Category Archives: Anti-Cyberlaundering

An Abridged History Of Money Laundering

Although the exact, specific origins of money laundering are not known, it’s roots can be traced to before the advent and introduction of the figure of Christ. In arbitrary ancient countries, vivid pictures of groups of people in primitive cultures have been portrayed who would hide their wealth from their early landlords or renting institutions by physical means, or by possibly investing in other portions of their respective institution. (even beyond their home countries borders in someone else’s claim and name). Either way, the purpose of the action was to conceal the origins and amount of money that they held from authoritative figures. These techniques are rather primitive, however this action set the stage for later, more inventive ways of achieving the same goal within the realms of today’s time congruent with advanced techniques and methods.

Hiding the origins of financial gains is as aged as the process of accumulating the monies, it is a natural physcological reaction of humans when they accumulate revenue to want to keep it, people working for financial gain rarely wish to let it leave their hands (as the current case of tax evasion in the United States and other developed countries) and into governmental, or other “owing” bodies to which some sort of debt or “honor” is owed. This process however has drastically shifted classes however. Before, mainly poorer, hand labor bound people were involved as a means of survival. However, in current times, the higher income brackets are largely involved in this types of dealings due to the amount of money that is needed in order to justify the act.

Aggregately defined, populations looking for methods to conceal ownership of specific, arbitrary assets were, in essence birthing the technique of laundering. This led to future developments as financial developmental practices progressed, the breeding of offshore industry and investment, and the origins of tax evasion came to fruition.

People saw that it would be profitable to invest in varying assets that would hold constant value regardless of time or industry state, such as diamonds, gold, or any other material good that was under constant desire by those parties that would continually pay for it. Gold became the ideal asset, because it could be melted down and then the figure of the arbitrary gold object could be manipulated to be something completely different than its original state. In this way, the origins of the gold could not be traced and people could camouflage their assets origins. Clearly, this method is relivaly the most “pure” of all the techniques, as the valuable asset was defined by shape and structure, and the manipulation of these two aspects would offer complete cloaking, quite effective in terms of the end goal.

Money Laundering Comes Into the Public Spotlight

Money laundering didn’t come into the popular public spotlight until the twentieth century; when such things as extortion, prostitution, gambling, and bootleg liquor where prevalent due to sanctions on them. These are considered to be financial crimes because the money for these crimes is given directly to the criminal who is committing the misdeed; the only problem for the unlawful was what to do with such liquid assets without drawing attention. Clearly one of the simplest ways was to invest into justifiable businesses. The most famous of all figures involved with this type of activity was the infamous Al Capone of Chicago, IL, whose primary intention was tax evasion, and really brought public intention to this type of activity. After having been prosecuted in 1931, the person’s associated with Al Capone, most importantly, the accountant for the mob Meyer Lansky, grew concerned over his financial assets, and began to explore options for concealment and transformation. Ergo, the most popular banking secrecy ring was generated, the “Swiss Circle” which would later birth advanced techniques such as correspondent banking tactics and “Dutch Corporations”. Using the prevalent intra-loan technique, Meyer Lansky would filter the funds into the Swiss banking institution, which would provide a blanket of secrecy laws that would aid in concealment of the orgins of the funds. The Swiss banks (at this particular period I time the bank laws were slightly different than at the time of the writing of this book, due to increasing pressure from financial authrories such as the FATF) were by all means legitimate banks, and could therefore conduct business within this realm of business practice, meaning they could offer loans to their clients. This would allow Lansky to retrieve his funds back from the Swiss Banks, and at the same time, he could also claim a significant tax benefit.

There is also a clear case in which the IRS began intensive investigation in the 1920’s into the opium trade in Hawaii which I believe is the first intensive time that man hours were put towards bringing this criminal activity to justice. In general, the persons involved with the scheme were filtering several millions dollars without having to pay taxes, which in turn lead to an quasi-AML investigation. This lead to several US laws being implemented, such as the very important Bank Secrecy Act which will be discussed in later chapters in great detail.

Although these were the public origins of laundering, it didn’t really become a popular “table” subject until the 1980’s when the drug cartels became increasingly popular and powerful through the United States. It had however been previously noted in the newspaper during the Watergate scandal in 1973, but due to the extemirty of other factors related to the case, did not gain much public attention besides the general coining of the phrase. Following, it gained legal notice when it entered into judicial context in 1982, during the case of US v. $4,255,625.39 (551 F. Supp. 314 (1982 US Dist. LEXIS 15918)). Following, the next important leap took place when laundering in the US was criminalized with the advent of the Money Laundering Control Act of 1986 (18 USC §§ 1001, 1956, 1957), generated in reaction to nthe milestone case of US v. Anzalone (766 F.2d 676 (1st Cir. 1985)), which basically paved the road for prosecuting parties involved in the movement of financial assets derived from illicit activities. Most notably, the Colombian and Nicaraguan cartels began to become progressively more powerful, and birthing laundering schemes such as the Black Market Peso Exchange (BMPE). In general, the BMPE is a system in which United States Dollars are converted in Colombian pesos, funds gained from illicit drug proceeds. More often than not, the pesos are then used by third party importers who purchase goods from the United States, which are following brought back into Colombia in order to avoid costly custom duties and other types of taxes.

