Money Laundering

1.1 What is Money Laundering?

Taken at its simplest, money laundering is a process by which the origins and ownership of
money, generated as a result of criminal activity, can be concealed. In effect, the money is
‘cleaned’ or ‘laundered’ through legitimate means and, as a result, the proceeds lose their
existing criminal identity and appear to have originated from a legitimate source.

This process is usually completed several times. It is common for this process to occur in respect
of the proceeds of drugs/human trafficking, prostitution, corruption, bootlegging, racketeering
and illegal arms smuggling.

The process allows the money to be controlled, without the fear that the transaction will lead
back to the originator(s) of the proceeds. Criminal organisations utilise this process to enable
them to exploit further criminal opportunities in a systematic and large scale manner.

1.2 The History of Money Laundering

The phrase “money laundering” was first coined at the beginning of the 20th Century. The
criminalisation of the actual or attempted laundering of proceeds of crime is also quite recent.
However, the practice of disguising income derived from illicit activities can be traced back to
the 13th Century B.C, when the oceans and seas were originally used as international trade
routes. Rife with pirates, the shipments were often purged and plundered for valuable
commodities and assets. Pirates were arguably pioneers in the practice of laundering such articles
as they and even the empires they served sought to profit from their treacheries in a way that did
not attract any ramification.

As the profile of money laundering has heightened, it has become an increasingly expensive,
time-consuming process to undertake and ultimately dangerous. By placing proceeds into a bank
account or other negotiable, redeemable or saleable instrument or object, the originator is
attracting tax liability and other obligations, which if not fulfilled, can ultimately lead to the
illicit origins of the proceeds being discovered.

Alphonse “Al” Capone or Scarface, probably the most famous mob gangsters, created a criminal
organisation in America in the 1920s, during the US Prohibition Era, grossing an estimated
$100,000,000 of illegally gained proceeds annually, which he laundered through a series of
businesses. However, his subsequent incarceration in the 1930s was not as a result of money
laundering or his criminal activities such as bootlegging, prostitution and gambling, but in fact
was as a result of being found guilty of a $1,000,000 tax evasion. His imprisonment in Alcatraz
ultimately brought an end to his Chicago based operations.

Al Capone’s incarceration, however ultimately backfired on the authorities as it forced criminals

to become more “organised” in order to profit financially from their illicit activities. Later
gangsters such as Meyer Lansky grasped the importance of creating businesses, not only as
mechanisms to launder money, but also to provide “fronts” for their illegal activities. Casinos are
notorious business “fronts” for illegal activities. Las Vegas was infamous in the 1940s for being
a tool of money laundering, especially by the likes of Lansky and Benjamin “Bugsy” Seigel.

Lansky also understood and appreciated the usefulness of foreign countries that provide havens
for criminal activities. Later in life, Lansky would hold untold millions in Swiss bank accounts
and in banks and corporations in Hong Kong, Israel and throughout South America. He was an
expert at exploiting flexible governments and their officials and was never convicted of any
charges brought against him.

Today, Lansky can be credited for establishing the modern form of money laundering (described
below) and tax evasion. Ironically, the extent and sophistication of his operations may never be
fully understood as most of them still remain undetected.

As mentioned above, money laundering is certainly not a new concept. Those who conduct
criminal activities for financial gain have always attempted to profit from their efforts without
drawing attention to their criminal activities. As demonstrated by Lansky’s pioneering
operations, methods of concealment and money laundering have become increasingly
sophisticated. There are a number of reasons for this:

• The globalisation of the financial system: Advancements in communications and

transportation have allowed the concealment of crime and its proceeds to become a much
easier task in today’s world. Proceeds can be wired from one financial institute to another
instantaneously;

• Crime has become more global. It is no longer sufficient for enforcement authorities to
merely be aware of what is occurring within their own jurisdiction. They must anticipate
and cooperate with other authorities and jurisdictions as criminal activities can become
widespread in a matter of minutes;

• Also, criminals no longer have the desire to remain or limit their activities to one country.
If fact, Lansky proved that it is safer for them to move their property and business
between countries to avoid detection by local authorities. As a result, international
criminal organisations have become skilled and experienced at moving property from one
country to another, taking advantage of the notoriously lax legislation existent in some
countries that provides safe havens for foreigners seeking to conceal their wealth. Many
of these countries provide “dead ends” for investigators who attempt to follow the trail
left by the proceeds.

Money laundering has ultimately become a successful tool for criminals because the financial
system does not prevent the possibility of money laundering. In fact, if criminals are prepared to
make concessions, the system can be most accommodating. The financial transaction system was
set up to provide a safer exchange system for businesses all over the world. It generates detailed
and often permanent records of all financial transactions. However, the standards of scrutiny,
regulation and law are not consistently and universally applied. Flexibility is the key to success
for money laundering. The lower standards and lax legislation afforded by many countries
provide the necessary flexibility to allow criminals to exploit the system to launder their
criminally obtained profits.

1.3 The Money Laundering Procedure

Money laundering, at its simplest form, is a three stage process:

1. Placement or “Smurfing”

This is where the criminal proceeds are converted, through a succession of small and
anonymous transactions or deposits, into bank accounts or other negotiable, redeemable
or saleable instruments or objects.

The bank account is generally opened in the name of a corporation especially set up, with
the assistance (either willingly or subconsciously) of professionals such as lawyers, for
the purpose of laundering money. These corporations or businesses are known as
“fronts”, as their legitimate appearance conceals the illicit activities which generate the
criminal proceeds.

Small cash deposits are then repeatedly made into the bank account by a series of
individuals. The amounts are always small enough to fall below the declaratory
thresholds of the bank, thus ensuring that no further due diligence checks are made. The
cash, being now in a legitimate entity, loses some of its original illicit origins when it is
subsequently withdrawn or used to purchase further assets.
2. Layering

“Layering” is the second stage of the money laundering process. Here, the proceeds are
converted or moved further from the original source by purchasing legitimate assets, such
as property. The asset is then sold on to an independent, and often unsuspecting,
legitimate third party. This stage is often repeated several times, with the proceeds
appearing a little more legitimate than they really are on each occasion.
3. Integration

Some argue that integration, the final stage of the money laundering process, was the
only stage that Meyer Lansky failed to successfully achieve in his operations. On this
stage, the proceeds are injected into a legitimate economy. The most common example is
where the proceeds are injected into a legitimate business that has a high percentage of
cash sales (ie, a casino). The result is that the proceeds are ultimately cleaned and they
supposedly lose all of their original illicit origins. A profit can ultimately be made from
the original activity.

There are arguments, however, that “dirty” money, money associated with criminal
activities, can never lose its criminal origins no matter how many times the three-stage
process is implemented. The reason is that proceeds never disappear. They just change
their appearance and form, making it harder to trace them. Ultimately, money generated
from criminal activity is more restrictive than normal “clean” money. It can only be
invested in or spent on less visible and profitable activities. There always is a risk that the
proceeds will lead authorities back to the initial criminal activity, and/ or the
originator(s).