Money Laundering Prevention

Deterring, Detecting, and Resolving Financial Fraud

Jonathan E. Turner

• Publisher: Wiley
• Year: 2011
• ISBN:
  9781118086681
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Auditoría

A how-to guide for the discovery and prevention of the illegal transfer of money

Written for the private sector—where most money laundering takes place—this book clearly explains shows business professionals how to deter, detect, and resolve financial fraud cases internally. It expertly provides an understanding of the mechanisms, tools to detect issues, and action lists to recover hidden funds.

• Provides action-oriented material that will show how to deter, detect, and resolve financial fraud cases
• Offers an understanding of the mechanisms, tools to detect issues, and action list to recover hidden funds
• Covers mechanisms for moving money, identifying risk exposures, and investigating money movement

Arming auditors, investigators, and compliance personnel with the guidance that, up until now, has been restricted to criminal investigators, Money Laundering Prevention provides nuts-and-bolts information needed to fully understand the money laundering process.

Chapter 1
Understanding the Process of Money Laundering

What Is Money Laundering?

People often see money laundering as an exotic process, an objective whose very name evokes some mysterious and nefarious financial crime. In reality, it is one of the most common—and commonly misunderstood—financial activities connected to illicit financial schemes, including fraud, tax evasion, narcotics, human smuggling, corporate fraud, government corruption, and terror financing. The beauty and danger of money laundering is that it touches them all.

Anti-fraud professionals, criminal investigators, tax auditors, government prosecutors, and corporate compliance professionals are all focused on different aspects of these actions, oftentimes missing the larger picture due to an incomplete understanding of what money laundering is, how it works, and who is involved. It is important to understand the meaning, role, and history of this kind of activity to see how it began and evolved to impact a wide range of business functions. Today money laundering is a criminal business, with the emphasis on the business aspect. To merely look at one statute or another, or focus on the criminal elements involved, significantly misses the point. Today the attraction to money laundering is profit—it is a service-oriented business where readily available knowledge can position people to make significant profits with little perceived risk.

This chapter explores the origins and evolution of money laundering, tracing it to the current day, providing the foundation necessary to deter, detect, and document money laundering activities. With this foundation, the role and responsibilities of the money launderer can be explored as well as what makes money laundering so attractive to all kinds of people engaged in criminal activity. Understanding why something is done, as well as how it is accomplished, often provides the best path for defending against it. Simply calling something a “crime” is unlikely to make much of an impact where the financial benefits are often compelling.

Money Laundering Defined

What we now refer to as “money laundering” is popularly said to originate from Mafia ownership of laundries in the United States. Gangs generating illicit cash from extortion, prostitution, gambling, and other enterprises purchased legitimate businesses through which they funneled these illicit goods. True or not, the term stuck and for people seeking to legitimize cash, the laundry analogy is popularly accepted.

The reasons date back to Al Capone. Although reputed to be one of the biggest criminal leaders of his time, he was convicted of simple tax evasion. Seeing what happened to Capone forced gangsters to be more careful with the origin, accounting, and disbursement of their funds, and although the world is no longer the cash-based economy it was in the 1930s, the lessons they learned in trying to avoid criminal prosecution are still used today.

To protect the mob bosses' money from government insight, Meyer Lansky is reputed to have developed the modern money laundering approach. He created a process whereby cash from crimes in the United States was taken to Switzerland and loaned back to entities owned or controlled by the various illegal gangs. The “loan-to-back” concept, which can obscure the real timing of the illicit funds, is still one of the more popular mechanisms for laundering cash. It allows the beneficiary to document, declare, and utilize cash while providing limited recourse for government investigators.

Money laundering has been defined in a variety of ways by a variety of sources. While the definitions used by various regulators, criminal codes, and law enforcement agencies are valid, they and others like them are mostly focused on the criminal aspects, the accounting aspects, or the illicit nature of the actions. For that reason, most are incomplete to a proper understanding of the laundering process. Traditional definitions have focused on the activities involved and are usually divided into three phases: (1) placement, (2) layering, and (3) integration, or some variation on those themes. While action oriented, these definitions also cover a lot of perfectly legitimate activities. Creating an adequate definition is challenging, since the basic roles and actions are often disputed, and the process is global where the lack of common practices and codes of conduct leave room for debate about the meaning of even the word illicit. This book uses a process similar to zero-based budgeting in that each step in the process is built from the ground up, creating a viable definition for the objectives and actions involved in money laundering.

