Awash with cash from peddling narcotics and guns, international crime syndicates dump billions in illegal earnings into the ligitimate financial system. Even with tighter laws and more vigilant police investigations, this dirty money continues to pollute the world economy.
For some time, a Dutchman would appear each week at a German bank o the lower Rhine and convert cash from various currencies into Dutch guildes and US dollars. Invariably, the amounts ran into six figures. When Belgian police picked him up in October 1996 after he tried to exchange 240,000 pound at a bank in Belgium, police in the German state of North Rhine-Westphalia launched an investigation, which revealed that the Dutchman earned his living by laundering money for drug traffickers from the United Kingdo, Scandinavia, Germany adn Australia. Altogether, it is thout that he channelled about US$66 million through the German financial system.
Although the sums of money involved are huge, not many people know exactly what is involved in money laundering. In 1984, an American commission looking into oraganised crime provided a comprehensive definition. It described money laundering as 'a process whereby the existence, the illegal source, or the illegal use of funds is disguised, in order that these funds appear to have been legally acquired'. In plain language, this means channelling money into normal circulation in order to unlawfully conceal its illegal source - be it drug trafficking, arms dealing, blackmail or other criminal activities. Money laundering enables criminals to destroy the evidence of their criminal activity.
Because laundered money is often hard to trace, it is difficult to determine exactly how much is at stake in these transactions, and the estimates differ enormously. According to an International Monetary Fund (IMF) estimate in 1996, more than US$500 billion is laundered annually throughout the world. Money laudering takes place around the world, from the nations of Western Europe and North America to newly democratised Eastern Europe and the developing nations of South America, Asia and Africa.
Three phases
The nature of financial transactions makes it easy for organised crime bosses to distribute their profits into a variety of businesses and areas of activity. Investigators face an uphill task in determining the source of a particular sum of money. But years of expeience have enabled them to distringuish three distinct phases of money laundering.
Placement. The most obvious way of introducing illegal earnings into the legal financial economy is to deposit cash at a bank. Syndicates usually use front men for this purpose. In the early 1980s, for example, a German grocer deposited cash amounting to 14 million Deutschmarks (US$8 million) in his bank account over a short period of time. The money had been entrusted to him by drug couriers from all over Europe.
The risk of getting caught is considerable. Because criminals amass huge quantities of cash - from street sales of drugs, for example - they face the problem of depositing large amounts of banknotes. Any one appearing at the teller of a bank with shopping bags full of banknotes is viewed with suspicion by bank officials. A grocer who suddenly has millions to deposit should be a dead giveaway.
The solution is for the criminals to get other people to deposit money for them. Often, restaurant owners are forced to open bank accounts into which dirty money can be paid. An established business is unlikely in attract attention, even if the amounts deposited are as much as tens of thousands of dollars.
But criminals are tending increasingly to mix dirty money with legal profits. For this purpose, they set up front companies including import-export firms, video rental outlets and sex shops. Such companies use decoy sales in order to move illlegally earned profits through their cash registers. The owners can then deposit them in various accounts without concern, and even pay taxes to create the illusion of legitimacy.
This technique was used by a Turkish money-laundering gang which operated in many European states. Members of the gang delivered wortless goods, such as rotting food, to a German businessman in Munich. When he took delivery, he issued a receipt for more than half a million Deutschmarks, and usually destroyed the goods. His only objective was to get his dirty money out of Germany. By the time police cracked the scam, he had transferred about 350 million Deutschmarks to accounts in 15 countries.
After the opening of the Berlin Wall in 1989, international criminals descended on the former East Germany. More than a third of the investments made there after 1989 came from illegally earned millions. It seems that the German government unwittingly participated in money laundering when it set up a trust to dispose of East Germany's state-owned enterprises. The trust sold almost worthless, loss-making state corporations on extremely generous terms and asked few questions about the accounts of these firms. The new owners could easily declare that the proceeds from drug trafficking, arms dealing and protection rackets were actually legally earned income.
Layering. During the second phase in the money laundering process, the money has to circulate. Usually, it moves from one international financial centre to another. Here, an important role is played by offshore tax havens - countries where there is either low taxation or none at all - which allow the formation of anony mous companies. These conditions make it easy for criminal groups to form front companies. Typically, they grant lawyers power of attorney to conclude transactions, open accounts at local banks and position themselves to invest transferred funds at short notice. The most important offshore havens are Hong Kong, the Caymen Islands, the Bahamas, Panama, the Netherlands Antilles and Bahrain. Apart from Hong Kong, the economies of the tax havens are not highly developed, so they compete fiercely for the illegal capital that serves to increase their national income.
Drug-exporting countries also depend on the flow of illegal money. It is estimated that US$11 billion is channelled from the US to South America by front men working for drug bosses. Of this amount, more than US$1 billion originates in New York City. The money is transferred by telegraph from small currency exchange bureaus or via established financial services companies. Because these kind of transactions are so easy to carry out, the US government passed legislation in mid-1997 that required the reporting of all money transfers in excess of US$750. Previously, the limit had been US$10,000. But even before the legal framework was tightened, officials from the Drug Enforcement Agency (DEA), together with US Customs and the French police, exposed the involvement of Rapid-O-Giros, a chain of French currency exchange bureaus, in illegal transactions amounting to millions of dollars. It turned out that the company had links to the Cali drug syndicate.
