You’re likely familiar with money laundering as a concept from your favorite TV show or the news. Whether it’s Walter White legitimizing meth money via a carwash or Al Capone using literal laundromats to clean his cash (that’s where the term reportedly originated, in fact), it’s the stuff of pop culture and criminal legends.
But it turns out it’s not an activity restricted to gangs or white collar criminals. It’s a lot more common than that.
Anyone, in theory, can launder money, and plenty do. In fact, between $800 billion and $2 trillion—two to five percent of global GDP—is laundered each year, according to the United Nations Office on Drugs and Crime. And while drug cartels, terrorist syndicates and the one percent likely make up a significant portion of that total, your average, middle class investor and creative businesswoman also plays a part.
To simplify, money laundering is the process of making illegally-gotten money look legitimately earned; in other words, that money obtained from Illegal Source A was actually earned via Legal Source B. (This Youtube compilation does a good job breaking it down.) You’re taking dirty money and cleaning it.
The process involves three distinct steps, though it’s often much more intensive and complicated (the point is to make the money untraceable, and launderers accomplish this, obviously, with different degrees of efficacy) than a three-step plan:
- Placement: This is the stage in which launderers bring the dirty money into the “real” financial world. It’s the most dangerous stage because it often involves displacing large amounts of cash (because you’re likely not accepting Visa for, say, cocaine). There are countless ways criminals accomplish this: They might use the illegal funds to repay a loan or gamble it; use a legitimate, largely cash business (like a car wash or strip club) to integrate dirty and clean funds; exchange it for foreign currency; have “smurfs” exchange illicit funds for other financial products in small amounts to avoid reporting thresholds, buy real estate, etc.
- Layering: The next stage involves moving the money around to obscure its original source. For the more sophisticated scammers, this means moving it into overseas financial products, companies, investments, etc. This usually happens multiple times and across diverse products, thus why it’s called “layering.” So theoretically, a launderer could move money to one offshore account, then transfer it to a shell company, then to another shell company, and on and on, building an intricate web that’s difficult to unravel.
- Integration: At this stage, the launderer gets the money back from a legitimate source. This, too, can be done a number of ways, including through buying art, selling property, etc.
In the U.S., there are hundreds of federal crimes, called “specified unlawful activities,” that the money must stem from to be considered money laundering, including various drug crimes, Medicare/Medicaid fraud, etc. In addition, a person must engage in those activities with the intent to disguise the money’s origins.
To get a better understanding of exactly how it works, let’s look at some case studies.
Perhaps the most recent high-profile example, President Trump’s former campaign chairman was indicted for money laundering, as well as tax and bank fraud. Here’s a summary of how he laundered money, according to How Stuff Works:
Manafort is alleged to have garnered millions from the former Ukrainian President Viktor Yanukovych. Rather than declare these earnings to the IRS and turn over the taxes due, Manafort is said to have placed them in offshore accounts and then used them to buy expensive real estate in the U.S.
Once he owned the properties, prosecutors say he then used them as collateral to take out millions of dollars in loans from U.S. banks. Since the money was in the form of loans rather than income, he wasn’t obliged to pay taxes on it.
Investing in luxury real estate is a common way for criminals to launder money, according to financial crimes experts like Tom Cardamone, managing director of Global Financial Integrity. “A classic way of laundering money is buying real estate in a high price jurisdiction like New York or Miami,” he says.
It works like this: “The presumption is the money you’re using to buy the property is dirty, and you have to clean it, you have to get it into the legal financial system,” he says. “You’ll pay for a piece of property in cash and then you’ll hold it, and whenever you sell it, the money you get from the sale is clean, it’s laundered.”
And even if you sell at a loss, it’s likely worth it to get potentially tens of millions of dollars in clean money. In fact, anonymous buyers will often offer over the asking price to make the transaction more seamless.
That’s because, until the New York Times wrote a series of articles on the practice of anonymous LLCs (likely owned by wealthy foreigners) snapping up expensive properties in the U.S. in 2015, there were no federal reporting requirements. In 2016, the Treasury Department said it would begin requiring “real estate companies to disclose names behind cash transactions.” But that means no one could trace the Upper West Co-op or Miami Beach mansion to its owner until a few years ago if they used a shell company to purchase it.
But Manafort didn’t stop at real estate. Over the course of six years (and this is just what was included in his indictment—there’s potentially more nefarious activity that wasn’t uncovered), Manafort used a system of offshore bank accounts to make “transfers totaling $6.4 million for real estate and more than $12 million for personal goods and services like clothing, vehicles and home improvement,” according to the New York Times, including over $1 million for an antique rug and care related to it, and $15,000 for the now-infamous ostrich coat.
That Manafort got caught for his misdeeds means he’s, well, either “stupid or unlucky,” as Politico puts it, as 99.9 percent of launderers get away with their crimes.
