How Does Money Laundering Work?

Chances are, you are familiar with the concept of laundering money from your favorite TV show or news. Whether it’s Walter White who legitimized methamphetamine money through a car wash, or Al Capone who literally uses self-service laundries to clean up his money (which is where the term is said to have originated), it’s pop culture stuff and crime legends.

But it turns out it’s not just gangs or white collars. It is much more common than that.

In theory, anyone can launder money, and many do. In fact, according to the UN Office on Drugs and Crime, between $ 800 and $ 2 trillion is laundered annually – two to five percent of global GDP. And while drug cartels, terrorist syndicates, and one percent probably make up a large chunk of that amount, the average middle-class investor and creative businesswoman also play a role.

To simplify, money laundering is the process of giving the appearance of illegally obtained money as legally earned; In other words, the money received from Illegal Source A was actually earned through Legal Source B. (ThisYoutube compilation does a great job of breaking them down). You take dirty money and clean it up.

This process includes three separate steps, although it is often much more intensive and complex (the point is that the money is not tracked, and launderers do this, obviously, with varying degrees of effectiveness) than a three-step plan:

• Placement : This is the stage where money launderers bring dirty money into the “real” financial world. This is the most dangerous stage because it often involves moving large amounts of cash (because you probably do not accept Visa, for example, for cocaine). Criminals can do this in countless ways: they can use illegal funds to pay off loans or gamble; use a legitimate, mostly cash-register business (such as a car wash or strip club) to integrate dirty and clean funds; exchange for foreign currency; Let the Smurfs trade illicit funds for other financial products in small quantities to avoid reporting thresholds, buy real estate, etc.
• Layering : The next step involves moving money around to hide its original source. For more sophisticated scammers, this means transferring it to foreign financial products, companies, investments, etc. This usually happens several times and in different products, which is why it is called “bundling”. So, in theory, a launderer could transfer money to one offshore account, then transfer it to a shell company, then to another shell company, and so on, creating a tangled web that is difficult to untangle.
• Integration : At this stage, the launderer receives money back from a legitimate source. This, too, can be done in a variety of ways, including by buying art, selling property, etc.

There are hundreds of federal crimes in the United States called “specific illegal activities” that must have money to be considered money laundering , including various drug offenses, Medicare / Medicaid fraud, etc. In addition, a person must participate in these actions with the intent to hide the origin of the money.

To better understand how this works, let’s look at some case studies.

Paul Manafort

Perhaps the most recent high-profile example: the former chairman of President Trump’s election campaign was charged with money laundering , as well as tax and banking fraud. Here’s a rundown of how he laundered money, according to How Stuff Works :

Manafort allegedly received millions from former Ukrainian President Viktor Yanukovych. Rather than declaring these proceeds to the IRS and refunding the taxes owed, Manafort is said to have deposited them in offshore accounts and then used them to buy expensive US real estate.

After he became the owner of the property, prosecutors say he used it as collateral to obtain millions of dollars in loans from US banks. Since the money was in the form of loans and not income, he was not required to pay taxes on it.

According to experts on financial crimes such as Tom Cardamone, managing director of Global Financial Integrity, investment in luxury real estate is a common method of money laundering by criminals. “The classic way to launder money is to buy real estate in jurisdictions with high prices, such as New York or Miami,” he says.

It works like this: “The assumption is that the money you use to buy property is dirty and you have to clean it up, you have to put it into the legal financial system,” he says. “You pay for real estate in cash, and then you hold it in your hands, and whenever you sell it, the money you get from the sale is clean, laundered.”

And even if you sell at a loss, it is probably worth getting potentially tens of millions of dollars in cash. In fact, anonymous buyers often bid higher than the asking price to make the deal more convenient.

That’s because until the New York Times wrote a series of articles on the practice of anonymous LLCs (likely owned by wealthy foreigners) buying high-priced U.S. property in 2015, there were no federal reporting requirements. In 2016, the Treasury said it would begin requiring “real estate companies to disclose the names behind cash transactions.” But that means no one could have traced the Upper West Co-op or the Miami Beach mansion back to its owner years ago if they had used a shell company to buy it.

But Manafort didn’t stop at real estate. For six years (and this is exactly what was included in his indictment – there is potentially more nefarious activity that has not been exposed), Manafort has used an offshore bank account system to make “transfers totaling $ 6.4 million to real estate and much more. more than $ 12 million on personal goods and services such as clothing, cars and household items, ”according to The New York Times , including over $ 1 million for antique carpet and car care, and $ 15,000 for already the infamous ostrich fur coat .

Having Manafort caught for his wrongs means that he is, well, or “stupid or unlucky,” as Politico puts it , as 99.9 percent of launderers get away with it.

