How Dirty Money Is Cleaned: Placement, Layering, Integration and the Red Flags

The three stages of money laundering explained in plain language, how Malaysian cases fit the pattern, and the warning signs that banks, businesses and ordinary account holders should look out for

Why Criminals Need to “Wash” Money

Crime often produces cash, and a lot of it. The Small AMLA book explains that much criminal business is done in cash because it is hard for enforcement agencies to trace. But large amounts of cash quickly become a problem for the criminal. It cannot easily be banked without attracting attention, and spending it openly invites questions about where it came from.

Money laundering is the process of solving that problem. The book describes it as “washing” dirty money so that it looks clean and its source cannot be traced by the authorities. The term is often linked to the American gangster Al Capone, who is said to have used a chain of laundries he owned to pass off criminal income as legitimate takings.

The book gives a simple Malaysian-style illustration. A clerk earning RM1,000 a month also deals in drugs and makes RM15,000 a month from it. He owns five cars and has RM500,000 in the bank. To avoid attention, he opens a laundry shop, a cash business in which it is easy to create false receipts, and passes his drug money off as the shop’s income. Drug trafficking is a serious offence under the Second Schedule to AMLA, his savings and cars are proceeds of that unlawful activity, and passing them through the shop is money laundering.

The Three Stages at a Glance

Laundering usually involves three stages. Not every case goes through all three, and they often overlap, but the framework helps explain what investigators and banks look for.

Stage	What happens	Common methods described in the Small AMLA book
1. Placement	Dirty money is separated from its criminal source and put into the financial system	Depositing cash into banks, splitting large sums into many small transactions, using financing facilities and paying them off early, buying casino chips and cashing out as “winnings”, buying assets
2. Layering	The money is moved through many transactions to put distance between it and its source	Moving funds through several accounts and back again, issuing more than one invoice for the same transaction, selling assets bought with dirty money, parking money with third parties’ banks or businesses, keeping money in countries with loose financial rules
3. Integration	The money re-enters the economy looking legitimate	Buying property and high-value goods, trade deals using manipulated invoices to send money abroad, providing capital or loans to legitimate businesses

The BIG AMLA BOOK notes that the verbs used in Section 4 of AMLA, such as receiving, transferring, converting, disguising and using, capture this classic three-stage process. That means a person can commit an offence by taking part in any one stage, even if someone else handled the others.

Stage One: Placement

Placement is the riskiest stage for a launderer, because it is where cash first meets a bank, a casino or a seller of assets. It is therefore where many cases are detected.

Case Spotlight: Azmi bin Osman v Public Prosecutor and another appeal [2016] 3 MLJ 98 (Court of Appeal)

A police Superintendent in Johor earned a net salary of about RM2,855 a month, paid into a separate account. Yet between 2002 and 2005, deposits totalling almost RM4 million went into his Maybank accounts. Witnesses testified that illegal lottery operators paid him every month through a middleman so that he would leave their business alone.

The Court of Appeal held that, given his role and the size and frequency of the deposits, he knew or had reason to believe the money was tainted. A bank officer testified that he never once asked about the large sums entering his accounts. The court warned that there is no safe harbour for tainted money in “innocent” accounts.

Placement lesson: Deposits far beyond a person’s known income are one of the clearest warning signs.

Case Spotlight: Mohd Ismail bin Syed Merah v Public Prosecutor and other appeals [2022] 3 MLJ 786 (Court of Appeal)

A Deputy Superintendent in Batu Pahat received RM3,000 a month for several years from illegal gambling operators, who left the money in his house letterbox. When the MACC searched his house, it found about RM1.27 million in cash in plastic bags and boxes in his bedroom closet. He had also used large cash sums to buy insurance and investment plans, and had moved money through a third party’s bank accounts.

He faced seven money laundering charges for using the proceeds and one for possessing the cash at home. The Court of Appeal upheld his conviction, held that the minimum fine of RM5 million is mandatory, and increased his sentence to about ten years’ jail in total.

Placement lesson: Hoarding cash and then feeding it into insurance and investment products is a classic way of getting dirty money into the system. It did not escape detection.

