Money Laundering (#260)
/In this podcast episode, we discuss how money laundering works. Key points made are noted below.
Money laundering is all about making money that you shouldn’t have look legitimate. If it looks legitimate, then the government won’t take it. That seems like a worthwhile goal for someone involved in illegal activities, so how can we do it?
Money Laundering Process
The basic money laundering process involves three steps. The first is to get the money into a bank. By doing so, you’ve converted bills into digital money, which is way easier to move around. Though it is possible to smuggle the money overseas and deposit it in a foreign bank, the usual approach is to break up the cash into small amounts and deposit it all over the place. This can mean setting up lots of bank accounts at different banks, and then spending your day driving from bank to bank, making small deposits everywhere. The reason for the small deposits is that a bank is required to send the government a Currency Transaction Report if it receives at least $10,000 of cash in a single transaction.
So, assuming the cash is now in a bank, you need to move it around, perhaps to banks in other countries that have bank secrecy laws. By doing that, an investigator can’t follow the trail of wire transfers past the first foreign bank. So, if you keep splitting up the amounts and wiring it around to different banks, there’s no way for anyone to figure out where the cash went.
And the final step is to convert the cash into assets that you can use, such as real estate or maybe buying a legitimate business. So, the intent is to take dirty money that you can’t explain and shift it into a new form that you can now use.
Loaning Yourself Money
Of course, there’s still a problem with having more assets than it appears that you can justify, given your apparent income. For example, a politician who accepts bribes may only be making $50,000 a year, and yet somehow owns a $1,000,000 house. People might ask questions. Luckily for the money launderer, there are a few methods for improving the situation. One is to loan yourself the money. Let’s say that you’ve shifted cash into a foreign shell corporation. You can apply to a bank for a big loan, and have that shell company put up the cash for collateral against the loan. Then you use the loan to buy a local business, and use the cash flow from the business to pay back the loan. In essence, you’re loaning yourself the money, by way of a banking intermediary that makes the loan paperwork look nice and clean. And on top of that, you get a tax deduction on the interest paid on the loan.
Selling a Business to a Fake Buyer
And to take the concept one step further, let’s say that you’ve used the cash flow from the business you bought to pay back the entire amount of the loan. Now you can set up a fake buyer for the business, and pay yourself from the fake buyer to acquire the business from you. Now you legitimately have the sale price of the business sitting in your bank account – nice and clean. And you still own the business, though now it’s through an intermediary. Just don’t set too high a price, or you’ll have to pay taxes on the gain from selling the business.
Use of High-Cash Flow Businesses
Now let’s get back to that business you bought. Money launderers like to buy businesses that deal with lots of cash, like used car lots, and restaurants, and night clubs. When you own a business like that, you can fake lots of additional sales and pay for them with money from your pile of cash. On the books of the business, it just looks like you’re having an unusually good year. An extra benefit is that the business can pay you a salary, so you have some legitimate income to report to the tax authorities. And on top of that, you may be able to run your business from the premises. Like running a gambling operation from the basement.
Fake Invoicing Schemes
Let’s try a different angle, which is fake invoicing schemes. A money launderer owns two businesses that supposedly sell goods or services to each other. One is in the United States, and the other is overseas. If the money launderer wants to move money out of the United States, he creates a fake sale from the overseas corporation to the local business, and overbills for whatever is being sold. The local business pays the bill. By doing so, the excess amount paid represents a transfer of cash out of the country.
It’s quite possible to do the reverse, where the invoiced amount is underpriced. In that case, the overseas company is transferring value into the United States in the form of the goods shipped, which means that money is flowing into the country.
Black Market Peso Exchange
And here’s another scheme – a really clever one. It goes by the name of the black market peso exchange, and it was created by the Colombian drug cartels, which needed a system to bring their dollar profits from the United States back into Colombia. Let’s say that a drug cartel earns $1 million dollars from drug sales in the U.S. It contacts a Colombian peso broker, which offers to buy the dollars in the United States, minus a commission, and to pay the cartel in Colombian pesos in Colombia. This means that the dollars are still in the U.S. and the pesos never leave Colombia.
The broker then uses a group of associates to break up the $1 million into smaller amounts, and deposits it in a bunch of bank accounts – still in the U.S. Next, the broker lines up some actual, legitimate Colombian businesses that want to buy goods from companies in the United States. With these orders in hand, the broker goes ahead and buys them from U.S. companies, acting as the middleman. This means that the U.S. companies who are selling the goods are paid from that stash of $1 million that’s still sitting in the U.S. Meanwhile, the Colombian companies have paid the broker in Colombian pesos – in Colombia. That stash of pesos is now available for the next time the broker wants to buy dollars from a drug cartel.
In short, the money in this scheme never crosses a national border, which makes it so difficult to spot. Instead, there’s a flow of goods between the two countries that represents the actual flow of value out of the U.S. and into Colombia.
The Hawala System
Let’s do one more. This last scheme is really about shifting money out of the country in an undetectable manner. It’s not really about shifting the cash back into the country at a later date, though that may happen. This approach involves an informal money transfer system. It’s generally called the hawala system, but it goes under different names, depending on where you are in the world. In essence, you go to your local hawala broker, who usually operates out of a small storefront, and ask to send money to somebody somewhere else in the world. The broker takes your money, and then calls a contact close to where your recipient is, and asks that the broker on that end deliver the money as requested. The two brokers can settle up later, maybe with a wire transfer, and maybe by sending goods to each other that are priced in favor of whoever is owed money. This is actually a legitimate system. It’s mostly used to send money between family members. But it can also be used to launder money, simply by paying the money to a broker and having the broker arrange for payment at the other end to an associate. The brokers usually only keep enough records to make sure that they settle up with each other eventually, and after that they may chuck out the records, which makes it incredibly difficult to track down these kinds of money transfers.
Summary
In general, the most successful money launderers are the ones who use multiple methods to hide their cash, and who use accountants and lawyers to help them set up new schemes all the time. The ones who are caught are usually the small-time operators who aren’t so sophisticated.