Money Laundering

Posted by Allison on 5 April 2009, 10:51

Money laundering is a big business and one that globally is purported to involve around $500 billion every single year. That really is quite a sum of money and one that affects everyone no matter how law abiding you are.

So what is money-laundering and how did it come to be such a big problem and why wasn't it stopped before? Indeed, is money laundering such a problem now that we will never be able to get rid of it?

History of money laundering

Because money laundering is basically an illegal activity it is very hard to get some real information about how it started. Many experts believe that the phrase money laundering actually came about because in the United States, in the early part of the 20th century, Mafia gangs owned a considerable number of Laundromats.

These laundries had been acquired as a front. They wanted to hide the money that they were earning from amongst other things, extortion, hard liquor and gambling. If they had no way of hiding this money, then soon it would be obvious that they were involved in criminal activities.

Laundromats had been specifically chosen because people had to pay in cash and as such they could hide money with relative ease.

However, some people believe that this is actually just an urban tale and in fact money laundering as a term, is used because it is actually a very good way of describing how dirty money from criminal activities is made clean again, in other words it has been laundered.

So, the jury is out as to whether it did have its origins in the Mafia laundry businesses or whether it is just a descriptive term that describes the actual process involved.

But in 1931 the famous Mafia gangster, Al Capone was sent to jail for tax evasion and not for the criminal activities that actually netted him the money in the first place. Indeed, there seems to have been little interest in the criminal activities, the emphasis of the trial was on the tax evasion.

Due to media coverage, money laundering was actually given some publicity and to many seemed like an excellent way of hiding money that otherwise would signal that you had been up to no good.

Thus it is logical to assume that although money laundering has been around for some time, it really started to become an issue after the trial of Al Capone. After the trial, one of the accountants who dealt with the Mafia a lot, decided that he did not want to be charged with a similar indictment and as such he channelled all his energies into a acquiring Swiss bank accounts where he could hide his money without it being seen.

He was also a clever man and he made sure all that the Swiss bank accounts that he had created would allow him to loan money back to him from the Swiss Bank. He could then declare these loans and very often he got a tax reduction as a result, which is a fairly astute way of maximising your return. This is also a fundamental aspect of money laundering and is widely used, whenever the money launderers can sneak it through banking procedures.

How is money laundering done?

Money laundering happens in different ways. However there are usually three stages that need to take place, in order to successfully launder money.

The first stage is often referred to as placement. This is where a criminal will take money from illicit activities and try to place it somehow in a legitimate business.

Often money may be smuggled out of the country or even converted into other types of money, such as traveler's cheques and so on.

This sounds particularly straightforward, you have say $100,000 that you have acquired from illicit activities, so you buy a business and slowly (or quickly if you are really desperate) you just add that money into your business account and describe it as miscellaneous sales or something like that. How easy is that? Well it would be too easy and accountants and more importantly perhaps, the tax people would soon pick up on this and would immediately start asking questions about where the money had come from, so you probably wouldn't be able to carry this one off.

To successfully 'money launder' there needs to be a process of layering that takes place. This layering means that if you had this $100,000 then it is going to look pretty obvious, but if you break it up into 100 x $1,000, or even for 1,000 x $100 then it is much easier to disguise it. It is also much easier to get away with not having documentation for small sums as opposed to one big sum.

However, this is an extremely basic form of money laundering. The reality is that in money laundering as it is done by the most sophisticated of criminals, is a highly complex operation. Money is actually moved offshore and this is done through electronic funds transfer, which is basically a way of transferring money as a wire transfer.

Globally there are around 500,000 electronic funds transfers that happen every day and these actually represent in the region of $1 trillion. Due to the enormous number of electronic wire transfers and the money involved it just is not possible to know how much of this money is actually legitimate and how much is being laundered. This provides money launderers with an excellent opportunity to move money around without having to answer too many questions.

They also enter into a very complex set of deals relating to buying stock as well as other commodities and it is very difficult to trace the money from all of these transactions and find out whether or not it is legitimate money or if it is money that has been sent for laundering.

The money launderers always rely on the fact that huge amounts of money every day are being transported around the world and the enormity of the transactions involved, means that there is a good chance that they will not be caught. Or so they hope!

The final part of money laundering involves integrating the money back into the economy and making it legitimate. Once the money has reached this stage it is immensely difficult to ascertain whether or not it is clean.

By now, the money launderer will have a very sophisticated and complex set of accounts to demonstrate to anyone who is interested that all his money is legitimate. Due to the complexity of the financial accounting systems used, any investigation to ascertain the origins of money will take a considerable amount of time.

This means that anyone who wants to carry out an investigation on a potential money launderer will want to be pretty sure that the investigation will be successful and that it will show that money has been laundered. Otherwise, a lengthy and protracted investigation could take place and yet at the end, which could be two to three years in the future, it may not be possible to show that money has actually been laundered.

One very popular way of integrating money back into the economy is to establish an anonymous company in any country where you are guaranteed anonymity and you have the right to secrecy. Loans can then be granted from this company back to the money-launderer and they can even claim tax relief on this.

When looked at like this, it seems as if all the cards are stacked in favour of the money launderers and law enforcement has a really difficult job in trying to monitor the laundering of money due to the enormity of the problem.