Structuring or “smurfing”

One of the most common placement methods is breaking a large sum into smaller deposits so that no single transaction attracts attention. This is known as structuring, or smurfing.

Banks and other reporting institutions must file a Cash Threshold Report (CTR) with Bank Negara Malaysia for cash transactions of RM25,000 or more in a day. The Small AMLA book notes that this threshold was lowered from RM50,000 with effect from 1 January 2019. The BIG AMLA BOOK explains that deposits and withdrawals on the same day are added together and cannot be set off against each other. So a RM20,000 deposit and a RM10,000 withdrawal must be reported.

Structuring is a separate offence

Section 4A of AMLA makes it an offence to structure, or to direct, assist or participate in structuring, any transaction to avoid the cash threshold reporting requirement. The penalty is a fine of up to five times the total value of the transactions, jail of up to seven years, or both.

In deciding whether transactions were structured, the court may consider the value of each transaction, the total value, the period over which they took place, the time between them and where they took place. The BIG AMLA BOOK notes that repeated just-under-threshold cash deposits, made minutes or hours apart at different branches, will support an inference of structuring, while irregular payments that make commercial sense over a longer period may not.

Structuring can be an offence even if the money itself is clean. The offence is about defeating the reporting system.

Carrying cash across the border

Some launderers avoid banks altogether by physically carrying cash out of the country. Under Section 28B of AMLA, anyone entering or leaving Malaysia with cash or bearer negotiable instruments, such as traveller’s cheques, above the prescribed value must declare it. Failing to do so is punishable by a fine of up to RM3 million, jail of up to five years, or both. Section 28C applies the same duty to cash sent by post, courier or freight, and Section 28G makes it an offence to structure cross-border movements, for example by splitting cash among several trips or couriers, to avoid declaring.

Case Spotlight: Lee Won Kyu v Pendakwa Raya [2020] 7 MLJ 196

As summarised in the BIG AMLA BOOK, a South Korean national entering Malaysia from Singapore through the red lane at a Johor customs checkpoint was found with RM110,000 in cash in his luggage. He was convicted of conveying uncustomed goods under the Customs Act 1967, fined RM220,000, and his cash and vehicle were forfeited.

On appeal, the conviction was set aside. The court noted that under the Gazette order made under Section 28B, the duty to declare applied only to cash exceeding USD10,000, and that he had not been asked to declare or given the declaration form. Any breach was of a customs regulation carrying a much smaller penalty, not the Customs Act offence charged, and forfeiting the whole sum was disproportionate. The cash and vehicle were ordered to be returned, subject to any required declaration.

Lesson: Travellers must know the declaration rules and the prescribed threshold, which is set by Gazette order and may change. Prosecutions must also be brought under the correct provision.

Stage Two: Layering

Layering is where the launderer tries to break the trail. The money is moved from account to account, through companies and sometimes across borders, so that by the time it arrives at its destination, its criminal origin is hard to see.

Case Spotlight: Dato’ Sri Mohd Najib bin Hj Abd Razak v Public Prosecutor [2022] 1 MLJ 137 (Court of Appeal)

In the SRC International case, a total of RM42 million belonging to SRC was moved in December 2014 and February 2015 from SRC’s account to a subsidiary, Gandingan Mentari Sdn Bhd, then to a company called Ihsan Perdana Sdn Bhd, and finally into the then Prime Minister’s personal accounts.

The Court of Appeal described these intermediary transfers as layering designed to disguise the funds’ link to SRC and avoid detection. It upheld three money laundering convictions for receiving the money, alongside the convictions for abuse of position and criminal breach of trust.

Layering lesson: Passing money through a chain of companies in quick succession, with no real business reason, is a classic sign of layering. It did not hide where the money came from.

Case Spotlight: Jamsari Abdul Rahim lwn Pendakwa Raya [2022] MLJU 1245 (High Court)

A former Petronas Carigali Sdn Bhd employee arranged for false invoices to be issued by a drilling contractor for work that was never done, and about USD5.57 million was paid out. The money was then passed through the bank accounts of several companies and a business under his control, including one registered to his father-in-law.

