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By | May 25, 2012

Dear Toolkit,

For years we've heard about money laundering. Lately, with all the concern about terrorism, the subject comes up almost daily. But it seems as though nobody can actually define what money laundering really is. And why should we care anyway? Can you demystify this for us?

Thanks,

Curious George

Dear Curious,

Money laundering is basically the process of running the ill-gotten gains from criminal acts through our financial systems to disguise their illegal origins and make them appear to be legitimate funds and, therefore, spendable. Money laundering can be linked to any crime that generates significant proceeds such as (most notably) drug trafficking as well as arms smuggling, extortion, fraud, racketeering, insider trading, tax evasion and sundry other crimes. It should be noted, however, that laundering techniques are sometimes used to illegally hide perfectly legal funds. Wealthy CEO divorce cases come to mind, for example! And then there's the tendency of government agencies to circumvent spending limitations by reallocating or recharacterizing resources. Ever heard of Iran/Contra?

You're right about money laundering becoming a daily topic. Since the USA Patriot Act was signed into law on October 26, 2001, the government has been given extraordinary powers to stem illegal activity being used to fund terrorism, and a raft of new rules and regs have been created.

Even before 9/11 there was significant legislation attempting to regulate money laundering, but much of it pales in comparison to the USA Patriot Act. In 1970, as part of the Bank Secrecy Act, banks and other businesses were required to report transactions involving amounts in excess of $10,000 (in cash or negotiable bearer instruments) coming into or going out of the U.S. In 1994, the Bank Securities Act was amended to prevent the sale of money orders or cashier's checks for more than $3,000 unless the purchaser's identity was verified and recorded. Suspicious Activity Reports (SARs) and other reporting mechanisms were instituted and millions of these are filed every year.

In the past you'd have to rely on the collusion (or abject stupidity) of others to accomplish most laundering schemes, but these days we've got cybercash, ebanking and the anonymous joys of EFTs and wire transfers. The high-tech tool of encryption facilitates obfuscation at the speed of light! And the sheer volume of transactions (legal and otherwise) makes scrutiny a huge challenge for the financial industry and regulators.

But let's get back to textbook basics so you get familiar with the lingo. The money laundering process involves these three basic steps that, in banking parlance, are known as:

  1. Placement — physically placing illegal cash in banks or purchasing goods with it...such as art, precious metals, real estate, gems or jewelry and so forth.
  2. Layering — the act of separating the proceeds from their criminal origins through complex moves such as wire transfers; conversion of cash to financial instruments; sale of high value goods such as art, precious metals etc.; and real estate investments. And "offshore shell companies" are a common layering tool as well. Shells obscure the beneficial owners through restrictive offshore bank secrecy laws, not to mention attorney-client privilege.
  3. Integration — making the wealth derived from the illicit proceeds appear legitimate. Using funds on deposit in foreign financial institutions as security for domestic loans is a favorite technique. Another ploy is over-billing or producing false invoices for goods allegedly sold across borders.

So what can you, the small businessperson, do to identify and prevent money laundering? Let's say you're a jeweler, for example, or an art gallery owner, an antique dealer, a small CPA firm. When dealing with your customers, you might want to ask yourself questions like these:

  • Do I really know this customer? Was he referred by a reliable source or is he of obscure or unknown origin. If a seemingly affluent new client suddenly falls off a bus at your doorstep, alarm bells should ring! Especially if he stops in every other day to buy $9,500 worth of jewelry with cash or travelers checks.
  • Do I really understand this customer's proposed transaction and am I going to be comfortable executing it? Does this transaction make sense considering what I know about the customer and his business?
  • Is this the usual and customary way such transactions are done or are there some curious kinks in it? Why would a total stranger offer to invest a lot of cash in my little business, for example?
  • Are there any records I should be keeping to protect myself? There's no such thing as too much documentation.
  • What technology tools might help me prevent any involvement with money laundering schemes?
  • What can I do to keep myself up to date on the latest ploys?

The kinds of small businesses ripe for laundering activities include restaurants, bars, taxicab firms, casinos, travel agencies...in short, just about any high cash business, like, for example, a Laundromat. (Many believe that's how the process got its name — that the mobs of the 1920s and 1930s put their illegal rum running and numbers game proceeds through their legitimate laundry businesses. It's probably not true but it makes a good story.) Online auctions also offer a good laundering vehicle. Think of what a couple of creative conspirators could do with tools like eBay and PayPal! Perhaps you thought money laundering was only for offshore banks and Vegas casinos and wire transfers bouncing through the global banking system. Not! Your business could easily become an unwitting part of this process as well.

Public awareness is a key weapon in the fight against this economic crime. Growing international cooperation is another useful weapon. These and other tools should aid in prevention efforts going forward. For example, the Financial Action Task Force on Money Laundering (FATF) is an inter-governmental body whose purpose is the development and promotion of policies to combat money laundering. As their web site states, the FATF currently consists of many, many countries and international organizations. Its membership includes the major financial center countries of Europe, North America and Asia. It is a multi-disciplinary body, bringing together the policy-making power of legal, financial and law enforcement experts. There are a few "problem countries" you should be aware of that have notably weak anti-laundering laws. Be sure to take some time to peruse the FATF web site and learn as much as you can, particularly about the basics of this crime and its drastic economic and social effects.

We don't have enough space in this column to adequately cover this enormous topic so, if you're interested in further study of this important type of crime, here are some links to a few helpful sites:

Keep in mind that money laundering is a crime that affects us all as individuals, business people and responsible citizens. Be aware of how launderers are adapting to the new technologies and opportunities of the 21st century and do your part to help stop this dangerous threat to society.

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