MONEY LAUNDERING EXPLAINED

Have you ever played the popular game called  telephone?  One person starts a message, then whispers it once to the person next to them.  That person whispers what they hear to the next person, and so on.  After the message is spread from person to person to the last in the group, it often ends up unrecognizable and humorous.  Minus the humor, that is the basic premise for money laundering.  If you keep moving money from one account to another, from one bank to another, from one currency to another, or from one country to another, its origin is almost impossible to determine.

The dictionary definition of money laundering is  the process of taking the proceeds of criminal activity and making them appear legal.  When the average person thinks of the word laundering, he might envision a white tee shirt on which a splotch of orange spaghetti sauce boldly stands out.  This tee shirt is unwearable in its current state, and it needs to be pre-treated, soaked, bleached, cleaned, and perhaps cleaned again.  Only after all of this effort is the tee shirt wearable.  Nobody wants to be seen wearing a dirty or stained shirt. Money obtained illegally is viewed in the same way: it needs to be laundered to remove the proverbial stain, but the downside of dirty money is far greater than being labeled slovenly.  The farther the money is moved from its origin, the less recognizable its stain, and the less likely its holder is to be subject to prosecution.

Large transactions send up a big red flag, so when laundering money it is essential to break it up into transactions that are smaller than $10,000.  According to the Bank Secrecy Act of 1970, the federal government requires banks to report cash transactions of $10,000 or more that are performed in a single day by a single depositor.  Another way of avoiding this red flag is to attach the dirty money to a deposit of legitimate funds.  For example, a busy auto repair shop (the front) is making a weekly deposit of $12,000.  The owner, who is also making drug money on the side, adds eight thousand dollars from his drug profits to his deposit for a grand total of twenty thousand dollars.  This disguises the drug money and keeps it from appearing dirty.

So where else besides drug sales does dirty money come from?  Any illegal monies that need to be spent without suspicion constitute dirty money.  Arms smugglers, tax evaders, embezzlers, white collar criminals, and funders of terrorism are just some of the criminals who need their money laundered.  Even an ex-spouse might launder some cash to keep it from coming to the attention of their ex-wife.  Perhaps a person wants to hide normally taxable income from the IRS to avoid the steep tax payments.

There are generally three steps in laundering large amounts of cash: placement, layering, and integration.  Placement is the riskiest step of the laundering process, since large amounts of cash can obviously be conspicuous. The money needs to be deposited into a legitimate bank account without raising suspicion.  This often involves large amounts of smaller bills divided in amounts of less-than the dreaded $10,000 red flag amount.  Smurfing is the term used for breaking up funds into less conspicuous amounts.  (Yes, it does originate from the small creatures of television fame.)  Depending on the amount of cash that needs to be placed, it may take several days, several people, and several different banks to finally “place” the funds.  This can be avoided by placing the dirty money in accounts in countries that have fewer and more lenient cash deposit regulations.  Some countries have laws that allow anonymous banking.  “Offshore banks” are located outside the depositor’s home country, and provide low or no-tax advantages.  They may not report to other agencies, and provide better privacy. This is why they are so frequently associated with organized crime, tax evasion, and money laundering.  If you want to hide some cash, check out the banks in the Cayman Islands,  Switzerland, the  Bahamas, and  Luxembourg, to name just a few.  It is believed that offshore is where most of the world’s  drug money  is laundered.

The second step of the laundering process is layering.  This is the “telephone” game of your youth, times 100.  Sometimes dozens of transactions occur to move the money far from its original financial institution.  It may go from pesos to yen to dollars; from  Banco de México  to  Shoko Chukin Bank  to Bank of America.  The launderer will do anything possible to make the paper path impossible to track.  Another way of achieving this goal is to use the funds to make purchases.  Buying expensive items such as jewelry, cars, and houses changes the form of the money, but not the value.

Integration is the final step that brings the money back to usable funds.  It may look like income from a cash transfer or investment, or the sale of a high-end product such as diamonds or real estate when it reaches this stage.  If the launderer has done his job, he can now use the money without threat of confiscation or prosecution.

So where did the term money laundering originate?  Some believe that it came from the enormous sums of cash that gangsters were hiding in their fronts – laundromats.  The Mafia made much of their fortune from prostitution, gambling, bootlegging liquor, and other such unsavory actions.  It is said that Al Capone purchased this high cash business to help launder his dirty loot.  Others believe the term was derived from simply cleaning up dirty money.  Al Capone must have been a pro at laundering, since his final conviction in 1931 was simply for tax evasion, and not for the crimes that racked up all of his net worth.  It is believed that Capone laundered $1 billion through a variety of businesses.

