The Three Stages of Money Laundering (CISI Regulation)
The three stages of money laundering for the CISI exam: placement, layering and integration, plus the Proceeds of Crime Act offences and how suspicions are reported.
What are the three stages of money laundering?
Placement, layering and integration, in that order. Placement gets the criminal cash into the financial system, which is the riskiest stage for the launderer because raw cash is conspicuous. Layering moves the money through a series of transactions to break the link with its criminal origin. Integration returns the now-disguised money to the criminal as apparently legitimate wealth that can be spent or invested openly.
- Stage 1, placement
- Getting the criminal cash into the financial system, for example depositing cash, buying assets with cash, or mixing it through a cash-intensive business. The riskiest stage for the launderer
- Stage 2, layering
- Moving the money through transfers between accounts and jurisdictions, asset trades and multiple entities to break the link with its criminal origin
- Stage 3, integration
- Returning the disguised money to the criminal as apparently legitimate wealth, ready to be spent or invested openly
- Governing law
- Proceeds of Crime Act 2002, with the Money Laundering Regulations setting out the systems and controls firms must have
- Principal offences
- Concealing criminal property, arranging to facilitate the acquisition or use of criminal property, and acquiring, using or possessing criminal property
- Maximum penalty
- 14 years' imprisonment, an unlimited fine, or both
- Reporting chain
- Staff member to the firm's Money Laundering Reporting Officer (MLRO), who submits a Suspicious Activity Report (SAR) to the National Crime Agency where appropriate
- Tipping off
- Telling a suspect, or anyone, that a report has been made or an investigation is under way, in a manner likely to prejudice it, is an offence in its own right
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.
Test yourself on Global Fin. Compliance
4 questions written to the current syllabus, in the format of the real paper. Pick an answer and the explanation appears. Nothing to sign up for.
What UK Act sets out the country's overall regulatory structure for financial services?
Not quite. The answer is B.
The Financial Services and Markets Act 2000 sets out the UK's overall regulatory structure for financial services. The Bribery Act 2010 addresses corruption offences, the Data Protection Act 2018 governs the handling of personal data, and Sarbanes-Oxley is US legislation on corporate financial reporting, so none of the three sets out the UK structure.
What the board of a bank must do annually, under the ten BCBS principles on compliance and the compliance function, is:
Not quite. The answer is D.
The board oversees the management of compliance risk and should assess at least once a year how effectively the firm is managing it; separately, it approves the compliance policy as the formal document establishing a permanent and effective compliance function. Reviewing individual transactions and approving the wording of marketing material are operational tasks far below board level. Training the bank's staff is the same kind of task: it is real compliance work and it happens every year, but it is run by the business or by a learning and development function, and a board that delivered it would be doing the job it is supposed to be overseeing.
The money laundering stage at which the criminal's illegally-derived funds appear to be legitimately held, having successfully passed through the earlier stages, is known as:
Not quite. The answer is A.
Integration is the final stage, at which the layering process has succeeded and the illicit funds appear to be legitimately held by the beneficiary. Placement and layering are earlier stages, and 'disclosure' is not a recognised stage of money laundering.
An investor excludes an entire industry, such as armaments, from their portfolio purely because it conflicts with their personal moral principles. Which term best describes this approach?
Not quite. The answer is C.
Ethical investing is an investment strategy based on the investor's or fund manager's own ethical principles, typically excluding specific industries such as armaments. ESG investing focuses on environmental, social and governance factors as part of investment potential rather than personal exclusion, while the SFDR and IOSCO Model Code are regulatory and professional frameworks, not investment strategies themselves.
That is 4 of more than 10,800 questions in the PasskeyPrep bank. Chapter 1 of every exam is free, with the study notes and flashcards that go with it, and every answer is marked and explained the way these were.
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.
Drill it for free. Try a set of free CISI UK Financial Regulation practice questions.
For the method across every exam PasskeyPrep covers, see the complete guide to passing your CISI exams.
Frequently asked questions
What are the three stages of money laundering?
Placement, layering and integration, in that order. Placement introduces the criminal funds into the financial system, layering moves them around to disguise their origin, and integration returns them to the criminal as apparently legitimate wealth.
What is the difference between placement and layering?
Placement is getting the dirty cash into the system in the first place, the riskiest stage. Layering is the web of transactions afterwards that breaks the trail and makes the money hard to follow.
Who do you report suspected money laundering to?
Internally to your firm's Money Laundering Reporting Officer (MLRO). The MLRO then submits a Suspicious Activity Report (SAR) to the National Crime Agency where appropriate. You do not tip off the customer.
What is tipping off?
Disclosing that a report has been made or that an investigation is under way, in a way likely to prejudice it. It is a separate criminal offence, so suspicions are handled quietly through the proper channel.