Origins
Law enforcement strategies change over time. The popularity of any one strategy may relate to initial perceived successes, political advantages, or technological changes that either facilitate new forms of criminal conduct or enable advancements in enforcement techniques. Money laundering is obviously not new; however, what is new is the international preoccupation with the rhetoric of fighting laundering and terrorist financing.
Traditionally, law enforcement focused on the illegal activities of the criminal enterprises, with few resources targeting the illicit proceeds. However, beginning in the mid-1980s, this changed. As the chairman of the President’s Commission on Organized Crime in the United States commented in 1984: ”Money laundering is the lifeblood of organized crime … without the ability to freely utilize its ill-gotten gains, the underworld will have been dealt a crippling blow.” At that time, the attempt to seize and freeze illicit proceeds appeared to be a well thought out strategy that followed on the heels of the realization that ”kicking down doors” had no lasting impact on drug trafficking.
Likewise, the ”targeting up” efforts against the so-called kingpins was dubious given both the difficulty of actually convicting these people and the realization that the criminal operations could succeed quite well, often continuing to be run by the big-shot from a jail cell. The argument then became the too easily tossed off line: ”The heads of these criminal organizations may not dirty their hands with the drugs, but they do take possession of the cash.” If profits motivate criminals, then taking away the profit should reduce crime. Hence, law enforcement should go after the proceeds of crime. However, the difficulty is that despite the illegality and underworld connotations of the proceeds of crime, the laundering process itself is not an economic aberration. Indeed, it thrives and survives on the very same commercial transactions that most people utilize to sustain their own economic well-being and that drive the economy.
During the 1990s, the pressure from the international community intensified— most specifically due to the momentum and influence of the Financial Action Task Force (FATF). The FATF outlined a series of ”recommendations” (that were later enhanced) that specified what the member countries ought to put in place in order to illustrate their commitment to the ”war” against money laundering. Countries that did not comply were criticized and/or blacklisted for failing to put in place provisions such as a mandatory reporting regime for suspicious transactions and for failing to have a central financial intelligence unit to which all such reports could be sent. All of these changes occurred within little more than a decade. After 9/11, additional requirements were introduced when the FATF included fighting terrorist financing as part of its anti-money laundering mandate.
What Is Money Laundering?
As first described in the 1988 United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, a comprehensive money laundering operation satisfies three essential objectives:
• It converts the bulk cash proceeds of crime to another, less suspicious form.
• It conceals the criminal origins and ownership of the funds and/or assets.
• It creates a legitimate explanation or source for the funds and/or assets.
To realize the greatest benefit from money laundering, criminally derived cash should not simply be converted to other less suspicious assets. The illicit source of the assets must also be hidden. The third objective, while less frequently satisfied in most money laundering operations, is no less important than the former two. The effectiveness of a laundering scheme will ultimately be judged by how convincingly the scheme creates a legitimate front for illegally acquired cash and assets. In short, money is not truly laundered unless it is made to appear sufficiently legitimate that it can be used openly. This is the objective of the final stage of the cycle. One of the keys to satisfying the objectives of the laundering process is to conduct commercial and financial transactions that appear as legitimate as possible. The more successful a money laundering operation is in emulating the patterns of legitimate financial or commercial transactions, the less suspicion it will attract.
To satisfy the aforementioned objectives, the money laundering process generally entails four stages: placement, layering, integration, and repatriation. The initial placement stage is where the cash proceeds of crime physically enter the legitimate economy, which satisfies the first objective of the laundering process. Once the funds have been placed in the legitimate economy, a process of layering takes place. It is during this stage that much of the laundering activity takes place, with funds being circulated through various economic sectors, companies, and commercial or financial transactions in order to conceal the criminal source and ownership of the funds and obscure any audit trail.
The penultimate step of the money laundering process is termed integration because having been placed initially as cash and layered through a number of financial operations, the criminal proceeds are fully integrated into the financial system and can be used for any purpose. The final stage of the process involves repatriating the laundered funds back into the hands of the criminal entrepreneur, ideally with a legitimate explanation as to their source, so that they can be used without attracting suspicion.
The placement stage is the most perilous for the launderer since it involves the physical movement of bulk cash, usually in small denominations. It is at this stage that the offender is most vulnerable to suspicion and detection and where the funds can most easily be tied to criminal sources. Most often the money must enter a financial institution, and it is now mandatory for financial institutions, in countries that have complied with the recommendations of the FATF, to report all suspicious transactions to a central financial intelligence body within their jurisdiction. The financial institutions become ”enforcement” bodies in this fight against money laundering in order to detect laundering. Once the funds are placed within the legitimate economy and converted from their original cash form, the opportunities for money laundering are increased exponentially: The funds can be transferred among and hidden within dozens of financial intermediaries and commercial investments, domestically and internationally.