Panama / Paradise Papers

The Panama Papers and subsequent Paradise Papers have shed light on the extent to which the world’s richest people, including politicians and other government officials, evade taxes and reportedly launder money. And, as the documents point out, one of the main mechanisms of deceiving Richie Rich, like Manafort’s, is luxury real estate acquired through a shell company.

Backtracking a bit, shell companies are created solely to carry out transactions, with no “real” business purpose — for example, they do not create or sell a product or service. Typically, they are structured as limited liability companies and incorporated in a place like Bermuda or, of course, Panama, with little or no oversight. These financial havens do not tax money – instead, they simply charge a fee to set up an LLC (usually charged annually), which makes countries a big bunch of dollars as they save their owners a hefty amount of tax.

However, Cardamom says more anonymous LLCs are registered in the US every year than in any other country.

“You can open them in New York, New Jersey, Delaware, almost any state,” he says. “Most states do not require the beneficial owner’s name on the license,” which means you just need to go to your lawyer and open an LLC in his or her name. However, Delaware’s lax business rules make it attractive not only to anonymous LLCs, but to companies of all stripes.

LLCs can be used to launder money as they disguise their owners and where their funds are coming from. Basically, you can start a company, invest in it, and then spread that money around the world. By becoming an anonymous company owner, your company can open bank accounts all over the world. Money laundering often uses a network of shell companies to create an intricate web of transactions on behalf of the shell company that is difficult to decipher or trace to an individual.

“You might be incredibly difficult to structure these things, but one LLC in Delaware can own another LLC in the Cayman Islands that owns a bank account in Hong Kong,” Cardamom says. “And with all this opacity, it is often very difficult for law enforcement to push back the layers and figure out who owns which other company.”

Opening these LLCs is perfectly legal (the illegal part is money laundering / tax evasion), but if the IRS or other federal agency suspects something is wrong and traces the LLC back to your attorney, he or she may require your identity to be kept secret.

Drugs and weapons

It’s not just rich people who are trying to avoid paying taxes to launder money – it’s much more serious. “This is a crime that is fueling a devastating drug epidemic – opioids, methamphetamines, cocaine,” John Cassara, a former Treasury special agent, writes for Politico . “Gang violence, government program fraud, corruption, internet fraud, identity theft and many other crimes affect our daily lives. Terrorism, made possible in part by money laundering, threatens our national security. ”

And these criminals use basically the same mechanisms as the world’s richest people to clear their money. “There is a legal system of anonymous shell companies with which anyone can do whatever they want,” Cardamone says. “If you are a completely legitimate business person, you can use an anonymous shell company, and if you are a drug dealer, you can use an anonymous shell company. They use the legal system to continue their illegal activities. “

This goes beyond shell companies – legit business can also be used. The first season of the Ozarks on Netflix offers a clear (if not realistic) description of how it works in the drug business. In the first season, Marty Beard, played by Jason Bateman, our accountant-turned-cartel money launderer, buys a motel, which he then refurbishes. Having bought 16,000 square feet of carpet at $ 0.69 per square foot, he writes in a motel ledger that he actually purchased 32,000 square feet of carpet at $ 8.75 per square foot — a difference of almost $ 270,000. All that is required is creative accounting and readiness of ledgers. From the motel, he moves to a strip club, another popular cover for all kinds of illegal activities.

Incidentally, the strip club is owned by a shell company in Panama, and Marty’s name is not mentioned in the documents – it’s a perfectly legitimate component of his larger money laundering scheme.

Your everyday money launderer

All of this goes to show that just about anyone can open an anonymous LLC and try to launder money, according to Cardamom (not that we’re suggesting you try this).

But, as noted above, for money laundering does not require a complex network of shell companies – there are countless ways to do this, from the investment schemes up to, well, well, in general , in this example, which IRS reported in 2015 :

On March 19, 2015, [Erica Rae] Brown pleaded guilty to money laundering in connection with a banking fraud scheme. According to court records, Brown received a $ 4 million bank loan based on a series of fraudulent claims about a data warehouse project she claims she was working on. In January 2009, the bank sent the company’s loan application to the USDA. Following submissions from one of Brown’s partners regarding the project, the USDA pledged to guarantee the loan. As part of the loan parameters, the bank required proof that the companies were interested in using the data warehouse.

Brown sent fake letters to the bank from several well-known national companies that allegedly wanted to use the data warehouse in addition to a series of receipts and invoices to show that the company was in fact spending capital on the project. In fact, the national companies were not interested, and the checks were reworked versions of the checks that Brown had written for other expenses. A financial analysis of the loan found that Brown used the money for personal expenses, including $ 128,135 to rent a house in Laguna Beach and $ 5,825 for two Rolex watches. The bank revoked the foreclosure rights of the property in August 2013.

Not a very good example, but still an example. “Anyone could have done it,” says Cardamom. “You don’t need to be a brilliant lawyer to do that.” Just slightly better than Paul Manafort and Erica Rae Brown.

More…