The High Court upheld his conviction on 11 money laundering charges for receiving, transferring and directly engaging with the proceeds, and his sentence of three years’ jail on each charge running concurrently, with fines totalling about RM142 million.

Layering lesson: Using companies registered to relatives does not hide the origin of money. It is often the very evidence that proves laundering.

Case Spotlight: Nor Badli Munawir bin Mohamad Alias Lafti v Public Prosecutor [2024] MLJU 107 (Court of Appeal)

As summarised in the BIG AMLA BOOK, the former chief executive of TH Heavy Engineering Bhd was charged with criminal breach of trust and money laundering over company funds totalling several million ringgit. The funds were paid to contractors for supposed consultancy or manpower services, then withdrawn in cash and handed to him.

He was convicted in the Sessions Court. The High Court reduced his sentences but kept the convictions, leaving a total of eight years’ jail because the sentences ran consecutively. The Court of Appeal dismissed his appeal, rejecting his claim that the payments were genuine advances made during a company system migration.

Layering lesson: Payments dressed up as fees for services, followed by quick cash withdrawals, are a common way of extracting and disguising misappropriated funds.

Money mules

A growing feature of layering is the use of “mule accounts”. The Small AMLA book explains that a money mule is a person who lets a third party put money into their account and then passes it on, often in cash, in return for a commission. The book notes that the mule may not know the money comes from crime.

That lack of knowledge is not always a safe defence. Under Section 4(2) of AMLA, the mental element for money laundering can be inferred where a person had reason to believe or reasonable suspicion that property was tainted, or failed without reasonable excuse to take reasonable steps to find out. An account holder who is paid to receive and pass on money from strangers, with no genuine reason, runs a real risk of being drawn into an investigation, having their account frozen, or being charged.

Stage Three: Integration

Integration is the final stage, when the money comes back into the ordinary economy and can be enjoyed. The Small AMLA book notes that at this stage, the authorities find it difficult to detect the money because it now looks legitimate. Typical methods include buying property and luxury goods, investing in legitimate businesses, and using manipulated trade invoices to send money abroad.

Case	How the money was integrated
SRC International	The money in the personal accounts was spent, including on renovations to a private residence
Mohd Ismail	Large cash sums were used to buy insurance and investment plans
Jamsari	Some of the money was put into his children’s ASB accounts
The Small AMLA book’s laundry illustration	Drug money was passed off as business income and used to build up savings and buy cars

The book also describes another common technique: buying property with dirty money and then selling it, so that the proceeds look like a legitimate profit. Section 3 of AMLA defines proceeds widely to include property bought with, or reasonably believed to be connected to, the original proceeds. So the house, the insurance policy or the investment bought with dirty money can itself be frozen, seized and forfeited.

The Red Flags

Because laundering is designed to look normal, detection depends on spotting patterns that do not fit. The Small AMLA book lists examples of suspicious transactions, drawn from Securities Commission guidance. They are summarised below together with warning signs seen in the cases.

Category	Examples	Seen in
Transactions that do not match the customer’s profile	Sudden large investments by a customer known not to have the means, transactions out of line with income, unclear source of funds	Azmi bin Osman, Mohd Ismail
Large or unusual cash activity	Opening an account with a large cash sum, many small cash deposits adding up to a large total, large cash deposits into several accounts on the same day	Mohd Ismail. Also the typical structuring pattern under Section 4A
Unusual account movements	Payments to unrelated parties, customers authorising transfers to other customers’ accounts, large or frequent transfers that are withdrawn immediately	SRC International, Nor Badli
Suspicious behaviour	Customers who are hard to identify or reluctant to give details, unrelated customers sharing an address, unusual concern about confidentiality or failure to explain the source of funds	Typical of mule and nominee accounts
High-risk jurisdictions	Transfers to or from countries known for banking secrecy, drug production or weak anti-money laundering controls	Layering through countries with loose financial rules
Suspicious conduct by staff	Employees who always handle the same customer’s transactions or are unusually close to a customer	An insider risk for banks and companies
Documents and invoices	Invoices for work never done, several invoices for the same transaction, agreements created long after the money moved	Jamsari, Mohd Ismail

The Small AMLA book also flags politically exposed persons (PEPs), meaning individuals who hold prominent public positions or functions. Because of their power and influence, they are treated as higher risk, and Bank Negara Malaysia has issued guidance to reporting institutions on identifying and dealing with PEPs and their family members and close associates.

