money laundering

“Money laundering” means any act or attempted act to disguise the source of money or assets derived from criminal activity. Specifically, “dirty money” received from criminal activities is processed through legitimate businesses and converted into “clean money.” Once cleaned, the money cannot be easily traced to the person originating the transaction or to the criminal origin of the funds. Hence, the criminals can now do what they like with their money.

The term “money laundering” is said to have originated with the Italian mafia and such criminals as Al Capone, who allegedly purchased Laundromats to mix illegal profits from prostitution and bootlegged liquor sales with legitimate sales from the Laundromats to obscure their illegal profit.

But there is no real evidence that the term originated with the mafia’s laundromats. What makes more sense is that the term “laundering” was chosen because money laundering does what its name suggests: it “cleans” the “dirty” money and makes it look as if they were generated by legitimate businesses. It’s an indeed a catchy metaphor for ‘cleaning’ ‘dirty’ money.

Money laundering may not be the oldest crime in the book but it’s close. Historian Sterling Seagrave wrote that more than 2000 years ago, wealthy Chinese merchants laundered their profits because the regional governments banned many forms of commercial trading. Much of the merchants’ income came from black marketing, extortion and bribe.  

Wikipedia describes many methods of making “dirty” money look legal. Typically, it involves three steps: placement, layering, and integration. First, the illegitimate funds are furtively introduced into the legitimate financial system. Then, the money is moved around to create confusion, sometimes by wiring or transferring through numerous accounts. Finally, it is integrated into the financial system through additional transactions until the “dirty” money appears “clean.”

One method is structuring, which is often known as smurfing. Cash is broken into smaller deposits of money, and used to purchase bearer instruments, such as money orders, and then ultimately deposited, again in small amounts.

Bulk cash smuggling involves physically smuggling cash to another jurisdiction and depositing it in a financial institution, such as an offshore bank.

Cash-intensive businesses, such as service businesses, are used to receive deposits of criminally derived cash. In such cases the business will usually claim all cash received as legitimate earnings. Examples are parking structures, strip clubs, tanning salons, car washes, arcades, bars, restaurants, and casinos.

Trade-based laundering involves under- or over-valuing invoices to disguise the movement of money. For example, the art market has been accused of being an ideal vehicle for money laundering due to the subjective value of artworks as well as the secrecy of auction houses about the identity of the buyer and seller.

Shell companies and trusts disguise the true owners of money. Trusts and corporate vehicles, depending on the jurisdiction, need not disclose their true owner. 

In round-tripping, money is deposited in a controlled foreign corporation offshore, preferably in a tax haven where minimal records are kept, and then shipped back as a foreign direct investment, exempt from taxation.

In bank capture, criminals buy a controlling interest in a bank, preferably in a jurisdiction with weak money laundering controls, and then move money through the bank without scrutiny.

I’ve laundered money. No, really. It came out of the washing machine in good shape, and may even have been cleaner.

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