The background of money laundering seems to be pretty rudimentary and easy to get caught. With current regulations and laws, many people do have problems working with the techniques described in “old methods”. This is why the futures market is such a lucrative and appealing opportunity. A futures contract is a bet on the price movement of some commodity, asset, or index. The person that is going “long” believes that the prices will rise, and the person who is going “short” believes that the prices of the arbitrary object will decrease. For example, at the New York Mercantile Exchange (NYMEX), the crude oil futures contract is based on the price of West Texas Intermediate Crude. Each futures contract represents 1000 barrels of oil. So if the price of crude goes from $22.50 per barrel to $23.00, the long side of the futures contract will gain $(23.00- 22.50) x1000 = $500. The short side will lose $500.
As another example, each live cattle futures contract at the Chicago Mercantile Exchange (CME) represents 40,000 lb. of cattle. So if the price falls from 64 cents to 63 cents, the short side of a single futures contract receives $(.64-.63)x40,000 = $400, while the long side loses the same amount. Future contracts are huge part of business currently, and the key way to use them is to set up the dirty money correctly. You want it so that the dirty money is on the losing side.
Michael Sindona defined money laundering by the statement that “laundering money is to switch the black money or dirty money . . . to clean money.” The money that is earned from the futures contracts comes back as clean money.
Next, we have to arrange so we have the correlated price direction. We want the prices to rise, so we set our monetary funds to be on the short side. For example, let’s say that we expect the price of the national bond contract to fall, so you make it so that the dirty money funds are portioned into a long futures account. Then, you next open a clean money account and in the short futures market. The money you invested dirty will be sucked away if you are betting correctly, and you are making money with the clean portion, generating more clean cash and having a paper trail that is solid. You provide the image that you are genuine investor by showing both losses and gains, which will look like clean investment to any regulation committee.
Assuming that everything goes wrong, and the dirty money starts to accumulate money and the clean money is getting sucked away. This is a situation that we would like to avoid obviously, even though on the books we still maintain a healthy stasis. This is where we begin to seek help from some brokerage firm (assume Merlin Lynch) in order to try to correct a faltering situation.
Assume that all of our “dirty” money is shifted into an account that we will call ACCOUNT_1 (SQL Documentation). We want to gain money, and store it in a separate account that we make a “clean” account, named ACCOUNT_2. There is going to be a shifting of price during practically all days of trading, so Merlin Lynch makes matched trades at two materially different prices during the day. Let’s say Merlin has customer money that needs laundering, and decides to do it using the copper futures contract at the COMEX. At a random time in the morning, Merlin Lynch enters the market and buys (goes long) 100 contracts, say at a price of 94.20 cents per lb., while simultaneously selling (going short) 100 contracts, say at a price of 94.10 cents per lb. The price of 94.10 represents the market’s bid price, the price at which the market will purchase the futures contracts which Merlin is selling. The price of 94.20 represents the market’s asked price, the price at which the market will sell to Merlin the futures contracts Merlin is buying.
The next part needs increasing empirical input for it to make sense, so we will use an example by J. Orlin Grabbe to better explain it. Later, at a random time shortly before the close of trading, Merlin Lynch sells (goes short) the 100 contracts, say at a price of 92.30 cents per lb., and simultaneously purchases (goes long) 100 contracts at 92.40 cents per lb. Now Merlin Lynch is ready to launder some money. Since the price has fallen, Merlin assigns the purchase of 100 contracts at 94.20 to ACCOUNT_1, along with the sale of 100 contracts at 92.30. Since each COMEX futures contract represents 25,000 lb. of copper, the net loss to ACCOUNT_1 is $(.9420-.9230) x25, 000×100 = $47,500.
Meanwhile, Merlin assigns the sale of 100 contracts at 94.10 to ACCOUNT_2, along with the purchase of 100 contracts at 92.40. The net gain to ACCOUNT_2 is $(.9410-.9240) x25, 000×100 = $42,500. The $5,000 difference is the amount paid to the market for the laundering service. In addition, Merlin Lynch gets a brokerage fee of $13x100x2 = $2600, for a net cost of $7,600 to launder $47,500. This amounts to a laundering cost percentage of 16 percent. At these prices, the process is not terribly efficient, but workable in some cases. The natural evolution of the market will be to create more efficient, less costly laundering structures. This can be done in the current example by squeezing commission costs and bid-asked spreads.
Now, ACCOUNT_1 should be held by a party apparently unaffiliated with the holder of ACCOUNT_2. For example, ACCOUNT_1 account should be held by Buenz Holdings, while ACCOUNT_2 will be held by Adam Investments. The clean cash accumulates to the benefit of Adam Investments, who returns the favor by paying premium (above average) prices to Buenz Holdings for supplies of copper. Adam Investments, naturally, will want to gain something for its role in assisting the laundry process, so the premium price they pay for copper should not eat up the entire amount of its futures profit. This will increase Buenz Holdings cost of laundering funds.