Money Laundering

Why should you put your bills in the laundry machine?

Obviously, the spread of Covid-19 has made us all very sensitive to germs and viruses. Cash changes hands a lot of times and thus is the perfect medium to transmit diseases. … yeah, I’m actually talking about the art of financial subterfuge obscuring the illicit origin of illegally obtained money.

Apart from their ideologically motivated peers, criminals are driven by one thing: profit. Greed is the principal goal, but people that require money laundering skills don’t sell stolen chewing gum on the school yard. Instead, they have millions or even billions originating from illegal sources which need to be moved into official, legitimate and unsuspecting bank accounts of the criminals. Thus the money needs to be able to be handled just like any other legitimate money.

The problem is, as soon as a sovereign (and hopefully clean) police force would ascertain that an investment was done with money originating from illicit sources, they are most of the time allowed to seize the investments.

The goal is now to disguise the financial assets so they can be used without detection of the illegal activity that produced them. The term ‘money laundering’ describes the process of transforming the monetary proceeds derived from criminal activity into funds of an apparently legal origin.

Who is a potential user of money laundering? Drug cartels, terrorists, mobsters or the mafia, human traffickers, illegal arms dealers and the list goes on and on.

Money Laundering Methods

In principal, money laundering consists of three distinct stages: placement, layering, and integration. Personally, I use the terms entry, obfuscation, and integration which are more vivid terms in my opinion.

The first step is to place the money at the entry points of the modern financial system. If you got cash, you get ‘smurfs’ which repeatedly deposit money amounts just below the reporting line. Usually, deposits below 10.000 USD don’t have to be reported in the US, which led to bank tellers close to the Mexican border on the US side receiving up to 400.000 USD of deposits per week in cartel-linked accounts parceled out in 10k portions and deposited by local Americans to reduce suspicion.

The second step is to obfuscate the origin of the cash. You start moving money through different accounts or start to create round-about invoices with complicit companies. For example, a smurf would deposit money in a bank account or would pay a bogus invoice for a company that only exists on paper. Then the fake company would pay a fake invoice of another company which would then have an apparently legitimate income stream.

Layering or obfuscation serves the purpose of creating a fake, seemingly legitimate origin of the funds. Once a fake story for the money has been created, the main financial investments can be accomplished. Imagine a suspicious person trying to buy a condominium in New York with a pile of unexplained cash and a real estate company headquartered in the Bahamas buying the apartment next to him. The real estate company got its capital from the drug trade, human trafficking or sanction-busting arms trade just like the individual next door, but the police would be way more interested in the sole person with 15 million USD in unexplained cash and an unexplained stream of income. The real estate company first laundered its capital through multiple layers of obfuscation and wouldn’t provide a reasonable doubt for the origin of its money. It’s basically all about appearances.

I’ll outline some of the more common money laundering schemes. It’s important to note that dubious origin of criminally obtained money can in theory always be traced back. But the money launderers put in place so many layering steps that when law enforcement turns around the 20th corner and still has an apparently legit money stream, they’ll eventually give up.

You can have fake trials in which both parties are in on the jig and ultimately under your control. The defendant uses your illicit cash to pay the plaintiff the reimbursements. But, lo and behold, both the plaintiff and the defendant are just conduits with the damages paid creating a clean income receipt. If the police comes knocking, you can present the receipt of the indemnities.

Exaggerated or even fake invoices which can include non-existent services. Consulting on intellectual property is a favourite scheme, as the intellectual property is hard to value. Since the worth of intellectual property is more symbolic or even intangible you can pay whatever you want for consultation. I’ll outline an interesting scheme that was concocted to launder money in Germany using the sales of gangster rap music. Organized crime supported musicians and ordered their drug dealers, respectively and more formal vendors of miscellaneous illegal wares, to accept purchases of the musicians work in exchange for illicit goods. Instead of paying for drugs, they paid for intellectual property of the artist and thus the organized crime group had a steady inflow of money from music sales, which in itself is a legit business. This was expanded to bot farms in the era of music streaming with bot farms which are controlled out of the dark part of the internet anyway. The bot farms listened repeatedly to a musicians music who was under contract with an organized crime group. Thus Spotify paid the artist for the increased number of streams and the OC group got their cut.

