What Do We Know About Money Laundering

Money Laundering (ML) is one of the biggest financial crimes and it has been with us since we have used money. But what is ML?

Money laundering - a concept first used in the 80's in the United States with regard to income from drug trafficking and it is the process of converting illegal money into “legal money”. There is a legend according to which the term "money laundering" appeared in the US during times of the dry law, when the Chicago mafia received large incomes from illegal alcohol trade and from other sources. Ostensibly at that time, a scheme was developed according to which these revenues were officially registered as the proceeds of a network of automatic laundries. Laundry services were paid in cash, so it was impossible to track how many people actually used them, which allowed gangsters to "mix" criminal money into the legal proceeds of laundry. By association with laundry, the process of turning illegal money into legal ones was called money laundering, that is, "washing" or "laundering". However, this is just a myth.

Moreover, some researchers believe that this is a legend, and the term "money laundering" is called so because it really describes the process: illegal, "dirty" money, due to the transaction chain "laundered", becomes "clean". In other words, the source of illegal obtained money is hidden through various transfers and transactions, and money looked like it was received legally.

ML has only one main aim – to transform the profits of crime into cash and/or property and it consist of 3 stages; although, it is a solo process. In below we can see 3 stages of it:

1. Placement
2. Layering
3. Integration.

In the first stage (Placement) criminals place dirty money in legitimate financial institutions in the form of bank deposits in cash. Later in Layering with the help of electronic transactions, money is sent between different accounts, transferred to another currency, which is already being purchased for expensive goods, in order to change the money form. In order to reduce the traceability of money, money that enters the banking system is separated into small amounts and transferred from the bank to the bank, from country to country. In the final stage (Integration) laundered money is introduced into the economy as legitimate by bank transfer to the accounts of companies used for laundering or by selling expensive goods that were acquired in the second stage.

Why launder money?

Money should appear "clean", because criminals do not want to leave traces or be caught. Mafia and terrorists do not save money, since if legal structures find something and begin to investigate, then all other criminal activity will open, and punishment for whatever is more severe than for money laundering itself. People who usually deal with ML are precious dealers, embezzlers, corrupt politics, officials, scammers, thieves and terrorists.

First laundering occurred through the casino: to the usual proceeds of gambling establishments in the US and Cuba, dirty money allegedly lost by customers was "mixed". Later, big mafioso Meir Lansky (born Meir Sukhomlyansky from Grodno, known as the "mafia bookkeeper", one of the founders of Las Vegas) created a scheme using the banking system: he opened a number of (anonymous) accounts in Swiss banks, placed large sums in them, and then received loans from the same banks, which he showed as a source of his money. Subsequently, loans were repaid at the expense of money on numbered accounts. Thus, dirty money, passing through the bank, became clean, i.e., legal. As a matter of fact, the interest of the mafia to the official cleaning of incomes appeared only after Al Capone's arrest in 1931 on charges of non-payment of income tax: government agents were able to prove that his expenses did not correspond to official incomes, which meant that he covered some of the income which earned from taxation.

Moreover, the first use of the term "money laundering" in the press was recorded only in 1973 in the materials of the British newspaper The Guardian about the Watergate Ccandal. It was found that the funds from the unofficial Republican Party electoral fund, which included anonymous donations (which are prohibited by US law), through people’s personal accounts involved in the operation in the US and Mexico, turned into their contributions to an official fund.In 1993, the UN report says that the main characteristics of money laundering, which has gained immense proportions due to organize crime operations, are its globality, flexibility, the use of new technologies and professional assistance, ingenuity and vast resources.In legal practice, the term "money laundering" was first used in 1982 in USA case "US v 4 255 625.39 dollars" (551 F Supp.314). As part of this case, it was found that the American company Sonal, owned by several Colombians, conducted money from the drug trade through its account in Capital Bank (Miami, USA). Drug traffickers exported dirty dollars from the United States to Colombia and changed them to Colombian pesos in a special exchange company owned by a Carlos Molina (Colombians did not care about the origin of money). After that, dollars returned to the US in cash and they were placed on the account of a relatively solid company. Later, Molina received checks for various amounts signed by the leaders of this firm, and paid for their expenses (including the purchase of pesos for further transactions with the drug mafia). Through the firm's account passed more than $ 200 million, however the US authorities were able to track only a little more than 4 million.Subsequently (until 2001), the authorities of various states fought primarily against the laundering of money which received from the drug trade. As a result of the "War on Drugs", unleashed by developed countries, the profits of drug cartels sharply increased, which required the creation of global financial networks for their laundering. Accordingly, the attention of state bodies to the problem of money laundering increased. After the terrorist attack in the United States on September 11, 2001, the money spent on financing terrorism, including through the use of charitable, religious and non-governmental organizations and underground quasi-banking systems ("Hawala", "Hundi"), fell in the spotlight on anti-laundering bodies.

