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Banks, Categories, and Risk

As seen in previous research material, there are a variety of methods and tactics that a skilled launderer can use in order to transform illicit funds into a legitimate financial structure. However, these methods may shift and alter depending on a great variety of factors; there is one constant variable that must remain in the equation for any successful laundering technique, the bank. A person can not transform illicit funds without this pivotal item, it is necessary for launderer to introduce illicit funds; otherwise laundering would not prove to be a difficult technique in any way shape or form.

There are three general categories that banks that are used for the filtration of funds generally fall in. The most common of all these banks has been referred to in several past articles, and the process to set this operation into motion requires nothing but a large amount of monies. Shell banks are extremely common; several are set up for the sole purpose for transformation of funds, and little else. Shell banks derive their name from the fact that they are little more than the name implies, having no physical presence, existing solely as a name. The beneficial implications of this for a launderer are clear, no physical address, no office, no real staff, just a name to use in order to make transfers look legitimate. These banks can operate in extreme secrecy, and prove to be unmanageable in relation to strict AML regulation and enforcement.

There are two things that most often remain constant with shell banks, no physical presence, and no real staff besides the direct contact of the bank. I was involved with one shell bank generation that was run out of a hotel room for example, by a staff of one person. Having no physical presence offers these banks the clear benefit of being near impossible to monitor by officials concerned with AML regulation, rather, it is the most successful method of intra-banking that I have ever seen, and the age-old process is still as successful as it was 20 years ago. More often that not, these banks are actually completely under the radar of officials, they are not even aware of their presence, and if they are, it is too much of a task in order to track down the person(s) involved with the management of the organization.

Many might assume that this type of operation is quite difficult and time consuming to set up. Nothing could be farther from the truth. What a launderer has to take into consideration is that same thing you have to take into consideration with any business investment, location. You have to pick the right country with the right laws, and you have to be able if need be know that the officials of that country can be financially convinced if need be to skip passing judgment on the flow of illicit funds. There are several countries that are prime for this activity; however I believe the most lucrative of the groups are

1) Guatemala – Guatemala has extremely loose AML laws, and what laws do exist are easily surpassed.

2) Uruguay – This has been a shell bank house for several years now.

3) Bahamas – It used to be the haven for all AML activity piped into and out of the US, however regulation are becoming tighter around these area now due to the increase of arrests of US citizens for ML due to adoption of the patriot act.

The second category that we should examine for establishing a filtration point is banks in countries that just don’t cooperate or enforce AML regulations. Although this may seem simplistic, it is the starting point for any laundering operation beyond US borders. The benefits of these are clear, and don’t warrant much argument, but I will briefly go over this for the sake of consistency.

In order to understand this category we must look at who enforces international money laundering laws. Although this may seem like a lost cause (and based on current figures it really is, the flow of laundered funds is still an incredible amount. The group that attempts to enforce AML regulation is known as FATF, or the Financial Action Task Force on Money Laundering. Their contribution to stopping money laundering is thin at best, there most effective legislation was developing a set of 40 antiquated “recommendations” that were expected to become the standard for AML regulations. The largest fallacy of the group is there commitment to encourage cross-country regulation, meaning regulation checks by sister countries. What the FATF doesn’t take into account is several of these countries heavily depend on laundered fund in order to develop and finance growth bearing activities (Please reference my article on emerging markets and it’s relation to money laundering).

The FATF also released a list in 2000 of countries that they felt were the most prone to laundering activities. They have released another list recently, however the lists are inadequate are only included in my research for consistency sake. I have included the list below

1) Bahamas 2) Cayman Islands 3) Cook Islands 4) Dominica 5) Israel 6) Lebanon 7) Liechtenstein (which I think is the most lucrative transformation country) 8) Marshall Islands 9) Nauru 10) Niue
11) Panama 12) Philippines 13) Russia 14) St. Kitts 15) Nevis 16) St. Vincent 17) Grenadines

There is a type of methodology that that FATF uses in order to define this countries, which is faulty at best, based on legacy beliefs, and not scalable for future methods. For example, one of their decision points is “inadequate rules for licensing and creation of financial institutions”. This is something that should be taken as common sense, and not written financial law. Whereas criminal law is applicable by humans nature, financial law demands a certain amount of respect and discipline, and this is where the FATF becomes to general, and creates methodologies that are completely, for the sake of a better word, useless.

