Infernal Affairs III uses parallel storytelling, flashing between the past and the present. In the past, five months before the death of undercover cop Chan Wing Yan (Tony Leung), Yan seeks to uncover the link between Triad boss Sam (Eric Tsang) and the mysterious mainland triad boss Shen (Chen Daoming). In the present, ten months after the events of Infernal Affairs, former Triad mole turned top cop Lau Kin Ming (Andy Lau) struggles to whitewash his past and keep his cover, while trying to determine whether corrupt Security Division agent Yeung (Leon Lai) is another former mole out to execute anyone who could give him away. A battle of wits develops between Ming and Yeung as each tries to learn the other's secret.
Meanwhile, Ming's sense of identity collapses as he begins to lose track of reality, wrestling with his deep guilt. His continuous use of sleeping pills and pending divorce with Mary added to his misery.
At the end of the second film, Sam Hon became the triad boss due to Ngai's death. Because of Ngai's attempt to kill him, Sam is suspicous of all of his followers' loyalties and he tests Yan by asking him to smash an ashtray on Shen's follower, resulting in Yan being arrested by Yeung. After being released Shen crashed a bottle of liquor on Yan's head and called truce between his gang and Sam's gang.
At the same time, Yan is prosecuted by the police for violent behavior. His superior Wong manages to persuade the court to allow Yan to go and see a psychologist instead of being sentenced to prison. Yan thus begins seeing Lee regularly for psychological therapy. The two subsequently begins a romantic relationship.
Later, Sam asks Chan to deliver illegal arms to Shen but he himself and other members of the gang did not turn up. Yan delivers the cargo but Shen's gang discovers it is just empty boxes and both gangs begins firing gunshots at each other. Shen and Yan shoot each other in the battle, but both aim at the limbs. Shen thus discovers that Yan is a cop just as Yeung arrives at the scene. Yeung then tells Yan that Shen is not Shen (but actually an undercover cop from the mainland). Yeung also tells Yan that it was due to Yan leaving the police cadets that he gained top honours, thus revealing that Yeung knew Yan is a cop. The three shake hands and wait for the mayhem to die down before returning to their bases.
Ming steals and hacks into Lee's computer and finds Yan's file. He learns about Yan and begins to think he is him. Lee brought Ming back to her office and hypnotises him. Under hypnotisation Ming reveals to a shocked Lee that he is Sam Hon's mole.
Ming continues to suspect Yeung is related to the mainland Chinese gang and Sam. He breaks into Yeung's office and steal tapes from his safe. He thinks he hears tapes of Yeung relating information to Sam and he leads his team to the Security Division to arrest Yeung, just as Shen arrives. As Ming plays the tape, voices of himself and Sam is played and his second-in-command tries to arrest him instead. Ming suffers a psychotic break, asks for a chance to be a good man, but Yeung declares that "I am a policeman." the same way Yan did. Ming yells "I am also a policeman!" and fires at Yeung's forehead, killing him instantly. Ming is then fired at by other police officers and he falls on the floor. Ming then attempts suicide by shooting himself, but fails.
A series of flashbacks then plays, as it is revealed that Yeung and Shen, upon the death of their friend Yan, wanted to avenge for him by finding out who the mole was. Shen suspected Ming and Yeung broke into Ming's office and found the tapes of Ming's conversations with Sam, proving Shen right. Yeung subsequently put the tapes inside his safe.
Yeung is buried next to Yan in the police cemetry. Shen and Lee pay their visits. Shen said to Lee: "Events change men, but men do not change events. But these two men are extraordinary because they changed events."
Ming ends up crippled and catatonic, lost inside his own mind, haunted by the spirit of Mary Hon (Carina Lau) and locked in his own personal "Continuous Hell". His divorced wife Mary visits and tells him, "Our baby can say "pa pa" now."
But right before the movie ended, it showed one final flashback of when Yan and Ming met for the first time in the audio store in the first installment of Infernal Affairs (from wikipedia).