Alternatively Mr. Criminal can buy real estate way below the market value with the difference to the full market price price being paid in illegal cash. Afterwards, the property is quickly sold for the appropriate price on the open market. The illicit cash is given to the original owner and the money launderer creates a bogus profit via the sale at market level.

You can convert illegal cash to casino jetons and a little bit is used for gambling. Since gambling is intrinsically stochastic nobody can really trace back when you lost or when you won more money. After some time, the casino jetons are cashed back in and you get a receipt that you’re apparently an awesome gambler.

The most straightforward method is still fictitious business activity of cash-based enterprises. There, the illegal cash is simply mixed into the income stream proportional to the untainted money stream. I mean proportional since even the most amazing taco truck usually doesn’t make 200 million USD in revenue per year. The usual suspects are dry cleaning shops, casinos, supermarkets, drug stores, car shops, and anything that has a largely cash-based income stream.

Auctions of hard-to-value objects have also become a popular method and especially the art market has been captured. You basically let two fake personas outbid each other with your own illegal cash. The object with little intrinsic value is offered by you and the bidders get your illegal cash. The sale creates a fake yet clean receipt. Funnily enough, auction houses are exempt from money laundering prevention laws and you can often see people on phones bidding millions for an anonymous bidder watching it all from his or her sofa.

Offshore Jurisdictions and Banking

The principal safeguard against money laundering is the stringent enforcement of Know-Your-Customer (KYC) and Anti Money Laundering (AML) laws. Ideally, the entry points to the financial system should have gatekeepers who check for potentially illegal sources of money. Obviously, there is a conflict of interest since a lot of money means a lot of business for banks as was shown by HSBC scandal with the cartel money or the Raul Salinas story.

Fortunately, a whole industry sector has blossomed between the beaches of the Caribbean, the mountains of the Alps, and in general small insignificant countries selling the legislative sovereignty to the highest bidder: the offshore finance industry. It’s basically a sunny places for shady people.

Offshore finance centers implement effectively no regulation of the financial industry within their borders and similarly implement convenient financial secrecy laws by allowing trusts, straight-out banking secrecy limiting the information of who actually owns a bank account, nominee directors of shell companies hiding the true owner of a company, and the like.

By using the intricacy of modern tax codes, you can create a multitude of opaque companies which move money between them for no apparent reason. For law enforcement, proving that the money being moved around is originally from illicit conduct is close to impossible. Since innocence until proven wrong is a tenet in well-functioning judicial systems, it becomes close to impossible to prove the illegal source of the money.

Using international banking, one could use mirror trades like the ones Deutsche Bank executed for Russian customers in 2007. Two well-capitalized accounts, one in London and one in Moscow, would be under the control of the same entity at Deutsche Bank. The Moscow based account would use dirty money to buy stocks in a company and Deutsche Bank holds the stocks as a broker. Via ‘remote booking’ the Moscow front office would then conduct a sale of the same stocks in the London market place for an apparently unaffiliated entity in London obtaining euros or dollars in that brokerage account. The money to buy the stocks in London in the first place can be obtained via loans in Russia for example. But since the London entity was controlled by the same person, they spend Roubles in Moscow and obtained and an equal amount of Dollars in a financial offshore jurisdiction. The sale of the stocks in London created a squeaky-clean bill of financial health for the Dollars.

Alternatively, you can also buy options in the derivative market for which you pay a premium. These options have intrinsic value and can be sold, such that the dirty money can be used for the premium payments and the option itself can be sold for a higher value.