The above description is what a ”good” laundering scheme should be. Most of the money laundering literature continues to pay homage to this U.N. definition or a similar description of money laundering and then proceeds to ignore what is required in order for criminal proceeds to be actually ”laundered.” In reality, what has become accepted as money laundering is the mere use or deposit of proceeds of crime. In many of the cases that are called money laundering, the illegally derived revenue was merely deposited or spent on expensive commodities with little attempt to hide the original source of the proceeds. However, in other cases, millions of dollars of criminal funds were proficiently cleansed through elaborate operations that involved numerous economic sectors, dozens of professionals, a myriad of illusory guises and techniques, and hundreds, if not thousands, of obfuscating transactions. For both analytical and law enforcement purposes, attention should be paid to how the proceeds of crime are disposed of by the criminal element—with particular emphasis on how it enters and circulates within the legitimate economy—regardless of whether these transactions satisfy the definition of money laundering.
In a 1990 Tracing of Illicit Funds report completed for the Canadian government, an analysis was completed on all cases identified by the Royal Canadian Mounted Police as having a large financial component. The analysis of these police cases revealed that the sectors of the business or financial markets most often used by criminal enterprises in their laundering activities or to facilitate these schemes included the following:
• Deposit-taking institutions
• Currency exchange houses
• Securities markets
• Real estate
• Incorporation and operation of companies
• Miscellaneous laundering via big purchases (vehicles, boats, planes, travel agencies, gems, jewelry, and so forth)
• White collar professionals such as lawyers and accountants
The report concluded that money laundering in Canada was a thriving industry that had demonstrated that it could utilize any number of economic sectors and services. The Canadian findings were also shown to be true elsewhere. Australia replicated the study and produced similar results, detailed in a 1992 report titled Taken to the Cleaners: Money Laundering in Australia.
Laundering Schemes
Laundering schemes range from the extremely simple to the extremely sophisticated. The majority of the cases that the police identified were drug related, were located in the largest urban centers, and tended to make use of nominees to conceal ownership of the proceeds. We might consider the laundering schemes falling along a continuum. The basic distinctions reflect the degree of seriousness of the schemes— serious in terms of the amount of money involved and the ongoing nature of some of the schemes.
Some cases involved a simple-limited scheme. These cases involved a low amount of money being laundered on an ongoing basis. A typical scheme might involve a tavern, restaurant, vending machine company, or actual laundry—any business where the inventory is flexible and dirty money can be claimed as profit from the legitimate business. There is obviously a fairly restrictive ceiling on how much money can be pushed through these laundering operations. The business owner would have to pay taxes on these claimed profits, but this amount would be thought of as a business expense. The criminal proceeds gain the appearance of legitimate earnings that could be openly used.
Some fairly simple schemes are, however, less restrictive. This second category was referred to as simple-unlimited. There are businesses that have such large budgets and involve such a high level of technical expertise that it is typically very hard to refute the amounts of money required in the various operations. Dredging, waste, scrap metal, and construction industries are particularly suited for long-term, high-quantity laundering activity.
The next level of schemes becomes harder to trace, because in fact ”tracing” is required. We might differentiate between serial-simple and serial-complex cases. A final category would be the international schemes. In reality, many of the serial cases, and certainly most of the truly complex schemes, involve an international component. The serial-simple schemes involve a large number of financial transactions and account manipulations. The movement of the money through these accounts is designed to deceive the police. However, in most of the cases involving these schemes, once the police begin to investigate, the schemes fail to protect the illicit proceeds. The ability to follow an audit trail will reveal the true source of these funds—or at least reveal that there is no legitimate source.
The serial-complex schemes are by definition more complex. These schemes usually require the assistance of professionals such as lawyers and accountants. Imaginative real estate flips, complex invoice manipulations, and penetration of the stock markets may be involved. In the 1990 Canadian study, 80% of the cases had an international component. The movement of dirty money across borders provides a powerful concealing advantage. Exporting the illicit funds offshore and then repatriating the profits back to the country where the proceeds originated allows the criminals to make use of the proceeds to perpetuate their criminal operation (that is, purchase more drugs) and then make use of legitimate business opportunities such as the provisions available in some jurisdictions that allow for tax incentives for foreign investment. ”Loan-back” schemes, front companies, and double invoicing are all part of any of these schemes.
