https://sofrep.com/103751/money-laundering-in-three-easy-steps/
Everyone
has heard of money laundering. It features prominently in TV shows like
“Breaking Bad” and “Narcos” and just about every Mafia movie since the 1980’s.
Despite this, few people know how money laundering works. A perfect example
comes from the cinematic classic “Office Space”, where after executing a
skimming scheme that is years ahead of its time, the cast looks up the
definition in the dictionary and come away even more confused than before.
While
understanding how money laundering works may be a mystery, what it does is
well-known. Criminals, drug dealers, and terrorists want to spend their
hard-earned money like everyone else. Therefore, they launder the money to make
it appear legitimate. The process is complicated, but when drilled down to the
basics, it consists of three steps that anyone can follow.
Step
1: Placement
Placement
is what it sounds like, literally moving the funds into the financial system.
This step is the hardest, where law enforcement catches most criminals in the
act. Depositing the cash into a bank is the most obvious choice for putting the
funds in the system. Banks are safe and offer a wide variety of ways to
transfer and convert funds, which helps in masking the origin down the line.
Despite
the financial security, banks come with a definite downside. The IRS requires
all banks to monitor cash transactions over $10,000.00 with currency
transaction reports. Trying to get around this requirement by making multiple
small deposits or going to different branches will trigger internal alerts, and
the bank will file a Suspicious Activity Report, where analysts document the
activity, sending the information straight to the federal government. After the
attacks on September 11, 2001, the federal government forcibly deputized the
U.S. banks to identify criminal activity in the financial system as part of the
Patriot Act. Failure to comply resulted in massive fines exceeding $600
million, so the banks are hyper-vigilant to look for possible crime.
Investment
brokers and life insurance agents follow the same reporting requirements, so a
great place to deposit illegal cash is real estate. However, criminals first
need to find a builder who is willing to accept a sizeable down payment in
cash, who will not ask too many questions about where it came from. On the
downside, the U.S. Treasury Department issued Geographic Targeting Orders
requiring realtors and builders to provide information on cash payments in high
financial crime areas like New York City, Los Angeles, and even San Antonio.
For
computer savvy criminals, cryptocurrency offers a new avenue for placement.
They are semi-anonymous and unregulated. Identifying ownership is a strenuous
process and sold at specific ATM’s in some large cities. On the other hand, the
price of crypto-currencies fluctuates wildly, so $100,000.00 on plummet to
$60,000.00 shortly. The security provided for cryptocurrencies is also lacking.
Hackers wiped out major cryptocurrency exchanges such as Mt Gox, in 2014,
leaving a $460 million hole that no law enforcement agency wanted to
investigate.
When
all else fails, bulk cash smuggling is a tried method. Criminals gather the
cash and move it to a place where the bankers ask fewer questions about where
cash deposits come from. This act is a risky move. Taking money through
customs, requires cash over $10,000.00 declared at the border. Further, most
banking locations willing to look the other way are located in places where
transporting large amounts of cash is safe.
Step
2: Layering
Now,
imagine that the hypothetical criminals deposited the cash in the financial
system, without alerting the authorities or being robbed in a foreign country.
It is time to start moving the funds around. This disguises the source of the
funds from the original criminal activity. The more the cash moves, the harder
it becomes for investigators to see through the web of action and trace a path
back to the source.
Investments
in the stock market are a reasonably safe place to hide funds. Stock portfolios
are stable and allow money to gain dividends over time. Purchasing a front
company or a using a shell corporation is also a popular choice. These options
provide legitimate covers for criminal activity and might assist in placing
future illegal funds. One drawback comes from increased scrutiny the shell
companies are now receiving. Exposes on the Panama Papers and the Paradise
papers are now drawing scrutiny from banks over wires from overseas companies,
with little or no stated business purpose.
In
layering, criminals realize that they will lose a little off the top to move
the funds. The going rate is approximately 20%, but it is worth the cost.
Through going to casinos and taking out a line of credit, initial losses occur.
Despite that fact, in the end, the money appears legitimately won. Many
criminals also issue personal loans at low-interest rates and then offered a
quick payout for cents on the dollar.
Purchasing
luxury items, like gold bars, jewelry and cars are also favored ways to layer
funds. These are good investments for layering because they maintain a high
value, are sold for a profit and owning high-end goods is always a benefit. The
drawback to any layering scheme comes from moving funds too quickly. Banks and
credit card companies monitor purchases and transfers closely. Therefore, if a
middle manager living on a $60,000.00 salary suddenly starts living the life of
a Las Vegas high roller and wiring all the money to Hong Kong and Macau, alarm
bells start going off for investigators.
Step
3: Integration
Integration
is the final step that all criminals and terrorists look forward to reaching.
After placing cash into the financial system and moving it around, it is time
to enjoy life. There are still risks in this phase. Banks monitor cash
withdrawals just as tightly as deposits and file CTRs and Suspicious Activity
Reports accordingly.
Once
legitimized, there are multiple options to recouping the funds from the
financial system. Criminals withdraw funds from stock dividends, sell a luxury
car or even cash out the funds from a front company. Once criminals legitimized
the cash, determining the origin is difficult for law enforcement. Russian
Oligarchs serve as a prime example. They buy ownership in sports teams,
expensive houses in London and sail in yachts despite being targeted
sanctioned.
Caveat
One
might observe, that the steps may work better in different orders and that they
are cyclical. This is correct in both aspects. A good layering scheme makes
placing the money easier. A legitimate source of funds like a successful front
company makes mingling funds less complicated. One drawback to money laundering
is the limitations of places that one person can move funds.
Eventually,
if a criminal organization is successful, there will be too much cash to hide.
Zhenli Ye Gon, a Chinese Mexican citizen, was arrested in 2007 for trafficking
methamphetamine into the U.S. When Mexican authorities raided his villa in
Mexico City, they found 2 tons of U.S. $100 bills worth over $200 million. The
sheer volume of cash simply proved impossible to move without drawing
attention.
Conclusion
This
introduction covers only the basics of money laundering. Knowing the three
basic steps may not necessarily provide expert insight. However, it does lead
to a better understanding of how the drug trade and terrorism finance works.
Additionally, on a personal note, please keep this a hypothetical conversation.
The one thing that “Office Space” gets right is the money launderers do not go
to “white collar resort prison”!