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3
Money Laundering:
Methods and Markets
Money laundering is usually described as having three sequential elements—
placement, layering, and integration—as defined in a report by the Board of
Governors of the Federal Reserve System (2002, 7):
The first stage in the process is placement. The placement stage involves the phys-
ical movement of currency or other funds derived from illegal activities to a place
or into a form that is less suspicious to law enforcement authorities and more con-
venient to the criminal. The proceeds are introduced into traditional or nontradi-
tional financial institutions or into the retail economy. The second stage is layering.
The layering stage involves the separation of proceeds from their illegal source by
using multiple complex financial transactions (e.g., wire transfers, monetary
instruments) to obscure the audit trail and hide the proceeds. The third stage in the
money laundering process is integration. During the integration stage, illegal pro-
ceeds are converted into apparently legitimate business earnings through normal
financial or commercial operations.
Not all money-laundering transactions involve all three distinct phases,
and some may indeed involve more (van Duyne 2003). Nonetheless, the
three-stage classification is a useful decomposition of what can sometimes
be a complex process.
In contrast to most other types of crime, money laundering is notable for
the diversity of its forms, participants, and settings. It can involve the most
respectable of banks unwittingly providing services to customers with
apparently impeccable credentials. For example, Richard Scrushy, chair-
man and CEO of HealthSouth, a major health care corporation, was
indicted on 85 counts, including fraud and money laundering. His finan-
cial executives pleaded guilty to using false earnings reports to mislead
banks into providing a $1.25 billion credit line. Scrushy himself is alleged
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Box 3.1
Laundering methods of a drug trafficker
“Rick” launched his own drug trafficking operation using the funds of the cartel he once
served. With the help of former associates, he used several methods to launder the pro-
ceeds. Cash shipments arrived by boat or plane and were promptly placed by couriers
into a range of bank accounts (a process known as “smurfing”), an activity that corre-
sponds to the placement phase of money laundering. An agent then moved the funds to
the personal accounts of overseas intermediaries, each of whom arranged to transfer the
funds back into the country into accounts at the national central bank, which granted
authorization.
At this point, Rick would call the intermediary to cancel the transfer. The funds were
then withdrawn in cash from the intermediary’s account and wired back in country to
other accounts, using the authorization from the national central bank to explain the
origin of the funds. Without knowing it, the central bank was giving legitimacy to drug
monies.
After this layering phase, Rick purchased real estate with the funds, using lawyers, bank
managers, and other professionals, which moves the process to the integration phase. He
offered unusually high commission rates (3 to 5 percent) to gain the cooperation of the pro-
fessionals with whom he was doing business. The real estate purchases were usually
made in the names of other individuals or companies.
Eventually, several of the banks noticed that his account activities were rather odd and
notified the national financial intelligence unit. An investigation revealed that Rick’s
scheme had laundered tens of millions of dollars over several years.
Source:
Egmont Group (2000).
to have used personal checks, cashiers’ checks, and wire transfers to pur-
chase nearly $10 million worth of high-value goods and real estate during
the layering phase of this laundering operation.
Money laundering can also involve small nonfinancial businesses know-
ingly providing similar services to violent criminals, as in the case of truck-
ers smuggling large bundles of currency out of the country for drug
traffickers.
Money laundering does not require international transactions; there are
instances of purely domestic laundering.
1
Nonetheless, a large number of
cases do involve the movement of funds across national borders. Though
governments have unique police powers at the border, those same borders
can impede the flow of information. Thus the description and analysis in this
chapter place heavy emphasis on the international dimensions of money
laundering.
1. Just to cite one example, in the
United States v. Clyde Hood et al., Central District of Illinois,
an
indictment returned on August 18, 2000, charged the defendants with fraud for collecting
checks from investors, who were promised a 5,000 percent return. Funds were deposited in
checking accounts and used to incorporate and support participants’ businesses, as well as to
purchase real estate, all within the Mattoon, Illinois, area.
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CHASING DIRTY MONEY
Box 3.2
Embezzlement and (self–) money laundering
Several officials of the Washington, DC Teachers Union (WTU), including president
Barbara A. Bullock, were implicated in a recent scandal involving the theft of $4.6
million.
The astonishingly simple scheme had several concurrent elements. One involved
Bullock’s chauffeur, Leroy Holmes, who in February 2003 pleaded guilty to laundering
more than $1.2 million. Many of the more than 200 checks Holmes cashed were made out
to creditors such as Verizon or the DC Treasurer, with the original payee’s name crossed
out and replaced with Holmes’ name. He often left Independence Federal Savings Bank
with his pockets stuffed with as much as $20,000 worth of bills. The bank never filed either
the required currency transaction report or suspicious activity report and may face inves-
tigation for colluding in the union’s money-laundering plan.
In addition, the WTU made several payments totaling $450,000 for the “consulting ser-
vices” of a phony company called Expressions Unlimited. One of the company’s partners,
Michael Martin, claimed to be Bullock’s hairdresser but has since pleaded guilty to money-
laundering conspiracy charges.
Union credit cards were used to buy expensive clothing, electronic equipment, art-
work, and other costly items. As of February 2004, Bullock had been sentenced to nine
years in prison following a guilty plea, and four others had been indicted.
Source: Washington Post
(various editions, 2003 and 2004).
