The layering phase, in the context of anti-money laundering (AML) efforts, is the stage where money launderers create complex layers of financial transactions to obscure the origin and ownership of illicit funds. Layering involves moving funds between accounts, investments, or assets through various transactions, making it challenging to trace the money’s source. AML systems and processes are designed to detect and report suspicious transactions during the layering phase.
What Happens During the Layering Phase
The layering phase of money laundering is designed to obscure the origin of illicit funds by creating a complex web of financial transactions. These transactions are intended to make it difficult for authorities to trace the money back to its criminal source. This is often the most sophisticated and resource-intensive part of the laundering process.
In this stage, the criminal seeks to distance themselves from the original placement of the funds by:
Moving money between multiple accounts
Using shell companies or offshore entities
Purchasing and reselling financial instruments or luxury goods
Converting funds into cryptocurrency or other digital assets
Conducting international wire transfers or foreign exchange trades
The goal is to create enough “layers” to make forensic tracing of the money extremely challenging for financial institutions and law enforcement agencies.
Common Layering Techniques
While the specific approach varies by geography, sector, and sophistication, typical layering methods include:
Wire transfers to foreign jurisdictions, especially those with weak AML regulations
Complex corporate structures using nominee directors, trusts, and front companies
Rapid movement of funds across multiple accounts or currencies (also called “velocity”)
Trade-based money laundering (TBML): Using mispriced or false invoices to justify cross-border payments
Casino-based layering: Purchasing chips, placing minimal bets, then cashing out under a different name
Use of digital assets: Converting fiat currency into cryptocurrency via peer-to-peer platforms, mixers, or privacy coins
These activities are often timed and structured to avoid detection by rules-based monitoring systems, making advanced analytics and behavioral surveillance critical for detection.
Why Layering Is So Difficult to Detect
Layering presents significant challenges for compliance teams and investigators because:
Transactions often appear legitimate, especially when supported by fabricated documentation or made through regulated entities
Multiple financial institutions may be involved, fragmenting the transaction trail
The use of intermediaries, third parties, or high-volume trading platforms can hide the true origin and destination of funds
Geographic dispersion across countries with differing AML regimes can hinder cross-border cooperation
Cryptoassets and decentralized platforms provide pseudonymity, further complicating forensic analysis
Criminals exploit weaknesses in regulatory coverage, due diligence processes, and institutional silos to successfully layer illicit funds.
Compliance and Detection Measures
To detect and disrupt layering activity, financial institutions and regulators must deploy advanced tools and strategies, including:
AI-driven transaction monitoring systems that go beyond threshold-based alerts
Network and link analysis to map relationships between accounts, counterparties, and transactions
Customer behavior profiling to identify deviations from expected financial activity
Geolocation and time-based analysis to spot unusual fund flows or activity outside of normal business hours
Enhanced due diligence (EDD) on high-risk clients, sectors, or regions linked to complex structures
Collaboration between departments—such as compliance, fraud, cybersecurity, and legal—is essential to building a holistic view of suspicious activity.
Regulatory Expectations and Legal Considerations
Under global AML frameworks such as the Financial Action Task Force (FATF) Recommendations, the EU AML Directives, and the Bank Secrecy Act (BSA) in the U.S., financial institutions are required to:
Identify and report transactions that may indicate layering, even if they are small in value
Maintain detailed records of all transactions and customer interactions
File Suspicious Activity Reports (SARs) when activity suggests attempts to disguise the source of funds
Train staff to recognize indicators of layering, such as high-velocity transactions or unexplained complexity in fund movement
Failure to identify and escalate potential layering activity can result in regulatory penalties, reputational damage, and potential criminal liability.
Strategic Importance in AML Programs
The layering phase is the critical middle step in the money laundering process, where the criminal intent is most easily concealed. Financial institutions that effectively identify and investigate layering activity demonstrate strong AML program maturity and risk control. As criminal techniques evolve—particularly in digital finance—so too must surveillance capabilities, investigative expertise, and international cooperation.