Below I mention a few methods which are being used for laundering money.

Method 1. The Colombian market

On the Colombian black market, the currency is exchanged: money received from the sale of drugs was exchanged to Colombian pesos, further pesos were purchased various expensive goods, ultimately sold for cash dollars.This is one of the most established mechanisms of money laundering, obtained from the sale of drugs in the Western Hemisphere.

Method 2. Structured deposits

Large amounts are broken up into small (below 10,000 dollars) and deposited in various banks at different times. In the United States at a time you can make a cash deposit in the bank not exceeding $ 10,000, otherwise the bank is obliged to report on the operation to the federal government.

Method 3. Foreign banks

In this method, a shadow (underground) banking system is used. Illegal amounts of money are transferred to offshore accounts in countries where laws on the preservation of bank secrecy act, in other words, where it is permitted to invest money in the bank anonymously. Basically, banks in the Cayman Islands, Panama, the Bahamas, Bahrain, Singapore and Hong Kong are used for this.In Asia, there are banks offering a legal alternative system that allows customers to deposit, withdraw and transfer money without any accompanying documentation, which leaves no traceability.

Method 4. One-day companies

The cash deposit is paid by the name of a shell company, and then it is withdrawn for investing in a legitimate business with the help of counterfeit invoices and balance sheets. Such companies are opened by criminals only for money laundering, but sometimes they can be a legitimate business in which "investments" are made, for example, brokerage firms, casinos, bars, strip clubs. All these activities are associated with a large amount of cash, which helps illegal means to simply “dissolve.”

Money laundering is difficult to control, because it can be used by financial institutions in any country. This is a serious problem that requires the efforts of all countries in the world, but in many states there is still a concept of bank secrecy, which does not allow the US government to track money that has already gone abroad.

The legalization of money or proceeds from crime is used by organized crime to attract money or other property that does not have a direct link to a criminal source of income. Nevertheless, money acquired through legalization (laundering) is also related to criminal activity. It should not be forgotten that such funds are an indispensable element in the financing of terrorism.

Money laundering as a crime type attracted universal attention in the 1980s, especially in the context of drug trafficking. Growing concern over the huge profits of criminal origin and the spread of drug addiction in the West has caused governments to create legislation that prevents money laundering. In addition, it became clear that due to huge illegal profits, criminal organizations managed to bribe the authorities and influence them at different levels.

ML is a global phenomenon, facilitated by the close relationship of international financial centers around the world. In addition, it is worth remembering that in the constant pursuit of greater profits, money laundering extends to all new spheres of criminal activity. The grandiose nature of this "industry" inspires distrust: according to the International Monetary Fund, its volume is equal to 2-5% of the world Gross Product (or approximately $ 2 trillion), having penetrated almost all strata of society. And the same can be said for Scotland also.

The recent investigation of English newspapers provided undeniable evidence that criminals brought everyone into their chain - from tanning salons located in the backyard to venerable banks located in the central streets, even if the latter do not suspect that they are being used. Scammers can be even small gangsters, and major drug dealers, and terrorists of international class. All of them are real experts in money laundering. Even international companies can deal with the transfer and redistribution of funds for terrorist organizations such as Al-Qaeda.

The worst thing is that nobody, even the most respected financial institutions, are insured from the web of money laundering, because sophisticated criminals resort to increase complex technologies and legal loopholes for their own benefit. For instance, in 2002 the Royal Bank of Scotland was forced to pay a fine of £ 750,000 sterling for failing to provide a sufficiently stringent system for checking its account holders, which was exactly the loophole that could be used to launder dirty money first. Up until relatively recently, some banks were rather calm about the requirement of mandatory notification of all "suspicious" transactions. But after it became clear that the 1.3 billion pounds sterling stolen from Nigeria by the former dictator General Sani Abacha (Sani Abacha), were conducted through the City of London, the situation began to change. Then came the attack on the World Trade Center, which forced the British government to freeze funds to the amount of about 6.5 million pounds, which could be associated with terrorist organizations.

According to attorney Steven Philippsohn, a senior partner at Philippsohn Crawfords and Berwald and a fraud expert, Western governments have entered a very difficult war, as today's virtual banking operations are particularly favorable for money laundering. Philippson points out that even at the present time, a rather early stage of e-commerce development, the amount of money laundering through virtual systems is already estimated at $50 billion a year.

"The most important advantage of the Internet is full anonymity plus the speed of transactions," says Philippson. "Now any person can log into the system, open an account and immediately make 4,000 transactions for £ 4,000, because it is exactly in excess of that amount in the UK that the bank is required to send a notification to the Financial Services Commission."

