If you’re not familiar with how money laundering works, here’s a quick primer.
First, you take dirty money. This is normally cash that you’ve made in an off-the-books or black-market deal. You take your dirty money and you place it in a bank. This is called placement.
This is the riskiest step. Large cash deposits can be suspicious. Certain amounts can trigger the bank to report the transaction. But criminals tend to keep it slow and steady to avoid arousing suspicion.
Next, there’s layering. This involves transferring the money from your bank to various offshore companies, accounts, or even into high-value items.
If you’ve ever played a shell game, you’ll know what I’m talking about. In a shell game, a ball is hidden under one of three identical containers. Then the guy pulling the scam shuffles them about, so you lose track of where the ball is.
With money laundering, you’re basically doing the same thing — except with heaps of transactions and often dozens of (coincidentally named) shell companies.
A little transfer here. A payment there. A purchase here. A sale there. But it’s all part of the same family of accounts — your accounts.
Shrewd criminals set up firms and accounts around the world in so-called tax havens. Think Malta, Cyprus or Panama. It’s a whole lot harder for the authorities to keep their eye on the ball when it leaves their territory.
Now, once you’ve mixed the money into a cloudy green blob, you’re going to want to move onto the last step.
Integration — in this step, you’re bringing the money back onto the radar. But this time, it’s all going to be legitimate business transactions.
Your Panama-based corporation invests your money into real businesses. You can either a) resell these companies and claim the above-board proceeds. Or b) operate the businesses as normal, pocketing the profits like any normal businessowner.
Tada! The dirty money is now well-laundered and sparkly clean.
Sure, criminals have to pay taxes on laundered money…but they can now begin to use it.
From cash to coin
Now, criminals have long considered new ways to launder money. And one of the areas they keep coming back to is currency.
If you manage to change the vessel in which the dirt is held, you make it a lot harder to trace.
For example, banknotes can be exchanged for diamonds, then diamonds for gold, then gold for artwork, then artwork for property, and so on. Each time this happens, the picture becomes a bit murkier.
So when cryptocurrencies like bitcoin were created, the dark world of crime issued a worldwide sigh of relief. Finally, a digital asset that can transform real dollars into a digital vessel — encrypted and untraceable.
At least, that’s what the mainstream suggests.
Take a quick look at your favourite newsfeeds, and you’ll likely see a story or two about cryptocurrencies…and how they’re a lawbreaker’s tool of choice. Right alongside dark leather jackets, opaque sunglasses and a black fedora.
However, the leading expert on bitcoin’s dark side, Lilita Infante, recently reported that criminals have moved on.
Infante works for the US Drug Enforcement Administration (DEA) and is part of a 10-person Cyber Investigative Task Force. She tracks dark web and crypto investigations.
On Tuesday she stated, ‘Now, illegal activity has shrunk to about 10 percent and speculation has become the dominant driver.’
So who took over for bitcoin?
I’d wager that cash never gave up the throne in the first place. [openx slug=inpost]
Cash is king
In 1976, economist James Henry claimed that ‘…only two kinds of activities in the US required the use of large-denomination currency. One was tax evasion, and the other was organized crime.’
And yet, today, of the $1.6 trillion in US banknotes in circulation, more than 80% is made up of $100 bills (the largest US banknote).
And of those, over two-thirds are held overseas.
The fact is that big bills are still wildly popular. They’re liquid, even overseas. They’re mostly untraceable and easily convertible.
Frankly, I don’t see why criminals wouldn’t use $100 bills for their criminal activity.
You don’t need cryptocurrencies to launder money. Between cash, corporations and banks, criminals have everything they need for a solid money-laundering programme.
That’s why most money laundering is going to happen right under the authorities’ noses.
Take a look at Danske Bank for example.
It was recently uncovered that nearly 15,000 customers of the Danish bank were making suspicious transactions, to the tune of €200 billion.
It wasn’t dark, hooded thugs converting thousands of questionable bitcoins. No, it likely slipped under Danske Bank’s radar because these deposits were made by normal folks with cash.
Good old cash. Our bread and butter.
And with a good bank, it seems criminals have all they need to get their dirty laundry placed, layered, and integrated.
Editor, Money Morning New Zealand