Feature Articles

January 2005
A Primer On Money Laundering

By Mike La Sorte, Professor Emeritus

Mike La Sorte is a professor emeritus (SUNY) and writes extensively on a variety of subjects.

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"(AMSTERDAM.) Two directors of bankrupt firm Air Holland have been arrested on charges they financed the airline for years with illegal drug money. Police raided the homes of seven suspects�accusing them of money laundering and smuggling at least 633 kg of cocaine. The EUR 25 million allegedly earned by the drug dealing is believed to have been invested in Air Holland. The profits were also invested in real estate and other businesses." (Expatica, 30 November 2004)

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     In America money laundering as a descriptive phrase is of recent origin. Newspapers first used the term in 1973 when reporting the Watergate scandal in Washington. Its first use in a legal context was in 1982.

     Money laundering as an activity has never been the exclusive activity of organized crime. Respected people are not above engaging in the act when extra profit is at stake. Even the august J. Edgar Hoover, the former director of the FBI, did not hesitate to do some laundry. In 1958, Hoover published his book, Masters of Deceit. " Hoover�s total royalties eventually totaled $71,000, all funneled through the FBI Recreational Association to avoid taxes." (Richard Hack, Puppetmaster. The Secret Life of J. Edgar Hoover, 2004)

     Obscuring large sums of mob money probably began in the United States in the 1920s with the increased criminal opportunities provided by the ill-fated Prohibition legislation. Organized crime took over businesses with high cash turnovers and them commingled the licit and illicit funds, creating the illusion that all the money originated from a legitimate and profitable enterprise.

     Al Capone�s conviction for tax evasion in the 1930s taught organized criminals an important lesson: hide the money from the Feds. To mobsters, paying taxes has always been seen as anathema. According to the story, mob accountant Meyer Lansky, the "Little Man" behind the scenes, discovered the secret and numbered Swiss banking system. He used the "loan-back" concept, which meant that mob money was turned into loans from cooperating foreign banks, for a stiff fee.

     A wealthy Detroit hoodlum, known as Cash McDonald, operated another laundering route used in those days. On 17 January 1934, the notorious Barker Gang (Fred and Dock Barker were the sons of Ma Barker) kidnapped Edward Bremer, a millionaire from St. Paul, Minnesota, who owned the Schmidt brewery. The ransom demand for his release was $100,000. The ransom note read, in part, "Payment must be made in 5 and 10 dollar bills�no new money�no consecutive numbers�large variety issues." (B. Burrough, Public Enemies, 2004) The gang members were aware that the bills could not be freely spent locally because the FBI had previously traced Machine Gun Kelly�s kidnapping ransom money. McDonald assured the "boys" that he had exchanged the (water-stained) $100,000 for "clean" cash through gambling pals in Havana, Cuba, who then dispersed the money via banks in Mexico and Venezuela. The laundering cost, including McDonald�s 15% cut, was $34,000, leaving $66,000 for the outlaws to divvy up. Crime does pay�if you�re a launderer.

     But the tale does not end there. McDonald exemplified the old saying, " There is no honor among thieves." Later, the mastermind of the Barker Gang, Alvin "Ray" Karpis, while enjoying the good life in Cuba, exchanged a one-thousand-dollar bill at the Havana branch of the Royal Bank of Canada. Karpis, ever vigilant, noticed that the small bills he had received in exchange were water-stained. He checked the Federal Reserve numbers and realized to his dismay that he was holding part of the Bremer kidnap money. The ransom cash had never left Cuba; McDonald had apparently dumped it there and pocketed the full $34, 000. Karpis was steamed at the double-cross and his vacation was completely ruined when a friend warned him that a G-man had arrived in Havana making inquiries about him. He fled the island one step ahead of the law.

     Those days are not to be compared to today. Modern laundering is a new phenomenon on a scale never seen before�it is global and the sums massive. As George S. Schultz, former U.S. Secretary of State, noted correctly, "Today�s criminals make the Capone crowd and the old mafia look like small time crooks." The proliferation of laundering has been transformed by a business environment without borders, "the extensive utilization of non-financial businesses to launder money, the willingness of professional advisors to be part of the loop and the growth of numerous offshore centers." (Peter Lilley, Dirty Dealing, 2003)

     "Greed drives the criminal, and the end result is that illegally gained money must be introduced into a nation�s legitimate financial systems." (U.S. Treasury, 1996)

     Many definitions of money laundering have been offered. That is because it is a loose concept, conducive to change, with many ramifications, as new techniques evolve, global conditions change, and anti-laundering legislation is codified and enforced.

     In general terms, money laundering involves the processing of criminal proceeds so that they can be used "without detection of the illegal activity that produced them." It conceals the "true source of funds so that they can be used freely." The ultimate aim is to transform "the proceeds of illegal activities into legitimate capital." As long as such money issues from criminal enterprises it is of little use "because it raises suspicions of law enforcement and leaves a trail of incriminating evidence." Individuals wanting to benefit from large-scale crime must work out tactics to disguise their ill-gotten gain without comprising themselves. Presently, in most nations this conversion of dirty money into legitimate capital is illegal, although the laws do not necessarily hinder laundering or seek to prevent corruption of institutions or persons. In some countries criminals might choose to launder their profits, while in other countries might simply spend them.