You have to look no further than a criminal trial to see how diligently the standard definitions are disputed, as the prosecution attempts to corral the activities under this title and the defense argues they are merely common business activities. The problem with most standard definitions is that both the prosecution and the defense are correct. Money laundering in the criminal sense involves the use of criminal or illicit funds and assigns criminal liability to otherwise legitimate business practices. Thus the first task in defining money laundering is to recognize that it is a business function. That is, money laundering involves the use of traditional business practices to move funds and the people who engage in this activity are doing so to make money. The mere fact that the activity has been criminalized does not change its underlying nature.

Why Do People Launder Money?

While it is possible given some psychopathic personalities, it is exceedingly rare that anyone gets involved in money laundering because he or she wanted to commit a crime. It is far more likely that the person would get involved because the activity is profitable. Treating the topic as a crime, however, misses the business realities that impact legitimate participants and financial transactions and, eventually, the investigation into the money laundering itself.

As a business activity, money laundering can further be divided among those “self-employed,” who launder funds for their own use, and “service providers,” who provide a commercial service to others. Again, the mere fact that these activities may or may not be legal in the jurisdiction has little bearing on the actions themselves. Thus a more complete definition has to encompass both the personal actions and the professional initiatives.

This leads to the motivations of the actors in money laundering. If the intent is to hide illicit funds, then the transactions will have no or limited legitimate business purposes. Here there is a clearly differentiating action. Where the process serves a legitimate business function, it will take the path of least resistance. In other words, people being people do things in the simplest and most straightforward way to accomplish the task. When laundering illicit funds, however, there is no legitimate business function being served and thus the actions often violate this rule of human nature. Since the aberration is due to the laundering objective, it provides support for an actionable definition of the process.

Thus far the definition includes a business process that provides a means for profit, either on an individual or service provider basis, whereby overly complicated mechanisms are used to mask the infusion of illicit funds into legitimate commerce. But is that complete? Or is there more to understanding exactly what is being done?

To test if there is more, look at the question of the origin of the funds. Are the actions taken related to the underlying illicit nature of the funds? Surprisingly, the answer is no. Tax evaders, spouses seeking to hide parts of the marital estate, corrupt politicians, embezzling employees, and terrorists all use astoundingly similar mechanisms to hide the movement of money.

People looking to hide the movement of funds are interested in two primary things: (1) safety and (2) secrecy. They are looking for mechanisms that will allow them to move the money with minimal risk of loss and keep the knowledge of those movements hidden from perceived adversaries. This is instructive into the thinking and mechanisms chosen.

Consider the lesson of Eliot Spitzer, the former New York governor who was involved in a prostitution ring. His long career as a prosecutor and politician should have given him the knowledge necessary to hide his actions (that is, allegedly paying a prostitute) from the government entities he served. Yet, despite his knowledge of how the government investigations were conducted, his actions fell squarely within their view. Why? Look at what he was trying to do. He was focused on hiding his alleged activities from his wife—she being the perceived adversary. He was not worried about hiding his actions from law enforcement per se because he was not hiding his financial transactions from an investigation. He did not care that he was “Client no. 9”; he cared that his wife did not discover he was “Client no. 9.” Thus the perceived adversary is extremely important in differentiating and defining the money launderer's actions.

When the money launderer identifies the perceived adversary, he can make all kinds of adjustments to the scheme and go undetected for years. This can be seen by looking back at the Barings Bank scandal of the 1990s. Nick Leeson, in his book Rogue Trader describes being caught several times over the course of his unauthorized speculative trading. He recounts how each time he was able to talk his way out of discovery because the people who caught him did not understand what he had done. So the structure of the transactions depends on who the likely discoverer could be and what they are likely to look at or for.