Boxes 3.1 through 3.4 are examples of money laundering that illustrate
the variety of clients, providers, and methods involved. The chapter then
goes into more detail about the “market” for money laundering—what is
known about the providers and prices they charge. The final section pre-
sents a typology of offenses intended to provide a structure for policy
analysis in dealing with the heterogeneous set of offenses that engender
money laundering.
Laundering Mechanisms
A striking feature of money laundering is the number of different meth-
ods used to carry it out. Some of the major mechanisms described below
are associated with only one of the three phases of money laundering,
while others are usable in any of the phases of placement, layering, and
integration.
Four methods of money laundering—cash smuggling, casinos and other
gambling venues, insurance policies, and securities—are described below
in some detail. A number of others that may be of importance are listed in
box 3.5. The descriptions draw heavily on the FATF’s annual typologies
reports, which list notable cases that illustrate the variety of laundering
techniques used.
MONEY LAUNDERING: METHODS AND MARKETS
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Box 3.3 “Underground” banking that finances human
smuggling
A South Asian man ran a small business with an annual turnover of around $150,000.
His banks were understandably surprised to see that between $1.7 million and $3.5 mil-
lion flowed annually through his private accounts for three years. Their suspicious trans-
action reports triggered investigations that revealed that the suspect’s business was the
headquarters of an international “underground bank” with “branches” in several Central
Asian and European countries. Along with small amounts intended to support relatives
in the transferring parties’ home countries, this illegal banking system was used to trans-
fer large sums for smuggling people into Europe. In May 2000, the suspect and one of
his branch managers were arrested. He had squirreled away around $140,000 in cash
in a safe and had purchased his home for $400,000 in cash shortly before his arrest.
Source:
FATF (2002b).
Cash Smuggling
One of the oldest placement techniques, common smuggling of currency,
seems to be on the rise. Bulk shipments are driven across the border or
hidden in cargo, even though it is illegal to export more than $10,000 in
currency from the United States without filing a Report of International
Transportation of Currency or Other Monetary Instruments (CMIR). Cri-
minals have even been known to purchase shipping businesses so that they
can store cash inside the goods. Individual couriers transport cash in
checked or carry-on baggage or on their persons. Smugglers can also sim-
ply use the mail or a shipping company such as UPS or FedEx. US customs
officials spend most of their resources inspecting people and cargo coming
into
the United States, so it is relatively easy to ship currency to another
country.
2
Also, cash stockpiling (allowing cash to accumulate while wait-
ing for a smuggling opportunity) is thought to have increased, particularly
in port or border regions. If cash smuggling has grown overall, it may be
partially attributed to the success of banks’ antilaundering measures.
Casinos and Other Gambling Venues
Casinos.
Chips are bought with cash, then after a period of time during
which gambling may or may not take place, the chips are traded in for a
check from the casino, perhaps in the name of a third party. When a casino
2. The authority to search in the United States does not distinguish between entry and exit.
However, historically there has been more interest in preventing the entry than the exit of
inappropriate goods and people. Nonetheless, the US Customs Service does occasionally use
its authority for exit inspections.
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CHASING DIRTY MONEY
Box 3.4
Pilfering by a media baron
Flamboyant Czech-born British businessman Robert Maxwell used the
New York Daily
News
as a money-laundering device, funneling nearly $240 million through the tabloid’s
accounts during the nine months he owned the newspaper. In an audacious embezzle-
ment endeavor, he siphoned pension funds from Maxwell Group Newspaper PLC in
London and deposited them in accounts controlled by the
Daily News’s
parent company
in the United States. Within days, wire transfers would move the money to hundreds of
other companies that only he could access. Maxwell engineered several bank loans to
the newspaper, large portions of which never showed up on the publication’s ledgers.
After his mysterious drowning death in November 1991, allegations surfaced that
Maxwell also laundered money from weapons sales to Iran.
Source:
Robinson (1996).
has establishments in different countries, it may serve as an unwitting
international launderer if a customer requests that his or her credit be made
available in a casino establishment in another country. In addition, tokens
themselves may be used to purchase goods and services or drugs.
Horse racing.
Winning tickets are bought at a slight premium, allowing
the winner to collect his or her money without tax liability and enabling the
launderer to collect a check from the track. Relevant taxes will be deducted
from this amount.
Lotteries.
As at horse tracks, winning tickets are purchased from the win-
ners as they arrive at the lottery office to collect their winnings. In a case
believed to be a common type of operation, a launderer placed many low-
risk bets at various bookmakers within his city, ending up with a long-term
7 percent loss rate—an unusual pattern and poor record for a professional
gambler. He had the checks for the winnings made out to 14 bank accounts
in the names of 10 different third parties, some of whom happened to be
armed robbers and their immediate families (FATF 2002b).
Insurance Policies
Single premium insurance policies, for which the premium is paid in an
upfront lump sum rather than in annual installments, have increased in
popularity. Launderers or their clients purchase them and then redeem
them at a discount, paying the required fees and penalties and receiving a
“sanitized” check from the insurance company. Insurance policies can also
be used as guarantees for loans from financial institutions. Many insurance
products are sold through intermediaries; consequently, insurance com-
panies themselves sometimes have no direct contact with the beneficiary.
MONEY LAUNDERING: METHODS AND MARKETS
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