Layering definition and meaning | AML glossary
Layering definition: What it means in AML compliance.
Layering is the second stage of the money laundering process, where illicit funds are moved through a complex series of financial transactions to obscure their origin. The aim is to make the money harder to trace and disguise its criminal roots.
How does layering work?
Layering typically involves:
- Transferring money between multiple bank accounts or jurisdictions.
- Converting funds into different currencies or assets.
- Using shell companies or offshore accounts.
- Buying and selling high-value goods like art, jewellery, or real estate.
These actions make it difficult for authorities to follow the audit trail.
Why layering matters in AML compliance.
Understanding and identifying layering is crucial for financial institutions and regulated firms because:
- It’s a key step used by criminals to distance funds from their illegal source.
- Failure to detect layering can result in regulatory breaches, fines, and reputational harm.
- Detecting layering often requires real-time transaction monitoring and pattern recognition.
Red flags associated with layering.
Firms should be alert to warning signs, including:
- Unusual transaction volumes with no clear business rationale.
- Frequent international transfers to high-risk jurisdictions.
- Sudden changes in transaction patterns or client behaviour.
- Payments structured to avoid reporting thresholds.
How technology can help identify layering.
Compliance technology enables firms to:
- Monitor transactions in real time for suspicious patterns.
- Use AI and machine learning to flag complex layering schemes.
- Correlate data across clients, accounts, and jurisdictions.
- Maintain audit trails to support investigations and regulatory obligations.
With the right tools, firms can disrupt the layering stage before illicit funds fully enter the financial system.
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