The development of virtual banking business has put money laundering on a new level, however this activity has been in its heyday for several years. Usually criminals "legitimize" money received from robbery and from the sale of drugs, simply by buying or creating a company or real estate.That's how the gangster from Glasgow, Tam McGraw (nicknamed Licensee), created his empire: investing first in "Caravel Pub" and then in a taxi fleet called "Mac's Cabs". "It happens that some brewery announces a loan - in which case the initial payment is made in the form of "legal" cash. The whole point is to cover dirty money among legal means - "on the paper, a company can be owned by some front man who does not have a dossier in the police and who takes a hit if everything suddenly comes out. "However, an increasing number of gangsters prefer to diversify their interests. "Now in the money-laundering industry the most popular is tanning salons, there is a huge number of opportunities for counterfeiting," says one of the former members of the Scottish Detachment. “Suppose the client has to pay £ 10 pounds for the 15-minute session. If at the same time you are 10 units, solariums from 7 am to midnight, you may well say that the daily revenue amounted to? 6,000 when in fact, it is only £ 2,000. You can wash a lot of money here very quickly.”

Although in 1993 English banks and other financial institutions had to check the identity of the client opening a new account and report all "suspicious" transactions, however these rules are not always strictly followed.The received fear of terrorism led to the expansion of the powers of the Financial Services Commission and the emergence of the Law on Income from Crime, which is intended to facilitate the confiscation of the funds of drug traffickers and other criminals. From this moment, accountants who have not reported their suspicions of possible money laundering may be sentenced imprisonment for up to five years.Under the new rules of the British Financial Services Commission, banks should establish a new position - an official responsible for reporting on possible money laundering. In addition, banks are notified of the mandatory tightening of the checks on the identity of customers who opened accounts before 1994. With 114 million saving accounts in the UK, this will be quite difficult.

As a result of the fight against money laundering and terrorism, the number of reports of "suspicious" transactions doubled last year, increasing from 31,000 in 2001 to 60,000 in 2002.For instance, white-collar fraudsters - who illegally obtained funds from illegal transactions or from tax evasion - were likely to resort to creating holding or shell companies (that was, companies created to manage securities by their true owners) that were optimally suited to laundering of dirty money. In this they were helped by the uncontrolled distribution of agencies to create companies that supplied directors and secretaries for newly-established legal entities. They would help you to open accounts in offshore areas, for example, in Jersey or the Cayman Islands.

Moreover Barakat, a conglomerate of Dubai-based companies engaged in mobile communications and financial activities, was named by former US Treasury Secretary Paul O'Neill as the "disguised headquarters of terrorism." It was believed that its subsidiaries, scattered across 40 countries, not only transferred funds for al-Qaeda, but also used their millionth profits to finance the activities of terrorist organizations. Only at some point, did a number of some vigilant bankers notice how many electronic transfers to her accounts were made in amounts slightly below $ 10,000 dollars - that were up to that limit, after which the bank was obliged "to report where it should be." However, all these funds were frozen.

NCIS was also investigating a system of semi-legal bank transfers called "hawala", which was established in the Middle East and was used by emigrants to transfer money to their home countries - and vice versa. Due to the absolute lack of control of the system and the lack of documentary evidence of these transfers, the "hawala" system was an ideal for terrorists to move their funds from country to country without any suspicion.

Below I have mentioned how gangsters, terrorists and white collars laundry money.

In 90's Gangsters have to hide money which is obtained by robbery, theft or, most likely, by the drug trade. They create a company, with a large number of customers, for example, a pub, a tanning salon or a taxi company, headed by a front man or created by absolutely legally received funds.How does it work? Dirty money is hidden among absolutely legitimate ones. It is very simple to do in business with a large and unstable number of customers who spend relatively small amounts of money. "Creative" accounting allows gangsters to drive through the company more money than the company actually receives, legitimizing, thus, all the dirty money.

Scabs in White Collars are forced to hide money which is received from tax evasion, or income from doubtful transactions. What are they doing? They are buying 5,000 mobile phones or other similar products and creating a holding company, preferably in some not very cooperative jurisdiction with the tax authorities of another country, the checks in which are purely formal. Agencies for the creation of companies and websites greatly simplify this process. Then in the same jurisdiction an offshore account is opened. How does it work? Once you have an account, you begin to transfer your funds to the other banks through a system of "correspondent" relationships. As soon as money begins to travel to the accounts of well-known banks, it is practically impossible to distinguish them from perfectly legal ones.

Terrorists - What do they have to hide? Large-scale terrorist operations require a lot of money (the attack on the WTC cost about $ 1,000,000 pounds). These are too large sums to transfer them without the risk of raising suspicions, so the operations should be conducted by quite respectable international companies. What are they doing? They choose an international company that supports their aspirations, or create a false charitable organization. The company pumped funds back and forth on behalf of the terrorist organization, without causing any suspicion. Sometimes they even share with terrorists the profits earned. Charitable societies are a very convenient screen for illicit obtaining funds.