Another fraudster from the 1990s, Walt Pavlo, makes the same point in his published statements. He describes knowing what the auditors would look for and providing them with distractions to keep them away from what he was hiding. In other words, these overly complicated mechanisms described above are not incidental; they are required to conceal the activities from discovery.

The Money Laundering Cycle

The definition of money laundering now needs to expand to encompass a series of actions where the money launderer conceals his actions from a perceived threat—but not from all possible lines of discovery. This leads him to create façades, illusions that can only prevent scrutiny from the perpetrator's chosen direction or perspective.

Further, the actions are not only taken to hide, but they are taken to legitimize. An essential element in the process is the conversion of a wide range of illicit funds, including proceeds of street crime, narcotics trafficking, official corruption, corporate fraud, kickbacks, bribes, and even terror financing into apparently legitimate income. While a small portion of laundered funds are intended to be hidden for some period of time, the eventual purpose will be for the initiator to publicly use the funds. The mechanisms, therefore, must use otherwise legitimate types of transactions, otherwise legitimate entities, and involve otherwise legitimate intermediary purchases to create the appearance of legitimacy. This concept, renting credibility, is often why and how ordinary organizations are involved in money laundering transactions. And since they provide a vital service to the money launderer, they are often compensated for their roles, which is an incentive to ask limited questions or to look the other way entirely.

This ability, and often willingness, to compensate people and organizations for their involvement creates a subtle encouragement for both participation and silence. Such entities may justify their involvement as saying that they did nothing different, but since they have accepted compensation for their role, their motives are clouded by at least the appearance of potential impropriety. Even when their actions appear otherwise ordinary, the fact that they have been compensated changes their motivation. As a for-profit enterprise, money laundering operators used compensation, coercion, bribery, and other forms of illicit pressure to induce otherwise law abiding citizens to become participants in the scheme. The use of ordinary individuals further produces the appearance of legitimacy and concealment for the money laundering operation. It also serves to decrease the likelihood that when found it will appear to be a criminal enterprise. Thus the definition must be expanded to include the attraction of individuals with no criminal objectives but purely financial objectives, who will become partners and promoters of the scheme.

So this yields a definition of money laundering that encompasses a range of otherwise ordinary business activities that are designed to hide the illicit source of funds, the illicit use of funds, the control of funds, or obscure the purpose of the funds from outside parties and provide privacy, access, and legitimacy to the end-user. The process appears harmless, enticing many people to actively consider participation and, when under stress, becomes an acceptable action. This creates a shared purpose, process, and role, where otherwise ordinary individuals and hardened criminals appear to act the same way. By hiding among the sheep, the wolves are much more successful. In laundering money, people seek to disguise the source origin or destination of cash, ending with the appearance of legitimate funds. Were the underlying funds legitimate, there would be no need for the time, risk, and expense of the laundering process. So money laundering, as the term is used today, indicates illegal conduct, but can involve any inappropriate financial behavior, including violent crimes such as extortion, drug trafficking, and arms smuggling; and nonviolent crimes, such as embezzlement, fraud, and corruption; and even personal motives, such as tax evasion and divorce. While resolving money laundering transactions is often like solving a puzzle, the model revolves around three related steps:

1. 1. Placement
2. 2. Layering
3. 3. Integration

The first step, placement, generates the cash. This can consist of any activity that creates cash that the recipient wants to hide. It may involve the sales of legal or illegal products, the acceptance of improper payments, or the removal of company assets. Whatever the source, the result is money, usually cash, which could implicate the individual unless its origins can be dis...

Table of contents

• Cover
• Table of Contents
• Title
• Copyright
• Dedication
• Preface
• Acknowledgements
• Chapter 1: Understanding the Process of Money Laundering
• Chapter 2: Motivations for Getting Involved
• Chapter 3: Mechanisms for Moving Money
• Chapter 4: Going Global
• Chapter 5: Technology and Tomorrow
• Chapter 6: Discovery and Prevention
• Chapter 7: Terror Financing
• Chapter 8: Identifying Risk Exposures
• Chapter 9: Investigating Money Movement
• Chapter 10: Reporting and Recovery
• Chapter 11: Conclusion
• About the Author
• Index
• End User License Agreement