Money laundering

Contemporary Review, June, 2002 by Keith Suter

OF the six largest forms of international trade, only three are legal: the speculation in foreign exchange, the sale of oil and of coffee. A fourth has some questionable participants: the sale of weapons. Two are illegal: drug-smuggling and money laundering.

Crime is global but law enforcement is not. Criminal law is still largely only a national or local matter. International criminals are often better organized than national governments and their police forces -- and they are increasing. Criminals can, for example, move across national borders more easily than can police officers, who are very restricted in their powers of detection, arrest and detention. There is no international police force to arrest criminals and no international prison. Organized crime pays.

The spread of organized crime has benefited from three recent trends. First, the development of computer and communications technology means that electronic funds transfer systems can move billions of dollars around the globe in seconds. Second, as a result of the collapse of communism in the former Soviet Union and Eastern Europe, there are weak governments unable to control criminal gangs. China remains communist in name but it, too, has been unable to control the crime and corruption that it has unleashed because of the liberalization of the economy. Finally, there is the declining significance of national borders. As late as the 1960s, the Japanese were not allowed to travel abroad for pleasure and just a few years ago exit visas for people living in the Soviet Union, Eastern Europe and China were a rarity. Now Czech prostitutes work the Italian Riviera; illegal Chinese immigrants to America are trans-shipped through Hungary; South American drug lords recruit traffickers in Nigeria; and refugees from Afgh anistan travel to Australia with the aid of people smugglers. European police forces are now concerned that the Euro may make money launderings (as well as counterfeiting) much easier.

A particular concern is the way that during the 1980s, the profitability of the drug trade meant that the 'narco-dollar' began to assume the economic significance of the 'petrol-dollar' in the 1970s. It had been estimated that the capital generated during the 1980s by illegal drug trafficking was in the order of US$3000 billion to 5000 billion. A random scientific analysis of US currency showed that it appeared that almost every $100 note in circulation contained traces of cocaine, indicating that the notes had once sat in bags next to bags of drugs or had been handled by people with traces of cocaine on their hands.

The sale of drugs is often done on a cash basis to hinder the police tracking down the evidence. But the retention of cash is awkward. A stack of $1 million in $50 notes would reach almost three metres in height. Large sums of cash may be stolen by unscrupulous people. Therefore it is necessary to hide the illegally obtained money: both to avoid detection from the police and to protect it from theft.

Money laundering is the process whereby the proceeds of all types of serious crimes are turned into apparently legitimate financial resources. This ensures that if a criminal is under suspicion, there is little evidence that the money has been gained from illegal means. This requires putting as many national borders as possible between the original crime and the final account in which it resides. Money travels easily over national borders; police do not.

There are three stages in the money laundering process. First, 'placement' is where the large amounts of cash are negotiated into some other less obviously suspicious form. One of the most common methods is to employ 'smurfs': individuals who do not look out of place in a banking environment and who are used to dispose of large sums of cash by depositing small amounts at different banks. A smurf may also purchase international money orders to pass on to third parties, who will deposit them in a bank elsewhere. Money launderers may also operate behind the cover of cash-intensive businesses, such as casinos, betting shops, amusement arcades and foreign exchange bureaux. Second, in the 'layering' stage, money is spread within the financial system to create a false picture of the provider of the original cash. Over-invoicing and false invoicing of imports and exports are attractive methods of layering, enabling cash to be moved under the guise of legitimate documentation. Third, in the 're-integration' stage, the cleaned-up money is brought back, supposedly legitimately, into the financial system operated by the end-user. Money launderers operate legitimate businesses and pay taxes like their fellow citizens.

For example, an American earns $100 million from drug-smuggling in Asia, which that person puts into a bank on the Cayman Islands (which the person had bought previously) and the bank lends the money to a 'shell' company owned by that person to buy works of art in Europe, which are then sold in the US, and the proceeds are then paid into another bank owned by that person in the Caymen Islands, which then lends money to a company registered on a South Pacific island, which then lends money to that person's real estate business in New York. The real estate business is legal and pays its taxes etc, so it would be above suspicion by the local authorities. If the police were to ask where the money comes from to finance the real estate business, the person simply says that it was lent from an overseas bank; the police cannot take their enquiries much further.