This lesson explains the general principles only. The detailed obligations differ by the type of organisation and its sector, and are determined by the laws and regulations in force and the instructions of the supervising authority.
1 The three stages of money laundering
Placement
Introducing illicit funds into the financial system
Layering
Successive transfers and transactions to obscure the source
Integration
Returning it as though it were the proceeds of a legitimate business
The easiest stage to detect is the first — which is why controls concentrate at the start of a relationship
2 Know your customer and due diligence
“Know your customer” is the foundation of the system: do not deal with an unknown party. Due diligence typically covers:
- Identifying the customer and verifying their identity with reliable documents.
- Knowing the beneficial owner of the relationship, not just the front.
- Understanding the purpose of the relationship and the nature of the expected activity.
- Ongoing monitoring of transactions and checking them against what was expected.
- Updating the data periodically and on any material change.
| Risk level | Level of diligence | Example indicators |
|---|---|---|
| Low | Simplified | A local customer with a known activity, small and routine transactions |
| Normal | Standard | The majority of customers |
| High | Enhanced | Complex ownership structures, high-risk activities, heavy reliance on cash |
The beneficial owner
This is the natural person who actually owns or controls the customer, or on whose behalf the transaction is carried out. Hiding them behind layers of companies is one of the best-known layering techniques.
3 Indicators that call for attention
- Transactions out of proportion to the customer’s known activity or income.
- Insisting on cash with no commercial justification, or splitting amounts to stay under certain thresholds.
- Refusing to provide basic documents, or providing contradictory information.
- A third party paying or receiving with no clear connection to the deal.
- Unjustified haste to complete the transaction, or willingness to bear an illogical cost.
- Repeated transfers from high-risk parties or countries with no commercial reason.
An indicator is not a verdict
The presence of an indicator does not mean the customer is guilty; it means the case needs additional documented review. The outcome is either a convincing explanation that is retained, or a suspicion reported through the approved procedure.
4 Reporting and record keeping
When suspicion arises, the matter is escalated to the designated compliance officer inside the organisation under a written internal procedure, and reported to the competent authority once the conditions for reporting are met. Three rules may not be breached:
- Confidentiality: neither the customer nor any unauthorised party is told that a report has been filed or is under consideration.
- No delay: report promptly, following the approved procedure.
- Record keeping: customer data, transactions and documents are retained for the statutory period and made available on request.
A new customer with a small business asked to execute a large deal, promised to pay from the account of a third company with no apparent connection to the deal, showed extreme urgency, and asked that the details not be documented.
The response:
- Do not execute the transaction under pressure of urgency.
- Request beneficial ownership documents and an explanation of the third party’s role.
- Document everything that happened in writing, with dates.
- Escalate to the compliance officer to consider the suspicion and take the required legal steps.
- Do not tell the customer that there is a suspicion or a report.
Lesson summary
- Laundering has three stages: placement, layering, integration — and detection is easiest at the start.
- Know your customer: identity, beneficial owner, purpose, monitoring and updating.
- The level of diligence matches the level of risk: simplified, standard or enhanced.
- An indicator calls for documented review, not an accusation.
- Report confidentially and without delay; retain records for the statutory period.
5 Test your understanding
Three quick questions
Pick the answer you believe is correct and you will see the result immediately.
1. An employee is suspicious about a transaction. What is the right response?
Telling the customer or circulating the case undermines the procedure and can expose both the organisation and the employee to liability.
2. What is meant by the beneficial owner?
The aim is to reach the human being behind the entity, not to settle for the trading name on the surface.
3. A customer insists on splitting a large amount into successive small payments with no justification. This is:
Structuring is a well-known indicator, but it calls for verification and documentation, not an immediate verdict.