Mr. Capone was not the only famous money launderer of the 20th century. Bertolt Brecht, the German poet, playwright, and  Marxist  once said, “If you want to steal, then buy a bank.”  It seems to be the easiest way of laundering money and making a fortune in the process.  The Bank of Credit and Commerce International (BCCI) made the list of the 10 Most Notorious Money-Laundering Cases of the 20th  Century.  BCCI was, at one time, the seventh largest private bank in the entire world.  Among some of its customers were Manuel Noriega, Saddam Hussein and Palestinian terrorist, Abu Nidal.  In the 1980s the BCCI was investigated and found to be laundering billions of dollars in drug money and criminal funds.  There is also some evidence that the CIA helped to fund the Afghan Mujahideen in their war against the Soviet Union in the 1980s using this bank.  On 5 July 1991, a court in Luxembourg  ordered  the Bank of Credit and Commerce International to close its doors since it was so fraught with problems and was “hopelessly insolvent.”  BCCI paid the largest fines and forfeitures ever obtained by federal prosecutors.  They paid $10 million in fines and lost all $550 million of their American assets.  Later, in 2012, HSBC would top that record fine at $1.92 billion.

Can you imagine being so rich that you have to spend $1,000 a week on rubber bands to bundle your cash?  Pablo Escobar’s total net worth was estimated at $9 billion – all drug money.  Eighty percent of the world’s cocaine trade was controlled by his cartel.  Now that is a lot of money to launder, and he did so in part through traditional laundering techniques, and in part by bribing bankers.

Did you ever wonder how Imelda Marcos could own over 2,500 pairs of shoes?  Her husband had to support her shoe habit by laundering billions of dollars of stolen public money through U.S. and Swiss banks.  The number one most corrupt leader on the top ten list was the president of Indonesia, Suharto, who was forced to resign after he was suspected of laundering about $73 billion.  He died before his trial at the age of 86.

So after all of this laundering, how do these individuals end up coming to justice?  Money laundering is a crime, and usually carries stiff penalties and extensive prison time.  There are many monitoring tools, laws and agencies in place to prevent and punish launderers.  Financial institutions are the soldiers on the front line when it comes to the battle of money laundering.  First, banks are required to watch suspicious activities such as unusually large deposits or an unexpected change in a customer’s banking habits.  For instance, a patron might regularly deposit between $12- $15 thousand a month, then suddenly deposits a sum in excess of $100,000.  If he hasn’t won the lottery, this should be considered unusual.

A “Suspicious Activity Report” or SAR is one of the tools provided by the Bank Secrecy Act (BSA).  This report is required to be filed for any transaction that is deemed “out of the ordinary.”  Once an SAR is generated, it is the responsibility of the financial institution to investigate the transaction.  If an SAR is not filed, the bank and/or the employee could be punished and/or fined.  In compliance with the Money Laundering Regulations Act of 1993, banks must train applicable employees on procedures for recognition and reporting suspicions of money laundering, and are required to employ a “Money Laundering Reporting Officer.”  If a bank employee is convicted of failure to report a suspicion dealing with drug trafficking or terrorism, he can be fined or imprisoned up to five years, or both.

***

Tactical Rabbit Inc. always protects the names of its contractors, clients, and sources regardless of circumstances. All activities will be planned and carried out in strict adherence to Intelligence Community Directive 304 (ICD 304), International Trafficking Arms Regulations (ITAR), the Foreign Corrupt Practices Act (FCPA), and all applicable U.S. laws and regulations, including but not limited to all SEC rules and regulations. Tactical Rabbit Inc. is a private intelligence company. Tactical Rabbit is not an investment advisor, accounting firm, law firm, or consumer reporting agency, and does not provide any investment, financial, accounting, legal, or credit advice. Tactical Rabbit Inc. intelligence may NOT be used to make decisions about consumer credit, employers, insurance, tenant screening, or any other purposes that would require FCRA compliance. Tactical Rabbit Inc. does not have any formal affiliation with or connection to the Central Intelligence Agency or the Federal Bureau of Investigation although it may at times contract with former employees of federal agencies. In some cases, Tactical Rabbit Inc. will attempt to facilitate a federal investigation through channels similar to those to which any private citizen has access. Tactical Rabbit Inc. uses the utmost diligence to guard and protect confidential information and trade secrets. In the event that a client signs with Tactical Rabbit Inc., client information will be kept confidential and not divulged, communicated, or used except to the extent deemed necessary by Tactical Rabbit Inc. in providing services to the client.

***