Anti-Money Laundering in a Nutshell 1/2

Kevin Sullivan

book source

MK: I’ve been in love with the money laundering topic from the age of 10 (it’s true) and just decided to refresh my memory of this tricky activity.

1/ Money Laundering Basics

  • ML is the process of integrating the proceeds of crime into the legitimate mainstream of the financial community by concealing its origin. I.e., the “dirty” money is made to look legitimate.

  • Money needs to be laundered because having lots of cash is an open invitation for robbery; having the money in the bank system allows moving it between countries if needed. Making money appear legitimate gets close to protecting a person from the government’s scrutiny as to the source of funds and its assets forfeiture laws when it becomes obvious that a person is living far beyond their means or is paying cash for everything.

  • The Palermo Convention (2000) adds the knowledge component of ML – a crime is a crime only when a person knowingly participates in it. Hence the separation of duties: mules are the tools of the launderers but not the launderers themselves. This makes getting to the source of crime much harder and the extent of the crime is underreported.

  • Many people think ML is a victimless crime as there’s no Nigerian prince using deceit to take the money from one’s pension account. However, it’s far from it: the easier it is to launder money – the more attractive crime is, with all the associated consequences. The countries’ tax base becomes lower, which means that any budget holes need to be patched with taxpayers’ money. Legitimate businesses may incur higher costs that erode their profit base or get passed to consumers (indirect taxation).

  • [MK: while some people quote $2T per year being the scope of money laundering per year, the number is a poor estimate by definition, as there’s no single ledger of all illicit activities to build on.]

  • It’s important to distinguish between money laundering of the proceeds of crime (aka “specified unlawful activities”), tax evasion (it’s not money laundering) and terrorist financing. They use similar methods for disguising the source and sometimes the final recipient of funds but are different in substance.

  • Banks play an important role in AML (anti-money laundering), as anyone opening an account with a major bank can attest (hence the endless questionnaires about the source of funds, income verification and proof of assets). [MK: however, banks don’t pay too much attention to small amounts falling under the mandatory reporting threshold of $10k per transaction. Some of them look at the total transaction volumes, but this is still not a widespread rule, as far as I know.]

The Three Stages of Money Laundering

  • Placement – taking physical cash and bringing it to a financial institution for deposit or transfer. Cash (especially small bills!) is bulky and can’t be safely transported far. However, banks get a bit suspicious receiving piles of cash that looks like it last changed hands at a street corner, so there needs to be a good cover story.

  • Structuring means splitting the transaction sized below the mandatory reporting limit ($10k in the US) by the banks; placement of funds requires visits to multiple banks or branches.

  • There are multiple businesses legitimately receiving lots of cash in small bills – laundromats, corner shops, restaurants, car washes, etc. Depositing, buying money orders or transferring money in reasonable amounts most likely will not raise suspicions and won’t trigger reporting by banks. The outcome is that the resulting money is one step removed from its starting point. It is the riskiest part of the process, with lots of ways the process can go wrong. Once the money is out of the person’s hands and in the hands of the party that accepts it – it’s the placement

  • Layering – adding the steps of separation (“layers”) of the person and the money makes tracing the money back to the source more complicated, especially when the process involves multiple banks in dubious jurisdictions with strict secrecy rules. The money can be used to purchase high-ticket items (luxury cars, boats, houses, etc.), which can’t be bought for cash (and definitely not small bills), and which can be resold at a nominal loss, but with the paperwork making the money appear legitimately obtained. Casinos are perfectly suited for layering as once the chips are bought – they are indistinguishable from winnings.

  • Layering via bank accounts usually involves different names of beneficiaries (almost always – companies). Following the trail of the money changing hands (some companies close immediately after the transaction) involved sending subpoenas to banks; the launderer only needs to move the money one time more than the authorities are willing to chase it.

  • Integration – that’s when the previously dirty money mixes with the clean money, but contrary to the popular belief, it becomes clean or almost clean. The money spent at this stage looks legit and can be used to safely buy luxury items or make investments.

  • Crimes are committed for the following reasons:

  • Greed / profit / personal gain (by far the most popular) – it’s about the money.

  • Passion – jealousy, emotions, short temper, etc.

  • Terrorism – the money supports a larger cause, an attempt to intimidate and influence the policy of the government and the civilians.

  • Unbalanced mind – mass shootings, etc. Very hard to predict and defend from.

  • Greed crimes requiring money laundering are committed in groups (ethnic mobs, gangs, terrorist groups).

Part 2.