The theories of the origin of the term “laundering” is debatable, however there are two main theories regarding its origin. Criminals wishing to cloak their illicit financial gains would invest into small businesses in a variety of industries, such as laundries. This would allow them to filter them in small amounts of financial instruments into a legitimate business, and this method requires little management and financial expertise. Being that drug trade usually brings in monies increments in small amounts, usually in notes less than 100 USD, this was a logical, effective solution because the nature of laundries is a cash business. Other theories as to where the derivation of the idiom came from are that the businesses were meant to take “dirty” wealth and “clean” it so that the origins of it where legitimate and within legal specifications. This terminology clearly also makes sense, bringing in financial instruments that are brought in from illegal activities and making them legal, much like the process of taking dirty laundry and making it clean. Although the exact origins of the terminology remains somewhat of a mystery, the meaning of it remains the same, and will for as long as it holds peoples interest and it is an actively used to conceal illicit funds.

The Natural Progression of Laundering

Obviously, there has been an evolution in the types of businesses in which people use to launder their financial holdings. It has advanced from pizzerias, retail shops, and other small businesses to accounting firms, law practices, and to the extent of governments. Logically, it is the natural evolution of it. One must examine this situation from a critical eye, laundering itself has grown, and therefore the components that structure the laundering methodology as well have evolved along with it. With the advent of a digital age, this evolution as well has grown exponentially in relation to technique, no longer are laundering person’s bound by physical borders. Having the ability to control the flow of money from a terminal is the largest leap that laundering has ever seen, birthing the term “cyberlaundering”, the birth of a new age.

Cyberlaundering has taken on many forms, many methods, and has different implications of each of these methods. The end goal is still the same as it always has been with general money laundering, and that is concealing the origins of illicitly gained monies. With the advent of digital cash, it has just gotten more lucrative for criminals because the controls are more robust, the money is still handed off, however they can actually begin to see the flow, and control the flow. Clearly, it is much easier as well to actually implement a variety of techniques, and because the whole concept of technology as a whole is a dynamic, this can progress into future techniques when one becomes obsolete due to law enforcement or policy implementation. During the course of this reading, you will begin to notice the difference between legacy techniques, and newer digital techniques which go beyond the benefit of concealing the illicitly gained funds from authority, but allow the criminal a larger involvement with the entire laundering process.

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The Old Methods

There are 6 basic methods and processing cogs of money laundering

Local company establishment

Offshore company establishment

Export-import invoices

Smurfing

Bartering

Bank falsification

Local company establishment is the age old technique of simply starting some type of business which is cash based. I can simply add cash to the drawer of my business, and as long as it is nothing that is extravagant or copious, there will not be any type of investigation or trepidation as to the origin of the money.

This method is most common throughout drug syndicates. Multiple, smaller transactions in the drug trade will result in the accumulation of multiple small bills, which can be an issue when trying to push financial assets into a singular account.

Banks are restricted also with respect to multiple privacy laws. All banks that are in this nation are limited by The Banking Secrecy Act. This allows your bank to exempt you from filling out currency transaction reports (CTRs) if your deposits or withdrawals of currency fall into any of the following categories (see 31 C.F.R. 103.22(b)(2)(1992)):

1) They are made from an existing bank account, and you are an established U.S. depositor who operates a “retail type of business”. This means that you sell consumer goods for which payments are substantially in the form of currency, just as long as you are not an automobile, aircraft, or boat dealer.

2) They are made from an existing bank account, and you are an established U.S. depositor who operates a sports arena, race track, amusement park, restaurant, hotel, check cashing service licensed by state or local governments, vending machine company, theater, regularly scheduled passenger carrier, or public utility.

3) You are a local, state or United States governmental agency or instrumentality.

4) They are made from an existing bank account, and you are an established U.S. depositor who regularly withdraws more than $10,000 to pay your employees in currency.

Offshore company establishment is one of the oldest methods of money laundering, it involved investing money in companies in specific countries where the secrecy relating to that company is guaranteed. In another legal transaction following, they can simply take out loans from that company, draining out the dirty money. This is also a very methods because of the nature of the loans. There can be interest charged on the loan (with the loan being your money) allowing them to gain tax relief on the loan repayments. An example of a company that used the offshore company establishment method (not specifically a loan oriented company) was the Bronfman family of Canada.

