Money Laundering

1.1 What is Money Laundering?

Taken at its simplest, money laundering is a process by which the origins and ownership of money, generated as a result of criminal activity, can be concealed. In effect, the money is ‘cleaned’ or ‘laundered’ through legitimate means and, as a result, the proceeds lose their existing criminal identity and appear to have originated from a legitimate source.

This process is usually completed several times. It is common for this process to occur in respect of the proceeds of drugs/human trafficking, prostitution, corruption, bootlegging, racketeering and illegal arms smuggling.

The process allows the money to be controlled, without the fear that the transaction will lead back to the originator(s) of the proceeds. Criminal organisations utilise this process to enable them to exploit further criminal opportunities in a systematic and large scale manner.

1.2 The History of Money Laundering

The phrase “money laundering” was first coined at the beginning of the 20th Century. The criminalisation of the actual or attempted laundering of proceeds of crime is also quite recent. However, the practice of disguising income derived from illicit activities can be traced back to the 13th Century B.C, when the oceans and seas were originally used as international trade routes. Rife with pirates, the shipments were often purged and plundered for valuable commodities and assets. Pirates were arguably pioneers in the practice of laundering such articles as they and even the empires they served sought to profit from their treacheries in a way that did not attract any ramification.

As the profile of money laundering has heightened, it has become an increasingly expensive, time-consuming process to undertake and ultimately dangerous. By placing proceeds into a bank account or other negotiable, redeemable or saleable instrument or object, the originator is attracting tax liability and other obligations, which if not fulfilled, can ultimately lead to the illicit origins of the proceeds being discovered.

Alphonse “Al” Capone or Scarface, probably the most famous mob gangsters, created a criminal organisation in America in the 1920s, during the US Prohibition Era, grossing an estimated $100,000,000 of illegally gained proceeds annually, which he laundered through a series of businesses. However, his subsequent incarceration in the 1930s was not as a result of money laundering or his criminal activities such as bootlegging, prostitution and gambling, but in fact was as a result of being found guilty of a $1,000,000 tax evasion. His imprisonment in Alcatraz ultimately brought an end to his Chicago based operations.

Al Capone’s incarceration, however ultimately backfired on the authorities as it forced criminals to become more “organised” in order to profit financially from their illicit activities. Later gangsters such as Meyer Lansky grasped the importance of creating businesses, not only as mechanisms to launder money, but also to provide “fronts” for their illegal activities. Casinos are notorious business “fronts” for illegal activities. Las Vegas was infamous in the 1940s for being a tool of money laundering, especially by the likes of Lansky and Benjamin “Bugsy” Seigel.

Lansky also understood and appreciated the usefulness of foreign countries that provide havens for criminal activities. Later in life, Lansky would hold untold millions in Swiss bank accounts and in banks and corporations in Hong Kong, Israel and throughout South America. He was an expert at exploiting flexible governments and their officials and was never convicted of any charges brought against him.

Today, Lansky can be credited for establishing the modern form of money laundering (described below) and tax evasion. Ironically, the extent and sophistication of his operations may never be fully understood as most of them still remain undetected.

As mentioned above, money laundering is certainly not a new concept. Those who conduct criminal activities for financial gain have always attempted to profit from their efforts without drawing attention to their criminal activities. As demonstrated by Lansky’s pioneering operations, methods of concealment and money laundering have become increasingly sophisticated. There are a number of reasons for this:

The globalisation of the financial system: Advancements in communications and transportation have allowed the concealment of crime and its proceeds to become a much easier task in today’s world. Proceeds can be wired from one financial institute to another instantaneously;
Crime has become more global. It is no longer sufficient for enforcement authorities to merely be aware of what is occurring within their own jurisdiction. They must anticipate and cooperate with other authorities and jurisdictions as criminal activities can become widespread in a matter of minutes;
Also, criminals no longer have the desire to remain or limit their activities to one country. If fact, Lansky proved that it is safer for them to move their property and business between countries to avoid detection by local authorities. As a result, international criminal organisations have become skilled and experienced at moving property from one country to another, taking advantage of the notoriously lax legislation existent in some countries that provides safe havens for foreigners seeking to conceal their wealth. Many of these countries provide “dead ends” for investigators who attempt to follow the trail left by the proceeds.

Money laundering has ultimately become a successful tool for criminals because the financial system does not prevent the possibility of money laundering. In fact, if criminals are prepared to make concessions, the system can be most accommodating. The financial transaction system was set up to provide a safer exchange system for businesses all over the world. It generates detailed and often permanent records of all financial transactions. However, the standards of scrutiny, regulation and law are not consistently and universally applied. Flexibility is the key to success for money laundering. The lower standards and lax legislation afforded by many countries provide the necessary flexibility to allow criminals to exploit the system to launder their criminally obtained profits.

1.3 The Money Laundering Procedure

Money laundering, at its simplest form, is a three stage process:

1. Placement or “Smurfing”

This is where the criminal proceeds are converted, through a succession of small and anonymous transactions or deposits, into bank accounts or other negotiable, redeemable or saleable instruments or objects.

The bank account is generally opened in the name of a corporation especially set up, with the assistance (either willingly or subconsciously) of professionals such as lawyers, for the purpose of laundering money. These corporations or businesses are known as “fronts”, as their legitimate appearance conceals the illicit activities which generate the criminal proceeds.

Small cash deposits are then repeatedly made into the bank account by a series of individuals. The amounts are always small enough to fall below the declaratory thresholds of the bank, thus ensuring that no further due diligence checks are made. The cash, being now in a legitimate entity, loses some of its original illicit origins when it is subsequently withdrawn or used to purchase further assets.

2. Layering

“Layering” is the second stage of the money laundering process. Here, the proceeds are converted or moved further from the original source by purchasing legitimate assets, such as property. The asset is then sold on to an independent, and often unsuspecting, legitimate third party. This stage is often repeated several times, with the proceeds appearing a little more legitimate than they really are on each occasion.

3. Integration

Some argue that integration, the final stage of the money laundering process, was the only stage that Meyer Lansky failed to successfully achieve in his operations. On this stage, the proceeds are injected into a legitimate economy. The most common example is where the proceeds are injected into a legitimate business that has a high percentage of cash sales (ie, a casino). The result is that the proceeds are ultimately cleaned and they supposedly lose all of their original illicit origins. A profit can ultimately be made from the original activity.

There are arguments, however, that “dirty” money, money associated with criminal activities, can never lose its criminal origins no matter how many times the three-stage process is implemented. The reason is that proceeds never disappear. They just change their appearance and form, making it harder to trace them. Ultimately, money generated from criminal activity is more restrictive than normal “clean” money. It can only be invested in or spent on less visible and profitable activities. There always is a risk that the proceeds will lead authorities back to the initial criminal activity, and/ or the originator(s).

Uribe, R, Changing Paradigms on Money Laundering, The Observer News – Second Quarter, 2003; Inter-American Observatory on Drugs.

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