Dirty Cities

Towards a Political Economy of the Underground in Global Cities

L. Talani, A. Clarkson, R. Pachedo Pardo, L. Talani, A. Clarkson, R. Pachedo Pardo, Kenneth A. Loparo

• Publisher: Palgrave Macmillan
• Year: 2013
• ISBN:
  9781137343154
• Topic: Politics & International Relations
• Subtopic: Trade & Tariffs
• Index: Politics & International Relations

This volume uncovers the relations between globalization and dirty dealings in urban settings, focusing on some capital cities and on the relations between underground and overground dynamics all over the globe. It aims to provide a new take on the dark side of globalization.

Part I

Capital Sins

1

London: The Laundry of Choice? Money Laundering in the City of London

Leila Simona Talani

Introduction: Globalization, money laundering and the City of London

This chapter will try and analyse to what extent the City of London can be considered the ‘laundry of choice’ for many criminals. Moreover, it addresses the reaction of the City of London and of the United Kingdom more in general to the introduction of Anti-Money Laundering Requirements (AMLR). Finally it answers to the questions relating to the motivations behind the City’s attitude vis-à-vis both money laundering and anti-money laundering legislation.

In theoretical terms, this contribution adds to widespread literature underlying how globalization has produced a clustering of financial activities in global cities (Sassen 1991; 2000; Dicken 2011; Palan 2003; 2006; Palan et al. 2010). Globalization is also at the roots of the increased capacity of criminal proceedings to successfully enter the legal economy.

The definition of globalization adopted in this chapter is the traditional, qualitative one, recognizing the phenomenon of globalization as a qualitatively new one producing a number of transformations in both the realm of manufacturing production and in the financial markets (Mittleman 2000; Dicken 2011; Overbeek 1995; 2000). Technological transformation is at the root of the exceptional developments of financial markets in producing what is normally defined as financial globalization, i.e., the existence of around-the-clock access to financial transactions all over the world (Cohen 1996:269; 2001; Strange 1986; 1998).

This, however, does not mean that the physical location of financial markets loses significance. There is some consensus in the literature that financial globalization has ‘made geography more, not less, important’ (Dicken 2003:59; Coleman 1996:7). The location of global financial power has remained surprisingly unchanged and concentrated in a handful of urban centres, namely New York, London and, to a more limited extent, Tokyo. This concentration is unparalleled in any other kind of industry and it is also extremely stable (Dicken 2003:462). This resonates with Sassen’s assessment of the role of global cities as financial centres (Sassen 1991; 2000).

Moreover, financial globalization, as defined in this chapter, does not imply that financial elites, as the City of London, become disentangled from national boundaries. On the contrary, their role and their bargaining power inside the national polity increase as their economic position improves, leading to a shift in the power relations between the different socio-economic groups whose relevance can hardly be overestimated. This statement is true both for developed countries and for underdeveloped countries, where the establishment of off-shore markets produces incredible transformations in the local economy and social structure (Lilley 2000; Chapter 4 Part 2). However, ‘offshore’ does not only refer to the geographical location of economic activities, but to their juridical status as well. In reality, off-shore financial transactions also take place in the great financial centres of London, New York and Tokyo (Palan 2003:2; 2006; Palan et al. 2010).

Finally, unlimited, 24-hour access to financial markets leads to a great sensitivity of capital to interest rates, which, in the long run, reduces the scope for the adoption of differentiated national monetary and macroeconomic policies (Padoa-Schioppa 1994; Cohen 1996; Obstfeld and Taylor 2004).

This definition of financial globalization implies that not only legal, but also illicit money now can move across the world, around the clock with the click of a mouse, rendering it almost impossible to follow it among myriad jurisdictions. It is true that states and international organizations have tried and have adopted some rules to limit the capacity of dirty money to disappear.

However, as rightly pointed out in the relevant literature (Lilley 2000:3), the reality is that as of yet, no ‘global’ jurisdiction exists for money, meaning that with respect to global money laundering there are no rules at all; or, stated differently, there are no global rules for money laundering. Many states adopt practices in contrast with the prescriptions of money laundering prevention (Naim 2005). Even when states stick to internationally agreed protocols, loopholes in legislation and gaps in its implementation are so wide that money laundering continues unhindered (Yeandle et al. 2005).

