Money Laundering: Top 5 Common Methods and How They Work

Money laundering is the process criminals use to disguise illegal funds as legitimate income so those funds can move freely through the financial system. It generally follows three stages called placement, layering, and integration. The most common money laundering methods include cash-heavy front businesses, structuring or smurfing, trade-based money laundering, shell companies, and real estate. Understanding how these methods work is essential for detecting financial crime and meeting modern AML and sanctions compliance requirements.

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What Is Money Laundering?

Money laundering refers to the deliberate concealment of the criminal origin of funds so they appear to come from lawful activity. Criminal organizations rely on money laundering to enjoy the proceeds of crime without attracting attention from banks, regulators, or law enforcement authorities.

Illicit funds often originate from fraud, corruption, cybercrime, drug trafficking, human trafficking, tax evasion, terrorism financing, and sanctions evasion. Without laundering mechanisms, criminals would struggle to use these proceeds for everyday expenses, investments, or business operations.

The scale of money laundering is enormous. According to the United Nations Office on Drugs and Crime, between two percent and five percent of global GDP is laundered each year. This equates to trillions of dollars flowing through the global financial system annually, undermining economic stability and public trust.

For regulated businesses, exposure to money laundering risk can result in serious consequences. These include regulatory enforcement actions, fines, restrictions on operating licenses, reputational damage, and in severe cases, criminal liability for senior management. As a result, regulators expect organizations to understand how laundering works in practice, not just in theory.

The Three Stages of Money Laundering

Although money laundering methods continue to evolve, most schemes still follow a consistent structure. This structure is commonly described through three stages known as placement, layering, and integration. Each stage presents different risks and detection challenges for compliance teams.

Placement

Placement is the stage where illicit funds are first introduced into the financial system. At this point, criminals attempt to move money away from its direct criminal source.

This stage often involves depositing cash into bank accounts, using money service businesses, purchasing prepaid cards, converting funds into digital assets, or buying high value goods. Because cash is inherently suspicious at scale, placement is frequently the riskiest stage for criminals.

To reduce detection, criminals may divide funds into smaller amounts or rely on third parties to make deposits on their behalf. Regulators and financial institutions place significant emphasis on identifying placement activity because early detection can prevent further laundering.

Layering

Layering is the stage where criminals create complex transaction chains to obscure the origin of funds. The goal is to break the audit trail and make it difficult for investigators to trace the money back to criminal activity.

Layering may involve multiple bank transfers, international payments, shell companies, cryptocurrency wallets, or trade transactions. Each additional step increases complexity and reduces transparency.

This stage is commonly associated with sophisticated laundering networks, including those linked to organized crime, corruption, and sanctions evasion. For compliance teams, layering presents challenges because individual transactions may appear legitimate when viewed in isolation.

Integration

Integration is the final stage of money laundering. At this point, funds re-enter the legitimate economy and appear to be lawful income or investment capital.

Criminals may integrate funds through real estate purchases, business investments, loan repayments, or luxury asset acquisitions. Once funds reach this stage, detection becomes significantly more difficult without comprehensive monitoring and historical analysis.

Because integration often involves legitimate industries, regulators stress the importance of detecting money laundering activity before it reaches this stage.

How Money Laundering Works In Practice

Cash-Heavy Front Businesses

Cash-heavy businesses have long been used as front operations for money laundering. These businesses naturally generate large volumes of cash transactions, which makes it easier to blend illegal funds with legitimate revenue.

This method remains popular because it relies on everyday commercial activity and can operate for extended periods without raising suspicion if oversight is weak.

How Cash-Heavy Front Businesses Are Used for Money Laundering

Criminals either establish or acquire businesses that primarily operate using cash. Common examples include restaurants, bars, car washes, laundromats, taxi companies, nail salons, and small retail stores.

Illicit cash is added to daily receipts and recorded as business income. The funds are then deposited into bank accounts, reported for tax purposes, or reinvested into the business. Over time, the criminal proceeds appear indistinguishable from legitimate earnings.

In some cases, criminals inflate sales figures or manipulate inventory records to justify higher revenue levels. In others, the business may operate at a loss while still serving as an effective laundering vehicle.

Why This Method Is Difficult to Detect

Cash-based businesses often have limited digital transaction records, which makes verification difficult. Revenue can fluctuate based on seasonality, location, or consumer behavior, providing plausible explanations for irregular patterns.

The Financial Action Task Force consistently identifies cash-intensive businesses as high risk for money laundering, particularly when combined with poor recordkeeping or limited regulatory oversight.

Key Risk Indicators for Compliance Teams

A business may report revenue that does not align with its size, location, or operating hours. Cash deposits may significantly exceed industry averages without clear justification. Financial records may be incomplete, inconsistent, or frequently amended. Sudden increases in reported income may occur without corresponding growth in staff, inventory, or customer traffic.

Structuring or Smurfing

Structuring, often referred to as smurfing, is a common placement technique used to avoid regulatory reporting requirements. It is designed specifically to evade transaction monitoring thresholds.