Exporting alcohol to the U.S. was not illegal in Canada; it was only illegal to import it from the U.S. side. Naturally those writing checks to pay for imported Canadian booze didn’t like to be so obvious as to make them out to Bronfman. So the Bronfmans opened up an account at the Bank of Montreal under the fictitious name “J. Norton”. Since no one knew anything at all about J. Norton, money could be wired to this account from the U.S. Or U.S. cash or checks could be used to purchase a bank draft made out to “J. Norton” at any branch of the Bank of Montreal. These drafts could then be deposited into the bank account of any Bronfman-controlled company. The company treasurer would see the name “J. Norton” and credit the payments to the company’s U.S. account.

Export-import invoices are another method used by money launderers. By overvaluing goods, the launderer can move financial assets from one company in a certain country to another. Then, the financial institutions that the money is being transferred to have a paper trail to follow which is completely legal. Cash can also be deposited into a legitimate bank.

Smurfing involves the use of multiple cash deposits. Basically, for a large sum of money, the bank when receiving the deposit has to record it. If the size of the amount being deposited is under the referencing requirement, then there is no reason for the bank to be concerned about where the origin of the money is from. Also, there are multiple laws which protect consumers against banks investigating consumers income (as stated in the portion of this essay above). With the use of multiple accounts spread across an arbitrary distance, each under the cash requirement, there is a good chance that financial assets can be hidden.

Bartering stolen goods is another method. Taking a highly desired, luxury item such as an automobile or rare objects and exchange them for illegal substances. This can be within national borders, or it can be a domestically desired transaction.

The last method, bank falsification, requires either a huge amount of primary investment, or connections to someone that has taken the step to institute the aspects of this method. Basically, there needs to be bank owned by launderers, which is not that uncommon. Banks that are off the shelf are often purchased in varying tax havens. Money is primarily deposited into the corrupted bank, and then can anytime be transferred over to a legitimate bank. The paper trail at this point is not even an issue, as the bank create any paper trail that they wanted because they are in complete control of the bank.

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General Money Laundering Information

Money Laundering is habitually an over-looked part of our financial system; generally it is not something that is often conferred about on the financial news network. However that some might not consider laundering a large scale economic and financial problem, a brief look at recent statistics reveals evidence of a situation that is quite the contrary. Even though laundering occurs outside of the normal range of economic statistics, there are still rough estimates that have been taken. In U.S. dollars, 590 billion and 1.5 trillion is laundered per year, that’s two to five percent of the world’s gross domestic product. The lower figure is roughly equivalent to the value of the total output of an economy the size of Spain. There are two main types of laundering, one old and physical, the other new and generally unexplored, entertaining the electronic, and providing lucrative opportunities for criminal activities to disguise illegally gained funds. In order to understand any of the methods that are used, some terms and general processes need to be discussed.

There are three main steps to launder money correctly: Placement, Layering, and Integration. These are the steps that lay the basis; they are the groundwork from which more advanced methods are built from.

Placement is the primary step in the laundering cycle, it is where the monies are put into the financial system, placed into the retail economy, or smuggled out of the country. Generally, in this stage we are looking to shift the money out of it’s origin of location, in the best case scenario changing it into a varying asset form such as checks or orders.

Layering is the second step in the process. Generally, it is the first attempt to conceal the origins of the large quantity of funds. One will create complex layers of financial transactions, making it possible to remain anonymous. Audit trails get more and more complex, and it becomes more and more difficult to trace the source of funds.

Integration is the last part of the laundering process. It is where it is wished to make the money a legal asset, where the money is “integrated” into the legitimate economy, weaving it with officially permitted assets. In aggregate, we are trying to make it so that the money appears to have been earned. If the money has made it this far, it is very difficult to assert whether the money has been gained by legal or illegal means.

From this foundation, it is possible to build up more complex methods. Obviously, the above methods don’t provide any type of concealment, they are just the wiring that is in place that holds the procedure together, they don’t describe any exact methods. The following five are common, often used terms and processing cogs of laundering.

5 Basic Terms And Processing Cogs of Laundering

Smurfing

Smurfing is taking multiple small units of cash deposits out of a larger quantity. All of these deposits are a certain amount under the miniumum cash requirement that would otherwise require that the deposit be recorded and reported to a banking authority.Misinvoicing

Misinvoicing of exports and falsification of import letters of credit and customs declarations can conceal cross-border transfers.Bartering

Trading of stolen property (e.g., antiques or automobiles), across national borders or domestically, for illegal substances.Parallel Credit Transactions

Parallel Credit Transactions can be used to avoid the formal economy, except for the final use made of the net proceeds of illegal activity to purchase legally marketed goods and/or services.

Interbank Wire Transfers

Interbank Wire Transfers may not be subject to reporting on money laundering. Bribery of bank officials can thus make it easier to conceal large illegal transfers between accounts.

Derivatives

Derivatives that replicate insider trading opportunities (i.e. a synthetic version of a company stock subject to merger or takeover) can be used to avoid detection of an unusual change in a listed stock price.

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