The Three Stages of Money Laundering (CISI Regulation)

Money laundering comes up on the Introduction to Securities & Investment and carries real weight in the market integrity element of UK Financial Regulation. The good news is that the core of it is three stages in a fixed order, and the exam tests that order relentlessly. Learn the three stages and the main offences and you have a reliable block of marks.

The three stages, in order

Money laundering is the process of taking the proceeds of crime and making them appear to come from a legitimate source. It is usually described in three stages, and the order matters because the exam will scramble it to catch you.

1. Placement. Getting the criminal cash into the financial system in the first place. This is the riskiest stage for the launderer, because raw cash is conspicuous. Examples include depositing cash into a bank account, buying assets with cash, or using a cash-intensive business to mix dirty money with clean takings.

2. Layering. Moving the money through a series of transactions to break the link with its criminal origin and make it hard to trace. Think transfers between accounts and jurisdictions, buying and selling assets, and routing funds through multiple entities. The aim is distance and complexity.

3. Integration. Returning the now-disguised money to the criminal as apparently legitimate wealth. At this stage it re-enters the economy looking like the proceeds of a genuine investment, business or sale, and can be spent or invested openly.

A simple way to keep the order straight: the money is placed in, layered around, then integrated back out. Placement first, layering second, integration last, every time.

The offences you need to know

The UK regime sits primarily on the Proceeds of Crime Act 2002, with the Money Laundering Regulations setting out the systems and controls firms must have. For the exam, know the principal offences.

The principal money laundering offences. Concealing criminal property, arranging to facilitate the acquisition or use of criminal property, and acquiring, using or possessing criminal property. These are the core offences and they carry a maximum of 14 years' imprisonment, an unlimited fine, or both.

Failure to disclose. Someone in the regulated sector who knows or suspects money laundering, or has reasonable grounds to, and does not report it commits a separate offence. The obligation to report is not optional.

Tipping off. Telling a suspect, or anyone, that a report has been made or that an investigation is under way, in a manner likely to prejudice it, is itself an offence. You report your suspicion through the proper channel and you do not warn the customer.

How suspicions get reported

This is the practical mechanism, and it is examinable. If you suspect money laundering, you do not confront the customer and you do not investigate yourself. You make an internal report to your firm's Money Laundering Reporting Officer, the MLRO. The MLRO assesses it and, where appropriate, submits a Suspicious Activity Report, a SAR, to the National Crime Agency. The chain is consistent: staff member to MLRO to National Crime Agency.

Alongside this sit the customer due diligence requirements: knowing who your customer is, verifying their identity, understanding the nature of the relationship, and keeping records. These controls are what allow suspicious activity to be spotted in the first place.

How the exam tests it

Most questions fall into a few predictable shapes. They scramble the order of the three stages and ask you to put them right. They describe a scenario, depositing cash, then ask which stage it is. They test whether you know that a suspicion goes to the MLRO and then to the National Crime Agency, not to the police directly or to the customer. And they probe the offences, especially that tipping off is an offence in its own right. Drill those shapes and the topic becomes routine.

For the method across every CISI paper, see the complete guide to passing your CISI exams.