Moreover, financial business being transnational almost by definition, legitimate business and banking institutions often have no idea of which money laundering legislation to implement. There is no international enforcement agency tracking international financial criminals and money launderers, and national regulators find it difficult to tackle cross-border transactions effectively (Yeandle et al. 2005:48).

Finally, even if everything was done by the banking system or business organization in question to prevent money laundering, globalization, especially through the Internet, has made it possible to easily circumvent regulation.

In the following section we will define what is money laundering, how it takes place and how it has been facilitated by globalization.

What is money laundering?

The origins of the term ‘money laundering’ can be traced back to the United States of the 1920s, when criminals used the laundering business to recycle the proceeds of their activities into the legal economy (Lilley 2000:5). But things have changed substantially since money laundering began; there are now a multiplicity of actors and even more techniques available to successful money launderers.

The IMF defines money laundering as:

‘… . a process by which the illicit source of assets obtained or generated by criminal activity is concealed to obscure the link between the funds and the original criminal activity’.

(IMF-http://www.imf.org/external/np/exr/facts/aml.htm)

In reality, laundering illicit money is not always a linear process bringing the proceeds of an illegal transaction directly to the legitimate business and banking system. The process can be extremely complicated and involve a number of actors and techniques that are almost impossible to be traced by authorities (Nordstrom 2007:97). Ultimately, however, if the money laundering is successful, the end of all illicitly gained money is always a legitimate financial institution.

A classic example of a money laundering scheme is the following:

From May 1994, two people used an accounting firm to launder the proceeds of sales of amphetamines. They regularly handed over to their accountant, brown-paper envelopes or shoeboxes containing US$ 38 000 to US$ 63 000 in cash, without any receipt being delivered. The accountant had set up a company and opened trust accounts for his clients, as well as personal bank accounts in the name of their parents. Some of the funds were used to buy lorry parts abroad, which were then resold in the country of origin, some were used to buy real estate. According to the investigation, the accountant and three of his colleagues had laundered about US$ 633,900 in return for a 10% commission.

(OECD 1999:85)

Globalization made things easier for money launderers all over the globe. It is almost a truism to say that globalization (or better, the technological developments associated with it) simplified things substantially to the extent that some authors provocatively provide ‘beginners’ guides to money laundering on the Internet (Lilley 2000; Nordstrom 2007:167).

How does this happen?

Money laundering is conventionally divided into three stages: (1) the placement of funds derived from the crime; (2) the layering of those funds in order to disguise their origins; and (3) the integration of the funds into the mainstream economy.

Many forms of illegal activity are cash intensive, although virtual money can now be a common proceed of an illicit activity. The first aim of the money launderer is to remove the cash from where it was acquired and put it where it will not be detected. The next stage is to disguise the source of funds by creating complex layers of financial transactions. The final stage of money laundering is to integrate funds into the normal economy so that these funds appear to be legitimate (Yeandle et al. 2005:12).

Placement is usually the riskiest stage when laundering money, as there is an immediate connection between the profits and the crime. Bearing in mind that a successful money launderer first needs to conceal his/her identity, the Internet has made that task extremely easy. One can open an anonymous credit card account online, often for life, which can then be financed with illicit money. Similarly, Internet facilities allow for the opening of bank accounts in the name of corporations based in off-shore centres. Many websites offer false identities selling fake passports (even diplomatic ones) and there is even the possibility of buying legitimate passports from various countries, which in some cases actually confer special diplomatic privileges. Other websites offer anonymous securities trading accounts or allow the establishment of shell business entities off-shore (Lilley 2000; Nordstrom 2007:167–179).

Another common way to gain access to the banking system is the use of correspondent banking, which has been greatly facilitated by modern technology. Correspondent banking often opens the door to the international bank’s global network to customers that the bank cannot directly monitor or police and that can transfer funds at the click of a mouse (Naim 2005:145).

Globalization has also made the second stage of money laundering much safer. Normally called ‘layering’ (or agitation or commingling) (Lilley 200:49), this process consists of moving money around by dispersing the bulk of criminal proceeds into different accounts, countries or investments.

The classic method of layering money is the front company. No longer a ‘launderette’ as in the 1920s, there are now plenty of opportunities for establishing ‘brass plate businesses’ which are incorporated in a specific jurisdiction but have no tangible physical presence. Some countries even allow corporate trusts that conceal the owner’s identity (Naim 2005:147).