The effects of money-laundering

Many people just aren't too bothered about money laundering and they really do not see it as a big problem. Indeed, many people think that it is a problem only to financial institutions, but they are not bothered by it.

Some people seem to view it as a crime that doesn't actually have a victim, after all you are only taking money and processing it and if it does affect a few financial institutions, then big deal where is the problem?

Well money laundering is actually a problem for everyone. Because the money involved in money laundering has been gained from criminal activity, it is likely that the money has come from stealing or from prostitution rings, or even international drugs deals.

The people who are involved in the most serious money-laundering are actually the most serious and hardened of criminals and they have enlisted the help of the greatest and most crooked accountants they can find in order to get their dirty money clean.

If money-laundering could be prevented then obviously it is much more difficult for drugs dealers to be able to hide their profits successfully and if they cannot hide their profits then it is much easier to discover who they are.

Governments throughout the world have therefore passed legislation which makes financial institutions much more accountable and they ought to be sure that any money which is invested in their financial products or in their bank accounts and so on is actually illegitimate money.

This makes financial institutions keen to ensure that they are responsible and that they take all sensible precautions to ensure that money laundering is stopped and that people stop viewing money laundering as being something that doesn't really affect people.

Internationally banks and financial institutions are working together to try and eradicate money laundering throughout the world. But due to the financial complexities involved, this is extremely difficult.

Money-laundering and the modern world

Money laundering was much more difficult before the advent of the internet, electronic banking and electronic wire transfers. Since the internet has revolutionised how we communicate and how we interact, in some ways it is much easier for money launderers to be able to move money around the globe and ensure that it is virtually untraceable.

Although the terrorist threat has made financial institutions set up systems that may show up any irregularities in accounts, there is a long way to go before money-laundering can be completely eradicated.

In some countries, there is more willingness to resolve this issue than in others and this has resulted in some countries being viewed as more lax than others. For example it would be quite reasonable to think that all countries should have a system whereby people who own businesses are identifiable and have their details published. Yet in many countries you can set up a company and you will have an absolute right to privacy and secrecy, so no one can identify who is behind the company. So long as this process is permitted, money laundering is likely to continue for some time.

So some governments even seem to turn a blind eye to money laundering because in some ways it helps their economy. After all, the money can be integrated into legitimate businesses within their economy and so can give the economy a boost, so they may pay lip service to the concept of eradicating money laundering, but in fact they really do not want to address it.

Yet the fact remains that money laundering is actually allowing criminals to take the profits that they have earned from drugs, prostitution, illicit firearms exports and so on and invest them in legitimate companies, which then gives them even more profit.

Who isn't bothered about money laundering?

Many countries are simply not too bothered about money laundering and they simply view it as something that happens.

One of the biggest countries in the world namely Russia has long since been identified as being a country that allows money laundering to take place and does very little to challenge the money launderers and also it refuses to co-operate with the other countries who may be investigating money laundering.

This would seem to be a hangover from the days of communism, where there was a very vibrant black market with regard to US dollars and British sterling. The Russian state also wants to distance itself from the days of communism where everyone's activities were very closely monitored. It is almost as if it is trying to shrug off the legacy of communism.

However, because Russia does not challenge money launderers on a very rigorous level, they simply do what they want and money laundering is a real problem. But this also gives Russian criminals the opportunity to ensure that their profits can be retained and they can then invest their money in legitimate 'cover' businesses. At this point there are obvious benefits to the Russian economy. Indeed, it is thought that if Russia actually stopped money laundering, there would be a quite significant adverse effect on her economy.

Another country that has a reputation for being a desirable place to put your money in if you are a money launderer is the Cayman Islands. One of the leading financial centres in the world is situated in the Cayman Islands and these are known as offshore areas, where any bank account set up is an offshore bank account.

Due to the offshore nature of the bank accounts they have been used for nefarious purposes for some time (in other words, for money laundering). The Cayman Islands also have a reputation for not co- operating with other countries when an investigation is being carried out.

There is a strange kind of cycle associated with countries who are named as not being co-operative during investigations of money-laundering. Once they are publicly named then they become of interest to anyone who is keen to do some money laundering and so they actually attract money launderers.

However, that being said the majority of businesses and bank accounts in both Russia and the Cayman Islands are extremely legitimate and have not been funded with laundered money. The problem is that some people have created a bad name for these countries and as such the reputation sticks.

Will money-laundering ever stop?

It is unlikely that money laundering will ever be brought to a complete stop. Too many people have got away with it for so long that it really is difficult to eradicate it now.

It happens all over the world and to various degrees, from multi-million dollar transactions, right down two small businesses secreting a few dollars here and there in different accounts.

Until every country in the world decides that money laundering is a bad thing and that it really should be stopped, money laundering will continue. Globalisation combined with technological advances have also led to an increase in money laundering, because it is so easy to send money all over the world and whereas 50 years ago it would have been a big thing to send money halfway across the world, now it is seen as completely routine and no one even raises an eyebrow.

So it does look as if money laundering will be with us for some time to come and that as a whole, we will have to put up with the situation since it is so incredibly difficult to resolve it.