Let’s Talk About Money Laundering

We at RAGEPATH predict that money laundering is about to become a major topic of public discourse in America. While there will be many specific things to say about that topic and its relationship to Trump in the near future, we thought it might be helpful to provide a little primer in the basics of money laundering. You deserve to be prepared.

What is Money Laundering, exactly?

Good question! Let’s say you come into some money you’re not supposed to have. You want to enjoy the possession of your money, but you’re not supposed to have it. So to enjoy your money, you have to come up with a story to explain how you came into unexpected money. Let’s start with a really simple example.

I’m not proud of it, but when I was a child, I used to steal money from my older siblings. They were old enough to earn an allowance and work for the neighbors, but I was not. As long as I wasn’t too greedy, my siblings wouldn’t notice a dollar missing here or there. But I was too young to have any legitimate income! So how could I explain coming into a dollar?

The scheme I came up with was quite simple. While walking to school one day, I’d be sure to walk half a block ahead of my siblings. Then I would noticeably stop and walk over to a bush. I would then hold up my stolen dollar and claim I had just found it lying in the bushes! Everybody saw me find the dollar, so there could be no doubt it was legitimately mine.  Even the sibling who had been robbed would agree that it was truly my dollar and marvel at my good fortune!

Voila. The money had been laundered. Stolen cash was turned into honest cash by telling a good story of how I’d come by it. And that’s all money laundering is. You concoct a lie to explain why you deserve money that has been acquired improperly.

The “dirty money” may have been simply stolen. It may have been confiscated from honest businesses as “protection” from harms you would otherwise inflict on those same businesses. It may have been earned illegally – by selling drugs, selling sex, performing assassinations for hire. The laundering process doesn’t care where the money came from. It’s just a method for explaining why you have money that you’re not supposed to have.

OK… so … how does money laundering work?

That’s another great question! While there are many different schemes for laundering money, all money laundering schemes have three basic components:

  1. Placement: This is the earliest stage of the laundry cycle, and it’s kind of like “spot cleaning” your dirty clothes. The cash you’ve generated illegally has to enter the money system. But large transactions trigger reporting requirements that require people to identify themselves and explain how they came up with the money. The most common form of placement is called smurfing – you divvy up your ill-gotten gains among lots of different people, who each make transactions too small to trigger reporting requirements. Collectively they create a legal pool of money that doesn’t have to be explained. Casinos can be very helpful to smurfs. Especially if they don’t make required transaction reports. But of course, at a real casino you’d expect to see actual gangsters trading in illicit cash for chips if there were truly something amiss.
  2. Layering: Once your smurfs have generated a pool of money with no origin story, that money has to be moved around enough times that nobody is going to know or care where it came from. This is where offshore money laundering havens like the Caribbean island of St. Martin or the Dominican Republic come in handy. Money gets shipped to secretive jurisdictions outside the reach of law enforcement, then it gets shipped to somewhere else. When it arrives somewhere else, there’s no way to know where exactly it started.
  3. Integration: This is the last and most important stage of the process, because this is the moment where the crook actually receives his filthy lucre. This is the drama of finding the dollar under the bush. Everyone sees you get the dollar, everyone knows it has to be legit. Putting out a press release announcing a doomed financial deal with America’s most famous real estate tycoon could be a great way to show off the legitimacy of a transaction.

So, that’s the basic structure of every money laundering scheme.

Am I going to need a glossary?

Probably. You’ve already learned what “placement, layering and integration” are. Here are some other key terms you might want to understand:

  • Smurf: A “smurf” is someone who receives a small share of a large pool of illegal cash and makes transactions too small to trigger reporting requirements. These busy beavers are the smallest fish in the money-laundering food chain. It should be noted that in nearly lawless states (like many former Soviet republics), smurfs are not necessarily required to create a pool of untraceable money.
  • Nominee: A “nominee” is someone who seems perfectly legitimate, receives laundered funds, then secretly passes it back to the crook who “earned” the ill-gotten gains. In some ways, a nominee is the negative image of the money laundering crook. While the crook comes into cash that he never earned, the nominee earns cash he never gets to keep.
  • Shell Corporation: A “shell corporation” is a corporate entity whose only purpose is to pass funds around, obscuring their true source. It needs a bank account. It might also have weird assets – like an Asian trademarking company that owns private real estate in Virginia.  The point is, that the shell company conducts no recognizable business activity, but holds or passes assets and/or liabilities.

We may update this post to add more terms if I think you’ll need them.

Are there any common money laundering schemes I need to know about?

Yeah, there are quite a few common schemes. I’m very enchanted with the elegance of the “Black Market Peso Exchange Operation,” but if you’re as interested in Trump as I am, you don’t need to worry about that one. What do people interested in Trump want to know about?

Loan-Backs: A “loan-back” money laundering scheme is a particularly ingenious way to come into laundered cash without even having to declare it as taxable income. The goal here is to “borrow” money from a foreign bank (or a domestic financial institution that acts like a bank but isn’t regulated like one) that you may or may not ever repay. The nice thing about borrowing money is you don’t owe income taxes on it. If you repay it, the repayments are tax deductible as a business expense. If you don’t repay it, you might owe taxes on the forgiven debt. But not if you offered collateral that the bank can confiscate when you refuse to repay. And if it’s a foreign bank or a “shadow bank” that collateral might not be in the United States. It might even be a direct product of the illicit activity you’re trying to conceal! If bank secrecy laws are tight enough or regulators are lax enough, nobody will ever know.

So, the basics of this scheme work like this. You steal money overseas… wherever you like… Azerbaijan, Georgia, Ukraine, wherever works. You move that money around until it looks legitimate enough to deposit in an ostensibly reputable Western bank. Then you can use that deposit as security or a guarantee to finance a crazy loan in a Western country. Once you receive the loan in the West, you’ve got a legitimate reason to own and use that cash. Who cares if you never pay it back?

[More to come… smurfing in casinos, smurfing in real estate, other known real estate schemes]