemptions to move money abroad, often in $100 bills.

Foundations and charity methods

Using foundations: Many politicians establish foundations, falsely donating to them to lure corporate donations, then siphoning funds. Companies or groups use fake donations to self-controlled foundations, moving money back and forth to evade taxes. Politicians or firms raise funds under disaster relief pretenses but divert or withhold funds into private accounts. In cross-border laundering, funds are transferred among foundations under different charitable names.

Other covert methods

Underground currency exchange: Common in disreputable jewelry stores. Besides illegal currency exchange, cash can be converted into foreign bearer or endorsed checks for deposit into foreign accounts.
Counterfeit currency or fake banknotes: Laundering through multiple small transactions, vending machines, or coin exchange machines to turn counterfeit into real money. Criminal groups involved in drug or arms trafficking transfer illicit funds to others.

Combating money laundering: global regulatory trends

As laundering methods evolve, global financial regulators are strengthening anti-money laundering measures. From strict customer due diligence (KYC), real-time monitoring of suspicious transactions, to regulation of emerging payment tools, countries are building more comprehensive anti-laundering systems.

The digital age makes laundering more covert but also enables more precise regulation. Blockchain’s transparency offers new tools for tracking illegal fund flows, and real-name requirements for cryptocurrency exchanges are gradually advancing. It is foreseeable that future efforts to combat money laundering will become more powerful and scientific.

Understanding the three major stages and various techniques of money laundering is essential not only for legal professionals and financial practitioners but also for society at large to enhance financial security awareness. Everyone should recognize that preventing money laundering is not only the responsibility of regulators but a shared societal duty.

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