Sunday, June 13, 2010

money laundering

I came across this term in a crime novel the other day and had the same question I always have about it--do they wash the coins and cash together, and, more importantly, what drying cycle do they use?

Just kidding. I don't remember if even the first time I came across the term, I thought it had anything to do with actual cleaning. But I have always wondered, and still wonder, how just passing money through some other more innocent looking institution makes it come out looking legit. Offshore accounts,  Swiss bank accounts, all kinds of ways for stowing money seem fairly clear to me. But hiding all trace of its criminal past seems a lot harder. Isn't there always a paper trail? Sure, a human accountant might take awhile to spot something, but these days, with the help of computers, isn't it all a lot harder? Or, with the ability to doctor accounts in cyberspace, is it possibly a whole lot easier?

...Although I haven't found any verifiable source as to whether this is true or not, a popular story is that the term money laundering came into being because Al Capone used to make his cash flow look legit by means of laundromats. Maybe, maybe not, but laundromats are actually a good example of how money can be laundered in a small scale way, because they are the type of business where cash taken in cannot be correlated with how much service has actually been rendered.

Say you have your little coin op. At the end of the day you do your bookkeeping on the cash you took in on all those loads of laundry and then it's child's play to add that fifty or a hundred bucks that came  in in a, shall we say, less conventional way to the books as just that many more loads of laundry, because who's ever going to know? As Philip Brewer at Wise Bread points out, the only way to prove otherwise is to have someone there undercover for weeks counting every coin. The fact that sometimes the water bill has been supoenaed in an attempt to prove a disparity is humorous, but on a small scale is exactly the type of roundabout information gathering that law enforcement must often resort to figure out and prosecute much more elaborate cases. Car washes and hair salons also make easy covers, as would many other businesses where the product is a service rather than a physical product that can be tracked.

As Wikipedia succinctly puts it, the basis of all money laundering is a track record of depositing clean money before slipping in the dirty money. So there has to be a clean, or seemingly clean, operation for the dirty one to camoflage itself within or through. Wikipedia also points out the inherent problem for organized crime in money laundering--you have to co-opt someone on the inside of a respectable organization, very often a bank, to do it. And as the game grows ever more sophisticated, and as financial institutions are ever more scrutinized, finding helpers who are not only willing but able becomes increasingly complex.

I mentioned Swiss bank accounts and the like in my original questions, but I was thinking about storing money, not laundering it. In fact, countries with secretive banking policies play a huge role in money laundering, and in fact you kind of wonder why any criminal enterprise would bother with anything else. I mean it takes a lot of laundromats to clean up the kinds of proceeds that come from illegal drugs, doesn't it?

How Stuff Works has a nice little lesson on money laundering, and if you're so inclined you can take a little quiz here.

Whew. Let's just say that you could enter the world of lore about money laundering and never, ever come out. It's fascinating stuff, really, and though the crimes it covers up are very often reprehensible, what I come away with after just dipping a toe into the ocean of literature is that what money laundering and the attempts to stop it are really like is an elaborate and ever changing game. Neither side is ever going to conclusively win, but it appears that for the foreseeable future, the money launderers will be ahead--to the tune of at least $500 billion dollars a year (and that's one of the lower estimates.)

...In the time between posing this question for myself and actually getting around to answering it, a short article on how Iran has been managing to get around sanctions has appeared, which illustrates at least a few of the principles of laundering. You can read it yourself, as well as the much longer New York Times piece it links to, but basically, the U.S. blacklisted 123 ships from the Islamic Republic of Iran's Shipping Lines, and Iran has gotten around that pesky problem by reregistering all but 43 of the ships to supposedly foreign companies, which later turned out to be shell companies that actually had offices in Tehran, run by managers of the original shipping line!

You would think it would be much harder to launder a ship than a little chunk of change, but apparently not so much...


  1. Seana, my thoughts are on how modern day technology affects money laundering. I mean, most of the time in this day and age, the amount of money somewhere is really nothing more then what some computer says it is, so how much easier is it now to "launder" money when it's nothing but a number on an account?

  2. Hey--new pic!

    I think you're right on point, especially after watching this clip on Sixty Minutes last night.
    cyber wars

    As someone said there, the financial system is all based on trust. Once that's undermined, you're left with nothing.

  3. Sean,

    Very intersting stuff. I scored 6 of 8 correct on the quiz. A 75 % keeps me in class antoher semester. Money laundering, "paper hanging", and "the skim", have always held a facination for me. Like Glenna mentioned, it all seems to be done electronically now. Although, I still run into "all cash businesses" and always think, who do they think they are fooling.

  4. Way to go the extra mile by taking the quiz, Sean. I did well too, but only because I'd just been studying up for this.

    I really should have understood a lot more of this already, after all the crime fiction I've read and watched on television. But like so many things in life, I've put money laundering into that category of things that I understand well enough to pass over in the particular.

    I actually need to go to the laundromat today, and let's just say I'm going to be looking at it in a whole new light.

  5. I got 8 out of 8 right on the quiz...the second time around ;)

    I disagree with the last answer on the quiz though, the question about it not being possible to put money anon. in a bank. I think it could be done with cash and an ATM if you had persons ATM card. Especially now that some banks don't even make you fill out a deposit slip or envelope. I'm not sure why you'd do it, but I think it's possible.

  6. Oh, and Seana, yeah, I figured it was time to update the's been a couple of years I think.

  7. I got the last one wrong too. I didn't really think it through after, though. I believe you're right, though I suppose you'd have to have something on the person whose account you were using.

    My picture should be updated too. I don't have a digital camera so I'm a bit at the mercy of circumstance there. I like yours, though.