This method is widely used because it exploits the mechanics of regulatory reporting rather than weaknesses in financial institutions themselves.

How Structuring Works in Practice

Instead of depositing a large amount of money at once, criminals divide funds into many smaller transactions that fall below reporting thresholds. These transactions may occur across multiple accounts, branches, financial institutions, or individuals.

In the United States, cash transactions exceeding $10,000 trigger mandatory reporting. Structuring aims to keep each transaction just below this threshold.

The US Financial Crimes Enforcement Network explicitly states that structuring is illegal regardless of whether the funds are derived from criminal activity.

Why Structuring Remains Effective

When deposits are spread across time and accounts, patterns can be difficult to detect without aggregated analysis. Criminals increasingly use automation, networks of associates, or digital payment platforms to scale structuring activity.

Without behavioral monitoring, individual transactions may appear benign and routine.

Key Risk Indicators for Compliance Teams

Accounts may show repeated deposits just below reporting limits. Multiple individuals may deposit funds into related accounts with no clear business relationship. Transaction frequency may increase suddenly without an obvious economic reason. Deposits may occur at multiple locations within short timeframes.

Trade-Based Money Laundering

Trade-based money laundering, commonly referred to as TBML, is one of the most complex and damaging forms of money laundering. It exploits international trade systems to move value rather than relying solely on financial transfers.

This method is particularly relevant for global businesses, financial institutions, and trade finance providers.

How Trade-Based Money Laundering Operates

Criminals manipulate trade transactions to shift value across borders. This may involve over-invoicing goods to justify excess payments, under-invoicing to move value offshore, misrepresenting the quantity or quality of goods, or shipping goods that do not match documentation.

In some cases, goods are shipped multiple times between related entities to create artificial trade flows. In others, documentation is falsified entirely.

The World Bank identifies trade-based money laundering as a primary channel for laundering proceeds of corruption and organized crime.

Why TBML Is Hard to Detect

Trade transactions involve multiple parties, jurisdictions, and documents. Financial institutions often see only payment data without access to shipping records or customs filings.

Differences in valuation standards, commodity pricing, and trade routes further complicate detection.

Key Risk Indicators for Compliance Teams

Invoice values may deviate significantly from market prices. Shipping documents may not align with payment amounts or product descriptions. Intermediaries may be used without clear commercial purpose. Trade routes may involve high-risk jurisdictions without a logical business rationale.

Shell Companies and Complex Corporate Structures

Shell companies are legal entities with little or no operational activity. While they can serve legitimate purposes, they are frequently abused for money laundering and sanctions evasion.

This method is especially relevant in cross-border transactions and corporate onboarding processes.

How Shell Companies Are Used for Money Laundering

Criminals establish multiple shell companies across different jurisdictions. These entities may share directors, addresses, or service providers. Funds are moved between companies through loans, consulting fees, dividends, or asset transfers.

The complexity of the structure obscures beneficial ownership and creates distance between the criminal and the funds.

The OECD has documented how opaque corporate structures facilitate money laundering and tax evasion.

Why Shell Companies Are Effective

Certain jurisdictions limit public access to ownership information. Nominee directors and shareholders further obscure control.

Without robust ownership verification, identifying the true controller of funds becomes extremely difficult.

Key Risk Indicators for Compliance Teams

Companies may lack a physical presence, employees, or clear business purpose. Ownership or directors may change frequently. Corporate structures may span multiple offshore jurisdictions. Business activities may be vague or inconsistent with transaction volumes.

Real Estate

Real estate is one of the most common integration-stage money laundering methods. Property can absorb large amounts of capital and provide long-term value and legitimacy.

This method has drawn increasing regulatory scrutiny due to its role in large-scale corruption and organized crime.

How Money Laundering Occurs Through Real Estate

Criminals purchase residential or commercial property using laundered funds. Transactions may be conducted through shell companies, trusts, or third parties. Properties may be purchased outright or financed through layered transactions.

When properties are sold, the proceeds appear legitimate and are difficult to trace to criminal origins.

The US Department of Justice and Transparency International have identified real estate as a major laundering channel.

Why Real Estate Is Attractive to Criminals

Many real estate markets have limited disclosure requirements. Cash purchases, opaque ownership structures, and inconsistent oversight make detection difficult.

Luxury property markets are particularly vulnerable due to high transaction values and international buyers.

Key Risk Indicators for Compliance Teams

Property purchases may occur without a clear source of funds. Buyers may use offshore companies or trusts. Properties may be rapidly resold at inflated prices. Transactions may involve politically exposed persons or high-risk jurisdictions. (See also: Our AML Guide for Real Estate). 

Conclusion

Money laundering continues to pose a serious threat to the global financial system. While criminal tactics evolve, most laundering schemes still rely on familiar methods such as cash-heavy businesses, structuring, trade-based money laundering, shell companies, and real estate.

Understanding how these methods operate across the stages of placement, layering, and integration enables compliance teams to identify risk earlier and apply effective controls. Regulators increasingly expect organizations to demonstrate this understanding through risk assessments, monitoring frameworks, and governance practices.

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