What Banks and Other Reporting Institutions Must Do

The red flags matter because the law requires certain businesses to act on them. “Reporting institutions” under the First Schedule to AMLA include banks, insurers, money changers and remittance companies, stockbrokers and unit trust companies, as well as non-financial businesses and professions such as lawyers, accountants, company secretaries, casinos, dealers in precious metals and stones, pawnbrokers and registered estate agents.

Duty	What it requires
Customer due diligence (Section 16)	Know who the customer is. No anonymous accounts or accounts in false names
Record-keeping (Sections 13 and 17)	Keep records of transactions, including the identity of the parties, the accounts, the type, date, time and amount. Records must be kept for at least six years after the account is closed or the transaction completed
Cash threshold reports (Section 14(1)(a))	Report cash transactions of RM25,000 or more in a day to Bank Negara Malaysia
Suspicious transaction reports (Section 14(1)(b))	Promptly report any transaction where an officer or employee has reason to suspect it involves the proceeds of crime or terrorism financing, whatever the amount
No tipping off	It is an offence to disclose to the customer that a suspicious transaction report has been made, as this could harm the investigation
Compliance programme (Section 19)	Internal policies, staff training, employee integrity checks and independent audit

The BIG AMLA BOOK explains that “reason to suspect” is a lower threshold than reasonable belief, and that a report does not require proof of any underlying crime. Failure to report is an offence punishable by a fine of up to RM1 million. In return, Section 24 protects those who report in good faith from civil, criminal and disciplinary action, and Section 20 overrides secrecy obligations for this purpose.

Why speed matters: PP v Sim Sai Hoon [2020] 6 MLRH 58

As summarised in the BIG AMLA BOOK, the court in this case observed that any delay in reporting or freezing can allow tainted money to be completely dissipated. If the original dirty money has been spent before an account is frozen, the remaining legitimate balance cannot be forfeited as the subject matter of the offence. Prompt reporting at the placement and layering stages is therefore critical.

Members of the public are not reporting institutions, but the Small AMLA book notes that anyone with information about suspected money laundering can pass it to the police or Bank Negara Malaysia. Section 5 of AMLA protects people who make such disclosures.

Practical Checklist

For individuals

Never let anyone use your bank account to receive or pass on money, however small the commission.
Do not split cash deposits or withdrawals to stay below RM25,000. If you have a genuine large cash transaction, carry it out openly and keep the paperwork.
Declare cash above the prescribed threshold when travelling in or out of Malaysia, and check the current threshold before you travel.
Ask questions about unexpected money coming into your account, and keep records of loans, gifts and business income as they happen.

For businesses and reporting institutions

Know your customer and your counterparties, including who ultimately owns and controls them, and apply extra checks to PEPs.
Train front-line staff to recognise the red flags in this article and to escalate them promptly.
Watch for patterns, not just single transactions, such as repeated just-under-threshold deposits, funds passing quickly through several related companies, and payments for services with no clear deliverable.
File reports promptly and never tip off the customer.
Keep records for at least six years and make sure they can be retrieved quickly.

Conclusion

Placement, layering and integration are simply a way of describing what launderers try to do: get dirty money into the system, hide its trail, and bring it back looking clean. The Malaysian cases show that each stage leaves its own footprints, whether it is deposits far beyond a salary, cash stored in a closet, a chain of company transfers, or a relative’s business account.

For the law, it does not matter which stage a person took part in. Receiving, moving, disguising or spending the proceeds can each be a separate offence, and splitting cash to avoid reporting is a crime on its own. For banks, businesses and ordinary account holders, the best protection is to recognise the red flags early and to refuse to become a link in someone else’s chain.

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