Toward a new model of money laundering: Is the “placement, layering, integration” model obsolete?

By Stefan D. Cassella[i]

Introduction

The criminal money laundering statutesgrew out of the experience drug investigators had in tracking the proceeds of illegal drug transactions.

In the 1980s, when the money laundering statutes were first enacted, the paradigm involved large sums of cash derived from drug transactions that had to be placed into the financial system without arousing suspicion. Frequently, the cash was disguised as legitimate proceeds or hidden in a way that concealed the true owner and was then moved into the legitimate stream of commerce or returned to the country where the drugs originated to keep the scheme going.

We see this view of money laundering reflected in the US statute that proscribes what is commonly known as“concealment money laundering:” in sum, the offense consists of conducting a transaction whose purpose is to conceal or disguise the nature, source, location, ownership or control of illegal proceeds.[ii]

We also see the 1980s paradigm reflected in the training that is provided to law enforcement agents who are assigned to money laundering cases. From the 1980s until today, they have been taught to look at money laundering as a process that happens in the stages:

  1. placement: the process of getting the large pile of cash into the financial system, perhaps through structured deposits, or by commingling it with the proceeds of a legitimate, cash-intensive business, like a restaurant or liquor store;
  1. Layering: the process of moving the money, once it is in the financial system, through a series of complicated transactions to make the trail difficult to follow;
  1. Integration: the process of using the money in the legitimate stream of commerce to pay for goods and services, whether to finance a particular lifestyle, keep the scheme going, or to gain control over property.

The question is, is this way of thinking about – and of investigating – money laundering cases outmoded. It may be that a lot of illegally-derived money is laundered in this way, and that it is appropriate to look at at least some money laundering cases as involving the three stages of placement, layering and integration. But I have never found this model particularly useful, and I find it less and less useful as time goes on.

Looking at money laundering more broadly

I have least three problems with this model. The first is conceptual: by focusing on the methods used to launder large sums of drug-generated currency, we limit the scope of both the money laundering statutes and the training of law enforcement agents to only a small part of the money laundering problem.

A policy maker, or legislator, should be less interested in how money is laundered in a particular situation (i.e., in big, cash-intensive drug cases) than in who is doing the laundering and why they are doing it. The 1980s model has the virtue of targeting the people involved in moving money for the big drug cartels in South America, but there are many other reasons to launder money, and many people other than South American drug traffickers who are doing it.

A car dealer who accepts criminal money in exchange for a car isn’t concerned with placing, layering and integrating the money; he just wants to sell a car. But he is wittingly or unwittingly facilitating the underlying crime by allowing the money into the stream of commerce and giving the criminal an outlet for his money. Law enforcement must target that person too.

A banker who allows money to flow through his financial institution without maintaining an effective AML program isn’t placing, layering or integrating anything; he is just making money on the flow of money through his institution. But if we are concerned about the integrity of the financial system, policy makers, regulators and law enforcement agents must target that person too.

A person financing terrorism may engage in a convoluted three-step process to get money to its intended destination, but he might also accomplish the same goal by putting the money in a box and shipping it to where he wants it to be. Investigators surely want to target that person as well.

The point is that we have to look at the reasons why money is laundered and the types of persons engaged in the process more broadly than the 1980s placement, layering, integration model allows.

Structure of the Statutes

My second problem with the 1980s model is that it does not correspond to what a prosecutor has to prove in a money laundering case. Placement, layering and integration may be a useful approach for an investigator looking at a complex series of transactions, but that is not what a prosecutor has to prove in court. The prosecutor has to focus on the elements of the crime, not on the means by which the crime was committed.

In the US as in many other countries, the elements of a money laundering offense include proof that the money is in fact criminal proceeds, that the defendant knew it, that he conducted a financial transaction of some kind, and that he did so with a particular intent, such as to conceal or disguise the money, or to promote the carrying on of another offense.

When a prosecutor meets with a law enforcement agent to prepare for trial in a money laundering case, he does not ask, where is your evidence of placement, layering or integration. To the contrary, the questions to which he needs to know the answer are these: What is the evidence that this money was criminal proceeds? What’s the evidence of the defendant’s knowledge? What financial transaction are we charging?Did the defendant conduct that transaction? Was the money criminal proceeds at the time the transaction occurred? Did the defendant have the knowledge that the money was dirty when the transaction occurred? Did the transaction involve the property we want to forfeit? Did the transaction occur in our jurisdiction within the statute of limitations? What is our proof of the defendant’s intent or purpose in conducting the transaction?

To be sure, the steps that a defendant takes in placing, layering and integrating a sum of illegally-derived money may provide circumstantial evidence of his knowledge and intent – elements that must be established at trial. To me as a prosecutor, however, it was much more important to have the agent thinking broadly about how we were going to establish the elements of the offense rather than focusing on whether the facts fit into the placement, layering and integration model.

So many modalities

Finally, the weakness of the 1980s model is that it does not reflect the vast array of ways in which money is being laundered. The fact is, virtually any financial transaction can be a money laundering offense, if the elements of the crime are satisfied, and relatively few of those transactions involve the placement of a large sum of money into the financial system, followed by a complex series of transactions designed to conceal its source or ownership.

In a fraud case, for example, the money is often already in the financial system. Someone may have happily turned over his life savings to invest in a get-rich-quick scheme, or a medical provider may have been paid by the insurance company for unnecessary services. The money laundering offense in such cases consists of the steps the defendant takes to keep the scheme going as he pays off early investors with other people’s money, spends money to lull new investors, pays associates whose expertise is necessary to the scheme, or just spends the money until he is caught. There isn’t any placement, layering or integration going on in those cases.

At the other extreme, even in drug cases, the laundering may consist mainly of bulk cash smuggling: hiding the money in a concealed compartment of a vehicle or in a truckload of ladies’ shoes and just getting it out of the country. There’s no placement, layering or integration there either.

If the focus of a money laundering investigation is limited to the 1980s model, it will fail to detect the wrongdoing in these cases that is actually taking place.

Conclusion

What is interesting about money laundering from the point of view of the prosecutor or agent is its endless variety: Money laundering cuts across all types of criminal activity, from drug trafficking, to white collar crimes, to trafficking in arms, human beings, and wildlife parts, to public corruption in the developing world, to evading sanctions on rogue states, to financing terrorism. And it occurs in an endless varieties of ways, from placing cash in the financial system, to moving money already in that system (domestically and internationally), to using all sorts of 21st Century alternatives to the financial system such as stored value cards, Bitcoins and other virtual currencies.

Having just one model or taking a one-size-fits-all approach simply doesn’t fit the reality of the situation. The solution, however, is not to replace the 1980s model with a new one that fits every case, but rather to recognize that if there is a crime that generates proceeds, virtually anything that is done with that money may be a money laundering offense, if the elements of the offense under the applicable statute are satisfied.

The focus then must be on what the Government has to prove to obtain a conviction and to see if the way the criminal proceeds were moved, spent or invested satisfies those requirements, however it was done.

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[i]The author is a former federal prosecutor who was a Deputy Chief in the Asset Forfeiture and Money Laundering Section of the U.S. Department of Justice for many years, and later Chief of that Section in the Office of the U.S. Attorney for the District of Maryland. He is now retired from federal service and is the CEO of Asset Forfeiture Law, LLC, a consulting company. This article is derived from a presentation by the author at the Cambridge International Symposium on Economic Crime on September 7, 2016.

[ii] 18 U.S.C. § 1956(a)(1)(B)(i).