     The process to totally disassociate the final washed product from its criminal origins is composed of three phases. The first phase in money laundering is called placement�the placing of the cash into a bank or financial or other professional institution, one that is at the disposal of the criminals or founded for primarily laundering purposes.

     The second phase (layering) is moving the money around, through and to multiple institutions in different jurisdictions to make improbable a successful audit trail that will uncover its tainted origins.

     The final step is called integration. Once the launderer has put the dirty proceeds through a cycle of transactions, for "cleaning" or "whitening" (as the French say), so that their illegal source is disguised through a series of transfers and deals, they can be spent or invested without fear of disclosure. Estimates of global crime proceeds laundered in one year, though largely guesswork or using mathematical formulae, range up to $1 trillion.

     "[In 2000] Spanish police arrested 24 individuals in relation to laundering money relating to drugs originating in Colombia, the funds involved came from Colombian cocaine sold in Britain and in Spain and was laundered through banks in Portugal, France and Andorra. The money was then transferred to the United States where it was converted to dollars and ultimately went back to the drug kings in Colombia." (P. Lilley, 2003)

     In the United States the Russian mafia has engaged in fuel tax scams that have cost $2 billion in lost tax revenue per annum. Other sources of their income include car theft, smuggling, credit car fraud, telecoms fraud and money laundering. Their power bases spread from coast to coast.

     The manager of a car dealership in Norfolk, Virginia, was sentenced for selling cars to drug dealers for cash. Legitimate businesses devise novel schemes. As one example, a company takes $1 million of drug money, buys 200 watches at $5000 each, then exports them to associates abroad who pay $5 each for the watches. They are then sold at the $5000 market value. Relevant import taxes are avoided and the $1 million is laundered outside the United States, away from the prying eyes of American authorities.

     "In November 2002 the U.S. District officials fined Broadway National Bank $4 million for not alerting the U.S. government of a two-year series of transactions that involved the laundering of $123 million of drug money. Broadway National Bank became a bank of choice for narcotics money launderers and other individuals who wished to shield their activities from the government. One such customer was Alfred Dauber�on a typical day his employees went to the bank with more than $150,000 in cash (in duffel bags). On one day they arrived with more than $660,000 in cash. The funds were then wired immediately to Colombia, Panama and Miami. Ultimately Dauber laundered $46 million through the bank and used it because its personnel did not ask questions." (P. Lilley, 2003)

     There is an obvious explanation why legitimate organizations turn a blind eye: easy money with minimum risk. They earn generous fees for handling illicit sums. They learn not to inquire too closely as to the source of the money and the backgrounds of their (shady) clients. Bankers, lawyers, fiduciaries and others get wide-eyed at the prospect of a hefty gain. A real estate agent with a perspective buyer ready to plunk down a neat sum for an expensive property will not pry for fear of losing a lucrative sale. Big banks are not above a scam or two. Citibank facilitated a money management system for the brother of a former president of Mexico that disguised the origin, destination and beneficial owner of the funds involved. Using an alias, the checks were commingled with other funds and then transferred to European banks. Other schemes have involved stolen art works used as collateral for loans, and substantially over paying taxes to then get a refund check from the revenue service�a sly trick, using the tax collector as your launderer.

     The criminal�s choice of launderer is limited only by his creativity. Once a loophole in the law is closed to him, he moves on. Companies listed on stock exchanges may be nothing more than laundering operations. Investment firms take commingled money and buy shares and other financial instruments. Major law firms have been accused of having traffickers as clients, offering services for a percentage. The firms provide accounts in banks where the firm�s reputation will not be questioned. Such businesses are working hand-in-glove with organized crime. Have they been hoodwinked? Not likely. They know who their clients are, how their clients make their money, and know their underworld connections.

     With the increasing high cash volume associated with gaming, a growing number of casinos worldwide have become venues for a quick laundering cycle.

     In 1998, four employees at three Atlantic City casinos were arrested in a sting. They were caught allowing customers to use fake identifications to launder $400,000 in drug money. In that same year leaders of a Rincon tribe in California pleaded guilty in connection with accusations of acting as a front for a Pittsburgh crime family plotting to take control of their casino to launder money.

     Wiring money from a criminal�s offshore bank to a casino in a tourist center abroad is a common laundering technique. The casino pays the money in chips. The chips are then cashed in and the money repatriated via a bank check, money order or wire transfer to the criminal�s bank account, where it can be explained as a result of good luck during a gambling junket. This trick is used sporadically because winning too often will attract undue attention. A variation involves an initial deposit by a wire or bank cashiers check. The funds are stored for a period of time in a casino safety deposit box or held in the form of safekeeping markers, and then cashed out.

     Money laundering has become a global corruptive influence. Anti-laundering legislation varies widely from nation to nation and can barely keep abreast of a phenomenon that has so many disguises and has embedded itself into the societal institutions. Anyone can turn bad money into good. As the expert Peter Lilley has noted, "Just plug in a PC, connect to a telecoms provider, and off you go."

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