However, some of these companies are perfectly functioning and some jurisdictions, like the United Kingdom, are softer than others with regard to the establishment of similar enterprises (Naim 2005:147; below).

Moreover, modern technology makes it possible to invest in Internet pornography or online casinos and sports gambling, where the level of regulation is low and the possibility of remaining anonymous very high (Naim 2005:148).

Ultimately, money is integrated into the legal economy through a legitimate transaction of any kind (a payment for professional services; a legitimate purchase, especially commodities and especially precious metals) (Lilley 2000:49; Nordstrom 2007).

Overall, manipulating money has become much easier through globalization and some of these activities are not even strictly illegal in many contexts. Buying from your own bank, transferring money in different countries through it, making a loan to yourself or to finance one of your businesses, multiplying the number of businesses you are involved in, and even changing the sets of ownership names, moving profits internationally as inter-business finance so as not to pay taxes on them and finally employing a horde of lawyers, accountants, financiers and managers to take care of all the activities and thus legitimize profits, none of this is illegal per se, but allows for any kind of illicitly obtained money to come out whiter than white (Nordstrom 2007:179).

Let’s see to what extent the City is involved in similar practices.

The City of London as a laundry of choice

It is very difficult to establish through evidence to what extent the City of London is involved by the phenomenon of money laundering. As Lilley states, ‘by its very nature, the whole point of a successful laundering operation is to convert dirty funds in one part of the world into clean money in a respected and respectable financial center’ (Lilley 200:17).

The City of London is certainly one of the most respectable and, above all, respected financial services centres in the world, and it is also one of the main final ‘depots’ of washed money. In a way, the City of London (or another established financial centre such as New York or Tokyo) is by definition the final stop of illicit money if the money laundering process is successful.

One could say that the City’s personnel or institutions cannot be held accountable for this, and of course it is very difficult to prove the contrary (although not impossible). This does not, however, eliminate the fact that the City of London and the British financial sector are among the winners (and there are, unfortunately, many losers!) of the process by which money obtained through drug trafficking, sex exploitation, arms dealing, smuggling of migrants and similar practices is given a new, cleaner face.

There is also another way by which the City of London contributes to a successful money laundering. Its bankers, lawyers, accountants, company formation agents, tax advisers, fiduciaries and other groups of professionals lend their services, both knowingly and unwillingly, to criminals for substantial commissions: ‘Pecunia non olet’, or, at least, not after being laundered.

Moreover, many city markets are used as vehicles for money laundering. The gold market is indeed extremely important for money laundering. Gold is both a commodity and, to a lesser extent, a means of exchange for covering transactions involving criminal proceeds between Latin America, the United States and Europe (Nordstrom 2007; OECD 1999). And the global centre for gold exchange is the London Bullion market.

Finally, we should not forget that the ‘off-shore’ economy, which so contributes to a successful money laundering activity (OECD 1999), is very often an on-shore activity, concentrated in the most important global financial centres, namely, New York, Tokyo and, obviously, the City of London. Referencing Palan (2003; 2006; Palan et al. 2010), we may define off-shore as ‘juridical spaces characterized by a relative lack of regulation and taxation’ (Palan 2003:9; 2006); and therefore, off-shore can be a market or a set of transactions which take place in a major financial centre. As an example, it is worth noting that the foreign exchange market, with a daily turnover of $2 trillion, is almost entirely off-shore (Palan 2003:7; 2006). Thus, off-shore does not refer to the geographical location of financial activities, but to its juridical status. For many of its activities the City of London enjoys a clear ‘off-shore’ juridical status: ‘there is nothing the City of London would like more than getting rid of its messy hinterland, Great Britain’ (Palan 2003:175).

The ‘messy hinterland’, however, also provides for other locations, apart from the City of London itself, to conduc...

Table of contents

• Cover
• Title Page
• Copyright
• Contents
• List of Figures and Tables
• Notes on Contributors
• List of Acronyms
• Introduction: Globalization and Its Impact on the Shadow Economies in Global Cities
• Part I: Capital Sins
• Part II: Underground/Overground
• Conclusion: Assessing the Dark Side of Globalization
• Index