Or you could use looped swap contracts across borders. For example, interest rate swaps make one party pay the London Interbank Offered Rate (the LIBOR, itself subject to major manipulations at the cost of millions of people as portrayed in ‘The Spider Network’ by David Enrich) while the other party pays a fixed rate and thus they ‘swap’ interest rates. If you now chain these swaps in a circle, you can easily move money with a valid, seemingly clean contract from Moscow to London and then to Moscow back again. Of course, the round-tripping is not obfuscated but each party seemingly gets a clean origin of money.

Once the money has been safely moved into offshore financial centers it can then be used to invest. The irony of many international active criminals is that they move their wealth out of their often unstable countries and park it in luxury real estate in judicially stable places like London, Paris, and New York. There has been a rise in super tall skyscrapers in New York City which is commonly referred to as ‘Billionaire’s Row’. But while these apartments offer amazing views of the City high above the problems of ordinary people, the ownership is more than opaque. A majority of the luxury real estate is bought by shell companies and they are often occupied only a couple of days of the year. Since they were legitimately bought, and the front companies in secrecy jurisdictions buying them being nearly impossible to crack open, it is next to impossible to prove that they had been bought with money obtained through illegal means.

Especially in the case of the US, there is an interesting historical anecdote to tell. Before 9/11, not a lot of people were interested in anti-money-laundering (AML) legislation. But once the terrorist attacks on 9/11 occurred, everybody suddenly became very interested in how it was possible that a terrorist organization was able to pay for the flight school of the terrorist hijackers. Somehow money was funneled half-way around the world out of Aghanistan into the US and used to pay for hotels, rental cars, flight schools and flights in and out of the US. It’s not exactly that Al-Qaida was selling hot dogs in front of the Metropolitan Museum in Central Park. Thus stringent AML laws were passed targeting every possible nook and cranny in which illegal money could be parked. Included were luxury real estate and luxury products such that prior to a transaction in these industries KYC procedures and other AML laws had to be conducted.

But a short while later, precisely these luxury industries were exempt from KYC and AML procedures. The industries lobbied lawmakers to exempt them such that they could continue to sell luxury real estate and products to customers they knew little about. To be fair, at a certain wealth you might want peace of mind and privacy and not see your latest purchase plastered over the morning edition of a tabloid. Nevertheless, it is a peculiar coincidence precisely because luxury items give you the ability to store large amounts of money in a small number of objects. Semi-fancy art paintings for 25 Million USD in an auction, a super expensive apartment in the UK or a gold-plated Lamborghini, none of these transactions require a stringent KYC procedure now anymore.

Reputation Laundering

But what do you do after you’ve laundered all your money? Essentially you have a criminal or a criminally connected person with large amounts of cash. After you laundered your money, it’s now time to launder your reputation.

A good example of this is the story of Dmitry Firtash. In essence, Dmytro Firtash is just a puppet for Semion Mogilevich, the mastermind of the Russian mob. He came out of nowhere and was suddenly made co-owner of RosUkrEnergo, which is an intermediary that for some unknown reason gets to buy gas cheaply from Gazprom and sell expensively to Europe. Since Gazprom is solidly in the hand of the Kremlin, it is assumed that these intermediary organizations pocket the difference and transfer it to Putin’s kleptocracy. Dmitry Firtash came out of nowhere within a position nobody could really explain resulting in money that is a bit shady, to say the least. Nevertheless, he quickly ingratiated himself with the who is who in the UK’s public sphere.

He went through all the necessary procedures that I will outline down below to become one of London’s elite and seemingly respected members. The first step was to obviously buy expensive real estate which gives ample room to host dinners and invite important people. This lets you put roots down and people consider you a member of London’s exclusive super-rich social circle. Next, you hire a public relations firm ( in itself a more than a weird concept) that will manage your public image. They will put you in touch with members of parliament and other prestigious people which will serve as directors for you charity or foundation which you obviously founded only for the reason to pay prestigious people. The charity, foundation or whatever should be nice and uncontroversial when people think of it: be socially active, give out stipends, build sports facilities or anything that gives you a nice PR photo op.