The countries above are lucrative stomping grounds for financial fraud activity for several minor reasons; however the most prevailing of them all is the fact that it is possible to create what is perceived as a legitimate financial institution with little or no regulatory limitations. Rather, the licensing for these types of organizational generations is rather simplistic and trivial, and can be hastened with a small donation to those in charge of these committees. The decision for the country lies solely with the choice of the launderer; there are pros and cons to all of those listed above. I believe that some of them are adequate, whereas others I would be hesitant to become involved in. For example, I would be more nervous about beginning a fresh laundering operation in the Philippines that the Bahamas for several reasons. Although it may not appear so, I believe politically the Philippines has tighter financial ties to the US, and if you would like to monitor your investment in anyway shape or form this can be quite a hazardous place for an American citizen. It is truly dependent on the launderer, clearly any place you have current ties to will be a much more lucrative option than setting up shop in a land completely foreign to you.

The third and most publicized of all are offshore banks. These institutions frequent movies and bring thoughts of tax evasion clearing houses, the widely notarized Cayman islands, just to name a few of the commercial perceptions. Offshore banks a great method for monies transformation, mainly because there is no loyalty of the bank to the foreign jurisdiction. This last statement can come across quite cryptic, however it is really simple in idea when the standpoints of offshore banks are described. Offshore banks, in general, are banks that exist outside of US borders as financial institutions; however have licensing which differs from its sister institutions in its respective countries. Meaning, these banks have a license to operate, however the license limits these banks to operate solely outside of their respective jurisdictions, or doing business with the national, respective currency. The reasons of mother country dislolayment should be coming clearer now. Offshore banks are popular because they aren’t dedicated, the operate outside of a Foreign national, inside the territory of international boundaries, not bound by one country. In aggregate, these are not country based banks, but rather, truly international banks. These may seem like a small industry, but it is quite the contrary. These banks hold several trillions dollars in monies and financial instruments, making them one of the largest powerhouses in the world. These banks are perfect money laundering shelters as well, because they don’t operate within national jurisdiction, they are quite difficult to monitor and regulate, often times impossible because they can further be hidden if they are also generally shelled. As well, the country housing this organization is not motivated to monitor these banks, as they are more concerned with those that play an impact within their countries financial structure. Furthermore, as stated in my previous article, most of the countries where these shelters are established are in emerging markets, and therefore welcome the opportunity for this type of activity. It can spur short term growth, and provide economic augmentation for what otherwise would be a stagnant economy. Although offshore banking is mainly used for tax evasion, its usefulness to the average launderer is invaluable. Although it might prove somewhat expensive to setup and maintain, the price of complete secrecy is relativity little when compared to the larger term benefits. It is important to remember that laundering follow the age old phrase, “it’s a means to an end”. One of the largest mistakes of those laundering is they believe that they can translate all money, no penalty, no loss of funds. This common mistake has landed several people in jail who got to greedy, and weren’t willing to make sacrifices that would otherwise had made them quite successful.

These offshore accounts relate to the CML method heavily as well. The nature of the offshore account is to conduct business in another country, in another currency, and to do it as quietly and effectively as possible. If you would like to read more about how this related to CML, please reference my articles on CML, and you can easily derive the relationship.

In conclusion, it is important to understand all of the financial instruments available to the launderer, and which of these assets are the most frequently used in relation to AML. The three arguments above are extremely important to understand, in any money laundering operation, either digital or physical, it is almost certain that one of the preceding mediums will be encountered.


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