How would I go about laundering money?

January 9, 2009

Dear Cecil:

Being the fount of all knowledge, could you tell me the best way to launder money? The information may come in useful one day.

Cecil replies:

I'm confident you're not contemplating anything illegal, Ben. However, it's helpful for us law-abiding folk to understand the workings of the criminal mind. So let's start at the beginning. Suppose you have a couple grocery bags full of ill-gotten cash. What do you do?

You sure as hell don't just spend it — Al Capone learned that the hard way when he was convicted of tax evasion. Modern bad guys understand that when large sums are involved, it's important to make the loot appear to have been legally acquired. Money laundering accomplishes this in three steps: (1) getting the money into the financial system, called "placing," (2) moving it around to hide the illegal taint, or "layering," and (3) commingling it with legitimate funds, known as "integrating."

Casinos used to make it easy to do this. In the 1970s, one organized crime figure went into an Atlantic City casino with nearly $1.2 million in small bills (authorities figured it must have filled a sizable duffel bag), gambled some of it away, then cashed in $800,000 in chips for $100 bills (these would fit comfortably in an attache case), and, some days later, dumped the money into a Swiss bank.

Trying this kind of stunt now would likely attract unwanted attention, as current federal law requires casinos and other operations handling large amounts of cash to report suspicious transactions. Instead, you might try an approach called "smurfing" — you break up your boodle into sums below the reporting threshold and arrange for proxies, or "smurfs," to deposit these into different checking accounts. In one infamous smurfing case a ring of middle-aged women placed over $25 million of Florida drug money into assorted California banks.

Another common approach is to mix up nonkosher funds with the assets of a front company: any above-ground business that handles a lot of cash, such as a check-cashing service, travel agency, grocery store, car wash, or coin laundry. Alternatively, you might use a business with a hard-to-value inventory — precious metals, jewelry, antiques, art, etc. Since law enforcement can't be sure how much money the business is supposed to have, the fake invoices or receipts you use to conceal your swag aren't conspicuous.

As a variation on the phony-invoicing trick, you can arrange to purchase property well below market value and slip the cash difference to the seller. You then resell a few months later at the true value, getting that cash back as a perfectly legal profit — any capital gains tax is just the cost of doing business. The cash you gave the original seller is his problem.

The stock market is another good place to wash money. You invest small amounts of cash in the market, several times a day, through different brokerage firms. Brokers don't routinely talk to each other, so multiple accounts with different firms won't attract suspicion. If you use your front company to buy the stock, there's yet another level of complexity for the investigators to try to unwind.

Once the money's in a bank, you want to further obscure the trail. Wire the cash to an offshore account somewhere with no tax on business or investment income and strict secrecy laws — the Cayman Islands, the Channel Islands, Bermuda, Luxembourg, etc. Then your U.S. front company can take a "loan" from your Cayman Islands bank account. If the FBI asks where you got the million dollars, you tell them truthfully it's a bank loan, and you've got legal loan documentation to prove it. The money isn't taxable (it's a loan); when you repay the interest, you pay it to yourself and deduct it as a business expense while shipping even more money out of the country.

So let's imagine a typical money-laundering scenario: (1) Make numerous below-the-radar deposits to accounts in different banks. (2) Consolidate the funds via wire transfer in a single account in, say, Tampa. (3) Wire that to a London bank. (4) Convert the funds to certificates of deposit. (5) Use those as collateral for a loan from a bank in the Cayman Islands. (6) Transfer the loan proceeds back to your front company in Tampa. Result: a confusing trail for the feds to follow, most of it electronic, with no need for small unmarked bills or other crime-fiction cliches.

In short, money laundering has become a species of high finance. Some claim it's the third largest business in the world, behind legitimate currency transactions and the auto industry. It conceals some nasty enterprises — criminal-finance experts estimate that more than two thirds of U.S. money-laundering prosecutions involve illegal drug dealing, and terrorists shuffle their share of cash as well. Then again, knowing what we do about many legal global transactions of late, you'd have to say it's not just the criminals in the financial marketplace who are up to no good.

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References

Hinterseer, Kris. Criminal Finance Kluwer Law International, 2002.

Madinger, John and Zalopany, Syndeny A. Money Laundering: A Guide For Criminal Investigators CRC Press, 1999.

Mathers, Chris. Crime School: Money Laundering Buffalo, NY: Firefly Books Inc., 2004.

Richards, James R. Transnational Criminal Organizations, Cybercrime, and Money Laundering CRC Press LLC, 1998.

U.S. Department of the Treasury - Financial Crimes Enforcement Network, "Reformed CTR Exemption Process: Questions & Answers," FinCEN Advisory (1998): http://www.fincen.gov/news_room/rp/advisory/pdf/advis10.pdf

Vukson, Wm. B. Z. (ed.) Organized Crime and Money-Laundering G7 Report Inc., 2003.

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