Given that you have paid a company to give you a good image with a suitable background, the PR firm will continue to actively forge new relationships. You host dinners with ex-politicians with a powerful rolodex, you cast your dubious conglomerate as a useful and relevant aid to the national interests of the country. Commodities, energy, media, and construction are of interest to a country but are hardly irreplaceable. Nevertheless, you are now a useful member of society and worth keeping in the fold. Another step is to be philanthropic in high society circles by sponsoring new buildings for colleges, preferably Oxford, Cambridge, and the London colleges like UCL. Dmitry Firtash founded a Ukrainian studies program that brought him in close contact with exclusive circles of Oxbridge. Given that London’s elite is definitely to almost exclusively educated at Oxbridge that brings you in fortuitous contact with a little of influential people.

The first aim of these PR shenanigans is to make the client too well-connected and too important to discard. The second part of reputation laundering in the UK is to use its potent libel laws to make reporting on the source of these people’s wealth impossible.

Libel Law & Tourism

Ultra-wealthy people don’t just travel to the UK to park their money there but also like to travel there to suffocate any reporting on their dodgy wealth.

English law allows them to sue for libel for any published statements which are allegedly defaming a named or identifiable individual if these have caused a loss in their trade or profession or just plainly damage their reputation. This is pretty standard around the world and is present in almost any judicial code. What sets the UK apart is that in a libel case, the allegedly defamatory statement is presumed to be false unless the defendant can prove its veracity.

This has conferred the status of ‘most favored nation’ (to borrow a WTO term) onto the UK from ultra-high net worth people with questionable sources of income. In essence, the burden of proof lies with the defendant such that even the slightest insinuation is impossible unless is airtight and reinforced with proof. Any sentence like ‘ … who has reportedly close dealings with the Russian mob …’ could set loose the legal hounds upon the publication outfit under which auspice this sentence was printed. Just imagine a multi-billionaire going to court against an investigative newspaper with the billionaire plaintiff being able to bankrupt the investigative newspaper through legal costs alone.

A good example of this is the excellently written book ‘Putin’s Kleptocracy - Who owns Russia’ by Karen Dawisha which was essentially shunned by every publisher in the UK for fear of being bankrupted by legal proceedings and ultimately had to be published in the US. The rebellious colony across the Atlantic had passed the SPEECH Act of 2010 which made foreign libel judgements without equivalent free speech enforcements unenforcible in the US.

To top it out, a public official or public figure as a plaintiff has to prove actual malice in writing possible ‘slander’ causing professional or reputational harm. A private individual instead must only prove negligence to be able to win the libel case. Especially in the case of off-shore finance and other dealings taking place in the dark, nothing is ever fully known and the slightest mistake which can be exploited by the plaintiff as negligence can lead to bankrupting the entire publishing outfit or journalist.

The misuse of libel lawsuits become so egregious that the libel law slightly reformed in 2013. While it made winning libel cases harder for plaintiffs as they now had to prove actual and objective harm, it left the legal costs unchanged. Simply maintaining a legal team which can hold its own against high-powered legal advice from oligarchs would bankrupt the defendant.

Unfortunately, this is not limited to news papers. Even the National Crime Agency, the UK’s main police force for economic crime and organized crime, is capped by litigious oligarchs. In a more than questionable legal setup the NCA is required to pay the full legal fees in case of a loss in court of the defendant. Given that shady ultra-high net worth people are financially able to employ law firms of the likes of Mishcon de Reya, the legal fees quickly become too much to bear by the public office. Thus the effect is that the economic crime division of the UK is legally hamstrung to prosecute shady billionaires afraid it will loose its entire annual budget to a single criminal case.

The annual budget of the NCA is around 4.3 million pounds.

Oligarchs buy third houses in Kensington and Mayfair for 80 million pounds …