Let's say you're a criminal with millions or even billions of dollars,
but you have one big problem: Transferring large sums of money or carrying suitcases
full of cash will raise eyebrows.
You need to launder the dough to make the dirty money appear to be clean money,
so that then it can be spent anywhere in the world (say, on real estate, luxury yachts,
strip clubs) no questions asked.
Fear not. With a little financial detergent, your dirty money can become more or less untraceable.
China leads the world in this ancient art.
Between 2002 and 2011, some $1.08 trillion departed the country illegally, despite currency-control
laws that require people to obtain a permit to exchange more than $50,000 a year worth
of yuan into any foreign currency.
But this is a truly international pastime.
Corrupt politicians, drug cartels, alimony deadbeats, nearly everybody's doing it.
When it comes to money laundering there are
three main steps to doing it right. The first step is the placement.
Placement is the stage when the money enters the financial system for the first time. In
this step, the money may be deposited in a bank, added to the accounts of an existing
business or disguised as a transaction.
The placement is usually achieved through a series of regular small transactions. If
you are a criminal and you make the mistake of a large amount of cash you are probably
gonna get caught right away.
Of course, many people who attempt money laundering schemes have no past experience and don't
know what behavior is likely to be flagged. This step is widely considered to be the riskiest.
If the deposits are scrutinized at this stage, none of the justifications that will exist
later in the scheme will yet be in place.
The second step of money laundering is the layering.
Layering is the stage where the illicit money is put
together with legitimate money or placed in constant motion. Layering usually involves
generating so many intricate transactions that the dirty cash disappears into them.
Illicit money can be used to gamble, then placed into stocks, then shuffled around in
different currencies and then used to buy financial products like life insurance policies.
Layering can work in dramatically different ways depending on the scheme. In all schemes,
however, the purpose of the layering stage is to make it difficult for even a skilled
accountant to differentiate between money that came from legal transactions and money
that came from funds that were placed for laundering.
While layering is typically a safer stage
than placement, those who are not careful often can still be caught easily if they make
mistakes. For example, if a business that averaged $5,000 in transactions a day for
years were to suddenly start processing $10,000 in transactions a day, it might attract scrutiny.
The third and last step is integration.
Integration is the stage where the money re-enters
the legitimate economy. When the money appears to come from legal businesses or investments,
or the trail has become too difficult to follow,
the money can then be placed into larger-scale investments.
Integrated cash is often placed into luxurious assets, properties, long-term investments,
and new businesses. Integrated cash may be used to purchase assets that can be used to
facilitate future money laundering more safely.
There are several types of money laundering,
like casino schemes, cash business schemes, smurfing schemes, and foreign investment schemes.
A complete money laundering operation will often involve more than one of these as the money is
moved around to avoid detection. For instance, proceeds from cash businesses can be gambled,
just as the success of a cash business that has been infused with placed cash can
be used to justify investments or loans, which come from cash placed offshore.
Let's talk about casino scheme.
The casino scheme works by funneling the money
through gaming. The money is converted into chips, which are then briefly played with and then
transferred back into cash. Those chips are usually converted by the launderer.
Often, the casino where the money is being
laundered is in a different nation than the launderer' s nation of origin. This makes
it difficult for law enforcement in either country to gather evidence that might reveal
proof of the money laundering.
When we talk about the casino scheme, the placement stage happens when the money is
delivered to the proxy who will take payment in cash and then change it into chips. In
some countries, travel agencies provide casino chips as part of their packages. Paying for
these in cash can be a smart way to avoid getting your cash moved without electronic records.
The Layering step is when the money is laundered
through gambling, the layering stage happens when the cash or chips are carried into the
casino and used for gambling. Usually, very few of the chips are used for gambling because
of the risk of losing. Instead, the chips are lightly used for several hours and then
converted back into cash.
The receipts from the cashout are used as evidence of the cash's legitimacy. There
is no record of how many chips were carried into the casino, so the launderer can plausibly
claim that small amounts were carried in and the larger sum comes from winnings.
The money laundered through casinos is relatively
easy to integrate. Once the winnings have been reported and any taxes have been paid, the
money can be used for any other purposes.
The cash business scheme is one of the most
used and popular schemes for laundering large amounts of physical cash. Even today, there
are a lot of businesses who handle most of their transactions in cash. Illicit cash can
be inserted into these transactions at a fast or slow pace.
Laundering money through cash-intensive businesses
was the preferred method of the famous gangster Al Capone. He evaded investigators for years
by funneling the money his crimes generated through his small empire of laundromats.
The term money laundering was coined by the agents investigating him.
The placement for a cash-intensive business scheme involves direct cash payments to the
owner or manager of the establishment. The money to be laundered for the day is brought
to the premises of the business. It stays in a safe place until it can be added to profits
for the day through one of several methods.
When the money is laundered through cash businesses,
the layering stage takes place when fake transactions are slipped into the books throughout the
day. These transactions may take the form of fake customers, or through extra services
tacked onto legitimate transactions, with the difference added from the placed money.
Cash-intensive business schemes often extract
the cash through daily profits. This scheme requires the money to be laundered kinda slowly,
but a decent amount is ready every single day, so, it's making it more liquid for
the launderer. Taxes are paid on the reported profits, and the money can now be used for
any purpose.
Now let's talk about the smurfing scheme.
The term smurfing refers to the practice of distributing small amounts of a larger cash
amount to a series of partners who then deposit the money in incremental amounts. Smurfing
is used to get around the currency reporting requirements that banks are required to observe
in a lot of countries. Small quantities that come from many partners are less likely to
trigger an automatic report.
The placement stage starts with the cash being distributed through a network of people, smurfs,
who can be trusted to deposit the money back again on schedule. Larger criminal organizations
are more likely to use this strategy because they already possess a big network of obedient
members. The layering stage for this type of scheme
happens as the money is deposited back into one or many different accounts. More advanced
smurfing schemes will try to make sure that the money is deposited in ways that avoid
automatic detection. The cash must not just be deposited in small amounts, but in varying
amounts and at different intervals. The money can be extracted as it is moved
back into the account. While this scheme avoids automatic detection, it is not as safe as
the other schemes. If the deposits do come under scrutiny, it could be difficult for
the launderer to explain why the deposits were made.
The foreign investment scheme
A lot of countries are allowed and encouraged
to invest in US businesses. However, the IRS has little power to account for how the money
used in these investments was accumulated. In some cases, the money comes from illicit
activities. The launderer delivers the cash to the foreign investor, who then returns
it by making an investment into the launderer's business.
The placement happens when the cash is delivered
to the foreign partner. In most successful schemes, the launderer will not appear to
have any prior contact with the investor who is holding the money. For all intents and
purposes, the money appears to be the property of the foreign partner.
The layering stage happens when the foreign business invests into
the legitimate, legal business using money that was placed with them. These amounts are
usually larger than in other schemes, but difficult to prove illegal.
The money in this scheme can be more difficult to extract, in spite of the fact that large
amounts can be moved. Investments into a business must be credibly used within that business
and for that business. The money can be extracted from the profits that the investment generates,
or from high executive salaries funded by the original investment.