Understanding the Three Stages of Money Laundering — and How Law Firms Are Involved

What is Money Laundering?

Money laundering is the process of disguising the origins of criminal funds to make them appear legitimate. It’s not just the subject of crime dramas — it’s a real-world risk that impacts the legal sector directly.

For law firms, understanding how money laundering works is critical to effective anti-money laundering (AML) compliance.

The Three Classic Stages of Money Laundering

While techniques are becoming more complex, the fundamentals remain the same. Traditionally, money laundering is broken into three distinct stages:

1. Placement

This is the initial introduction of illegal funds into the financial system. It often involves cash being deposited into bank accounts, used to buy high-value goods, or funnelled through cash-intensive businesses like car washes, takeaways, or nail salons.

Law firms are rarely involved at this stage — especially those with a “no cash” policy for trust accounts.

2. Layering

Layering is where law firms are most at risk. The criminal’s goal is to obscure the money trail through a complex web of transactions, often involving property, companies, and trusts.

A solicitor might be instructed to handle a property purchase, set up a trust, or manage company formation — not knowing the funds have criminal origins. The legal services themselves are legitimate. It’s the underlying intent that’s hidden.

3. Integration

By the time the funds are “clean”, they can be reinvested in the legitimate economy — often via luxury assets like real estate, art, or business ventures. While lawyers may be involved at this point, detecting the criminal origin of funds is even more difficult unless due diligence is rigorous.

Why Law Firms Are Targeted in the Layering Phase

Lawyers lend credibility. That’s why criminals want to use them.

Once funds are in the system, layering often requires legal transactions. A firm facilitating a commercial lease, property transfer, or company share purchase may be used — not because they’ve done anything wrong, but because the criminal needs a professional intermediary.

The key risk is being unknowingly exploited to create a paper trail that distances the criminal from their crimes.

Spotting the Signs: Not Every Client is Who They Seem

Criminals don’t arrive with bags of used note in a holdall. They come as businesspeople, investors, or developers — with plausible backstories and documentation.

Look out for:

• High-speed transactions with no clear commercial rationale

• Complex ownership structures with no transparency

• Clients insisting on urgency, secrecy, or unusual fee arrangements

• Instructions involving cash-rich businesses or sectors with high money laundering risk

Strengthening AML Compliance in Legal Practice

A strong AML compliance program helps law firms stay on the right side of regulation — and avoid being unwitting accomplices.

Start with:

• A robust firm-wide risk assessment

• Effective client due diligence procedures

• Training that focuses on real-world typologies and behaviour patterns

And most importantly, take time to think. If something doesn’t feel right, stop and reassess.

Final Thoughts

Money laundering isn’t a remote risk. Law firms are actively targeted because of their position in the financial and legal ecosystem. By understanding the stages of money laundering — especially layering — your firm is better equipped to detect suspicious activity and protect itself from regulatory and reputational harm.

Want help strengthening your AML compliance program?

AML Sorted supports law firms across Australia with practical, affordable tools and advice. Get in touch to find out how we can help.