The Role of White Collar Professionals
As noted above, the more sophisticated a scheme is, the more likely a professional will have facilitated the process—either knowingly as an accomplice or unwittingly by merely operating in a professional capacity. Legitimate businesses may knowingly accept cash for expensive purchases while ignoring the likely source of the funds. Michael Levi refers to the ”symbiotic relationship” between otherwise legitimate businesses and laundering. Professionals such as lawyers and accountants are seen as the gatekeepers, intermediaries, or facilitators of major laundering operations. They are able to offer not only their expertise but also their status, which serves to legitimate the various financial transactions that may be part of laundering schemes.
Lawyers, for example, may serve by providing a nominee function, conducting the various commercial and financial transactions, incorporating companies on behalf of clients, and managing the illicit cash, including coordination of international transactions. It is significant, therefore, that it is the lawyers in some jurisdictions that have resisted being included in some of the anti-money laundering enforcement requirements claiming solicitor-client confidentiality as the reason for their exclusion. While these professionals are often implicated in the criminal laundering, they are also valuable in working in a forensic capacity in partnership with law enforcement in fighting money laundering.
Impact on Policing
From a policing perspective, a focus on money laundering involves different types of skills, including training or recruiting special ”proceeds of crime” investigators. ”Traditional” policing seldom has the resources to successfully build complicated cases and follow the paper trails that often wind through numerous jurisdictions, making use of multiple corporations and nominees. Different policing structure, different policing expertise, and different working relationships with other police departments, other regulatory agencies, professional associations, and international contacts are all required. Investigators may require forensic accounting skills, computer intelligence systems, and sophisticated analytical work.
Increasingly, police are forming ”integrated” units that include this expertise in the form of having forensic accountants working directly with the police in assisting to trace the illicit proceeds. Ironically, one now must expect more laundering rather than less. As long as enforcement targets illicit proceeds, there will be more of a need for money laundering. In other words, enforcement that targets the proceeds of crime actually promotes more sophisticated forms of money laundering.
An earlier preferred theory was that organized criminals would use their illicit proceeds in order to ”buy into” the legitimate society and hence become legitimate (or at least allow their next generation to be legitimate). To the extent that enforcement has any impact on the criminal operations, enforcement activities may serve to ensure that criminals remain outside legitimate operations and only use legitimate businesses to further their criminal operations or to hide their proceeds before moving them elsewhere.
Unresolved Issues
The massive international antilaundering campaign is not a neutral activity but rather has been carried out at considerable expense in terms of resources, impact of the blacklisting sanctions imposed on certain of the more vulnerable nations, and possibly even on the way in which criminals conduct their business.
The results from all of the antilaundering strategies have been difficult to measure. As Levi states, ”… there are few defensible positive findings about the direct, short-term impact of money laundering reporting on prosecutions and on confiscations.” Assigning private sector institutions, such as financial institutions, enforcement responsibilities traditionally carried out by the state has numerous limitations. Different institutional cultures, different mandates, the profit-oriented and cost reduction goals of financial institutions, and hence different priorities will obstruct full compliance with the antilaundering requirements.
Given what remains a dearth of empirical information regarding the impact of laundering, the size of the laundering operations, or the impact of enforcement on the laundering operations, some critics question the international focus on anti-money laundering and challenge the notion that terrorism can be reduced via a focus on terrorist financing. The allure of seized dollars, the political sway over non-compliant states, the related focus on fleeing tax dollars, and/or capital flight all make these antilaundering campaigns attractive, and critics argue that the objective behind the antilaundering campaigns may have little relationship to crime control or even to terrorism.
Left as one policing tool among many, taking the profits of criminal activity away from convicted criminals makes sense. Using the intelligence gathered from the antilaundering strategies to advance police investigations is beneficial. However, the priority given to this approach and the international consequences of a ”harmonized” global commitment to the anti-money laundering strategies are perhaps more questionable. While one would not refute that organized criminal activities, such as drug trafficking, have a serious impact on society, the evidence is less strong that the criminal proceeds derived from these activities pose a significant additional harm, nor that the limited ability—regardless of the resources used in the effort—to deprive criminals of their profits will reduce the amount of these types of criminal operations.
Money laundering may, depending on the source of the funds, in fact have some positive benefits for some societies because it involves the transfer of funds from the underground economy (where it goes un-taxed and may be used to fund criminal activities) to the legitimate economy (where it may be invested or spent on legitimate goods and services and can be taxed). A more balanced focus on the criminals, their criminal activities, and the illicit proceeds may be the next enforcement shift.