Successful investigations like this are forcing the criminal organisations to think up new tricks. In 1997, the New York Times reported that the drug syndicates were increasingly buying consumer goods such as alcohol, electronics and automobiles in the United States, which they then sold in Latin America at prices far below their actual value. Although the money launderes lose about 20-30% of their expenses through such transactions, the money still remains undetected by the authorities. Even this loss is worthwile, given the massive profit margins of the cocaine trade.
Experts fear that layering is on the increase through the growth of cash-free transactions, such as those using credit cards, telebanking, teleshopping and so-called cyberbanking - capital transfers made via the Internet.
Intergration: In the last phase of the process, the newly laundered money flows back to where it came from, and the gangsters can now invest it legally. Often this is done by buying shares on the financial markets or purchasing good - particularly those that will improve the infastructure of their syndicates. Laundered money is used to purchase real estate, expand front companies and acquire ships and aircraft to facilitate smuggling. Gangsters also fit out chemical and pharmaceutical companies for the secret production of drugs and form tourism companies to enable them to sell drugs more easily. Many run their own gambling casinos where money can be laundered effortlessly.
On the surface, it might appear that the industrial nations actually profit from money laundering, since it introduces vast sums into their economies. However, criminologists are disturbed by the way criminals continue to introduce billions of dollars into many sectors of the economy, because this brings them social legitimacy. For example, South American cocaine gangs have invested in American television stations and newspapers and pumped money into the construction of office towers in centres of the drug trade such as Miami, Florida. On the Costa Del Sol, Spain's popular Mediterranean holiday region, cocaine syndicates now own botel and restaurant chains, as well as apartment building and night clubs.
According to an Italian financial journal, the Mafia owns more than half of the retail businesses, a third of all agriculture, 20% of transport companies, as well as 10% of the industrial and service sector in the province of Naples. But the Cosa Nostra is by no means confined to southern Italy. The men of respect own banks, insurance agencies and leasing companies throughout the country, and have also moved into the acquisition of high-value government bonds and letters of credit, which put the gangsters in a position to affect the national budget deficit. This is a worrying development, for it gives organised crime control over the state.
There is also a real danger that laundered money might, in the long run, drive out clean money - that Mafia-run enterprises might eliminate competition. Enterprises that are fed by laundered money have no need to worry about making a legitimate profit, and can afford to drive prices down, thereby putting legal businesses out of business. Economic power also determines political influence. The Russian Mafia has close ties to members of the government in Moscow, while the Colombian drug bosses keep their government in check with lavish campaign donations and bribes.
Inadequate laws
Western nations have generally been slow to introduce laws to fight money laundering. Among the first wa Italy in 1982, followed by the United States (1986), the United Kingdom (1986-1987), France (1987), Spain (1988), Canada (1989), Switzerland (1990) and Germany (1993). But such laws are often not enough to halt the problem. In 1994, German investigators confiscated 10 million Deutschmarks (US$5.5 million) in suspicious funds, but this represents at most only 0.02% of the total sum laundered by German banks and financial institutions.
Legislation runs into difficlties when it comes to confiscating private property, since this requires considerable legal justification. Prosecutors must be able to demonstrate not only 'sufficient' but 'compelling' cause to believe the accused's guilt. This is difficult to prove, since the origin of banknotes is not written on them.
Te weakest link in the chain is the banking system. Some time after Germany passed laws to control money laundering, the journalist Jorg Keimbrecht tested the willingness of banks to report suspicious customers to the authorities. Together with some colleagues, Heimbrecht set up a front company and employed a professional money launderer to 'wash' and invest some 400 million Deutschmarks (US$222 million) - a sum that had supposedly originated from criminal activities - in German, Austrian and Swiss banks. The result was that Heimbrecht received letters of acceptance from a dozen banks. A number of financial institutions did refuse to accept th e dirty money, but they neglected to inform either the police or state prosecutors.
Reform of the financial system is clearly needed, for Germany still has the reputation among gangsters as a haven for 'bleaching' black-market money. To get around problems when large amounts of cash are deposited at banks, criminals are starting to invest in property and life insurance.
Co-operation is needed
Even countries that have worked hard at perfecting their investigation procedures find themselves confonting serious problems, since money laundering often crosses borders with lightning speed. This does not only aply to bank transfers. In 1997, employees of the US Department of Justice admitted that US Customs agents neglected to check many of the trucks leaving the United States for Mexico, since they had their hands full checking vehices waiting to cross into the United States. Huge quantities of cash could be taken out of the US along this route.
Furthermore, money lundering cannot be detected as long as the offshore tax havens tolerate the influx of illegal funds. For years, the US government has pressurised offshore centres to stop criminal transactions. But most have shown little willingness to cooperate; it is apparently more important to them to secure their positions with short-term profits.
Experts stress that the fight against money laundering requires co-operation between governments, investigating authorities and banks. Many also recommend the formation of a global financial community that would only admit nations with efficient detection measures. Restrictions would be placed on transactions with non-member states. Until more people wake up to the problem, such suggestions will remain wishful thinking.
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