The Panama/Paradise Papers
The Panama Papers and subsequent Paradise Papers publications shone a light on the extent to which the wealthiest people in the world—including politicians and other public officials—evade taxes and reportedly launder money. And, as the papers detailed, one of Richie Rich’s main mechanisms for deception, like Manafort’s, is luxury real estate purchased through a shell company.
To backtrack a bit, shell companies are created solely to carry out transactions, with no “real” business purpose—they’re not creating and selling a product or service, for example. They are typically structured as limited liability companies and incorporated in a place like Bermuda or, obviously, Panama, with little to no oversight. These financial safe havens don’t tax the money—instead, they simply charge a fee to open the LLC (usually charged annually), making the countries a tidy sum as they save their owners a tidy tax sum.
Still, Cardamone says more anonymous LLCs are incorporated in the U.S. each year than in any other country.
“You can open them in New York, New Jersey, Delaware, just about any state,” he says. “Most states do not require the beneficial owner’s name on the license,” meaning you just need to go to your attorney and open the LLC in his or her name. That said, Delaware’s lax business regulations make it attractive not just to anonymous LLCs but to companies of all stripes.
The LLCs can be used to launder money because they mask their owners and where their funds are coming from. So basically, you can open the company, funnel money into it, and then disperse that money far and wide. Once you’re the anonymous owner of a company, your company can open bank accounts all over the world. In a money laundering scheme, there will often be a network of shell companies used to create a confusing web of transactions in the shell company’s name that’s difficult to decipher—or trace back to an individual.
“You can get incredibly complex with how you structure these things, but one LLC in Delaware might own another LLC in the Cayman Islands which owns a bank account in Hong Kong,” says Cardamone. “And with all this opacity it is often very difficult for law enforcement to peel back the layers and figure out who owns what other company.”
Opening these LLCs is perfectly legal (the illegal part is laundering money/evading taxes), but if the IRS or another federal agency suspects something is up and traces the LLC back to your lawyer, he or she can claim attorney/client privilege to keep your identity secret.
Drugs and Guns
It’s not just rich people trying to avoid taxes who launder money—it’s much more serious than that. “It’s a crime that sustains devastating drug epidemics—opioids, methamphetamines, cocaine,” writes John Cassara, a former Treasury special agent, for Politico. “Gang violence, fraud in government programs, corruption, internet scams, identity theft and so many other crimes affect our daily lives. Terrorism—made possible in part by money laundering—threatens our national security.”
And these criminals use largely the same mechanisms as the world’s wealthiest to clean their money. “There’s this legal system of anonymous shell companies that anyone can do anything with,” says Cardamone. “If you are a completely legitimate business person you can use an anonymous shell company, and if you are a drug trafficker you can use an anonymous shell company. They use the legal system to continue their illegal activity.”
It goes beyond shell companies—legitimate businesses can be used as well. The first season of Ozarks on Netflix offers a clear (if not realistic) depiction of how this works in the drug business. In the first season, Marty Byrde, played by Jason Bateman, our accountant-turned-cartel money launderer, buys a motel, which he then renovates. After purchasing 16,000 square feet of carpeting at $0.69 per square foot, he writes in the motel’s ledger that he actually purchased 32,000 square feet of carpeting at $8.75 per square foot—a difference of almost $270,000. All it takes is some creative accounting and voilà, the books are cooked. From the motel he moves on to a strip club, another popular all-cash front for illicit activity of all sorts.
The strip club, by the way, is owned by a shell company out of Panama, with Marty’s name no where to be found on the paperwork—a perfectly legal component of his larger laundering scheme.
Your Everyday Money Launderer
All of that said, pretty much anyone can open an anonymous LLC and attempt to launder money, according to Cardamone (not that we’re suggesting you try it).
On March 19, 2015, [Erika Rae] Brown pleaded guilty to money laundering in connection with a bank fraud scheme. According to court records, Brown obtained a four-million dollar bank loan based on a series of fraudulent representations about a data storage facility project she claimed she was working on. In January 2009, the bank forwarded the data company’s loan application to the USDA. Following representations by one of Brown’s associates regarding the project, the USDA committed to guarantee the loan. As part of the parameters for the loan, the bank required proof that companies were interested in using the data storage facility.
Brown submitted false letters to the bank from several well-known national companies that purportedly wanted to use the data storage in addition to a number of cashier’s checks and invoices in an effort to show that the company was in fact spending capital on the project. In reality, no national companies were interested and the checks were altered version of checks Brown had written for other expenses. A financial analysis of the loan proceeds revealed that Brown used the money for personal expenses, including $128,135 in rent for a Laguna Beach house and $5,825 for two Rolex watches. The bank foreclosed on the property in August 2013.
A not particularly successful example, but an example nonetheless. “Anybody could do it,” says Cardamone. “You don’t have to be some kind of brilliant legal mind to do this.” Just slightly more brilliant than Paul Manafort and Erika Rae Brown.
from Lifehacker http://bit.ly/2EJQK0N