Dark Side Part 2: Money Laundering

So you have evaded some taxes. Not exactly a cool crime, is it? Time to take it up a notch and move into money laundering.

Have your tailor sew you a black-and-white striped body suit and start streching and warming up your ankle for some ball-dragging because you, my friend, are going to jail.

And let me tell you why.

What is Money Laundering?

Good question. Most industry experts, regulators, and law makers agree that money laundering is a three-step process:

  1. Placement
  2. Layering (sometimes called Structuring)
  3. Integration

1. Placement

In this step, the funds are placed into the financial system. Common methods include:

  • Bank deposits: this is usually the end goal and many (try to) start here.
  • Blending: combining legitimate cash with criminal proceeds.
  • Gambling: buy and sell chips. This is why a lot of casinos have stopped giving out receipts or only give out receipts for winnings.
  • Paying back loans: pay back loans with illegitimate funds.
  • Currency exchanges: change illegitimate USD into less-obviously-illegitimate CAD.
  • Money remittance: for example Western Union cash to bank or hawala (long document but well worth reading).
  • Purchase of financial instruments: prepaid cards, checks, money orders, cryptocurrencies, et cetera.
  • Purchase of assets: real estate and other assets which do not decrease in value over time or decreases to a tolerable degree.

2. Layering

Once in the financial system, layering is when the placement is obfuscated. This is also called concealing the origin.

This can be done a number of different ways, such as:

  • Repeated purchase and sale of assets.
  • Transfer of funds to and from secretive jurisdictions.
  • Transfer of funds between bank accounts, e-wallets, cryptocurrencies, foreign currencies, and so on.

The goal here is that the origin of funds is practically or truly impossible to trace. Criminals get especially creative here.

3. Integration

Integration means the return of clean money to the criminal. The illegitimate funds have now been converted into funds which are so clean that they will never be questioned. Many still get caught after integration but only because it can take a long time to unwind what went on during Placement or Layering.

This is the most difficult part. While it is fairly easy to place and layer funds, integration is trickier. The criminal needs to find a reasonable explanation for why they are receiving so much money, either in one big transfer or multiple small ones.

Common techniques include:

  • Real estate: it’s not quite enough to just buy and sell properties, but done right the last sale should look legitimate and funds be clean.
  • Fronting: you know what I’m talking about. Waste management or laundromats or dry cleaners or car washes. The criminal’s choice for creating a legitimate business whose coffers are padded with illegitimate funds. Becoming more difficult with societies moving towards cashlessness but clever criminals are already finding ways around it.
  • False invoices: this goes hand in hand with fronting – sometimes. Sometimes it’s just complete bogus. Import and export of high-value or high-volume goods.
  • Corruption and Threats: this is often overlooked. You’d be surprised what bank managers and even regulators in less reputable jurisdictions are willing to overlook if you pay (or threaten) them.
money laundering scheme

Diagram from UNODC.

Predicate Crimes

Now that we know what money laundering is, it’s time to define what constitutes money laundering.

A predicate crime is generally an illegal activity from which a financial gain is made. However, not all crimes are considered predicate crimes to money laundering. While nearly all jurisdictions consider drug trafficking, theft, terrorism, bribery, corruption, and sale of illegal goods or services (unlicensed firearms, bombs, exotic pets, and so on) to be predicate crimes, tax evasion is not always included.

FATF (Financial Action Task Force) is an international organization that oversees money laundering regulation and enforcement across the world. They are famous for issuing recommendations that most jurisdictions take to heart and incorporate into their laws.

Those who read my article on Turkey will remember the back and forth between Turkey and FATF.

In February 2012, FATF issued new recommendations which include tax evasion as a predicate crime.

While it is not in the scope of this blog to go into specific jurisdictions’ laws, tax evasion is increasingly being added as a predicate crime among tax aggressive jurisdictions. Likely, jurisdictions that fall behind will face the wrath of FATF (and OECD).

Note that in many jurisdictions, it is not necessary to be convicted of the predicate crime in order to be convicted of money laundering. The mere suspicion can be enough.

Additionally, some jurisdictions even apply so-called reverse burden of proof (reverse onus) for money laundering (and in some cases tax evasion), whereby you are presumed guilty until proven innocent.

This makes money laundering one of the most aggressively prosecuted crimes in the world.

Enforcement

Enforcement of AML (Anti-Money Laundering) laws typically falls on financial crimes divisions of police departments, but they often work very closely with financial intelligence units (FIUs), which are largely a FATF invention.

Tax authorities rarely get involved in pure money laundering cases but will notify the FIU or law enforcement if a tax investigation turns out to involve suspicious activities.

SAR / STR

Initially called STR, for Suspicious Transaction Report, it is increasingly going by the name SAR, for Suspicious Activity Report.

This is a report any financial service provider is required to file with its jurisdiction’s FIU or, lacking that, financial crimes police department.

Any activity which is suspicious should be reported, such as depositing large sums of undeclared of money (placement), suspicious transactions (layering), and unusual invoicing or purchases (integration).

The FIU receives the SAR and must quickly decide whether to act on it or file it for future reference. SARs must not be destroyed.

Example of things that may lead to an SAR:

  • Asking a bank intrusive questions about secrecy and reporting.
  • Asking a service provider about structures that they reasonably suspect involve criminal activities.
  • Sending or receiving wire transfers that are out of the ordinary, especially if high-risk jurisdictions are involved (more on those later).
  • Splitting a large cash deposit into several smaller deposits.
  • Purchasing and selling real estate, cars, or other high-value items in a short period of time.

 

The Risks

While historically, running an undeclared offshore company was seen a petty tax evasion (and still is), getting caught is starting to have ramifications that go above and beyond a mere slap on the wrist and some penalties from your tax authority.

If proceeds from tax evasion are used in a manner which a prosecutor thinks is money laundering, you are suddenly in a whole new ball game.

The risks of detection for a petty money launderer are about the same as for a petty tax evader. Most never get caught. However, the repercussions are far worse than tax evasion.

Large scale operations can take years to unwind and by the time they are unwound, the top people are already gone without a trace.

Jurisdictions

The Basel Index is a meta-index which looks at vast range of factors to score how risky jurisdictions are in terms of risk of money laundering. They publish a basic ranking for free on their website, with a more in-depth version being available for a fee (or free for educational purposes): http://index.baselgovernance.org/index/Index.html.

The top 10 highest money laundering risk jurisdictions as of writing are:

  1. Iran
  2. Afghanistan
  3. Cambodia
  4. Tajikistan
  5. Guinea-Bissau
  6. Iraq
  7. Mali
  8. Swaziland
  9. Mozambique
  10. Myanmar

Other noteworthy listings under 100 include:

The top 10 lowest money laundering risk jurisdictions as of writing, all with an overall score of under 4.00, are:

  • Finland
  • Estonia
  • Slovenia
  • Lithuania
  • Bulgaria
  • New Zealand
  • Belgium
  • Poland
  • Malta
  • Jamaica
  • Hungary

Does Jurisdiction X Consider Tax Evasion a Predicate Crime?

Ask a lawyer.

Service Providers

While tax evasion is still a fairly mild crime – one for which service providers generally are not held accountable – money laundering is a different beast.

That said, there are plenty of service providers out there which knowingly engage in illegitimate funds and helps launder them. The going rate is around 10 to 30% depending on volume and how well connected you are.

Banks in the Middle East and Central Asia are notorious for doing this. Place the right phone call and meet with the right introducer, and the bank will take your money, and return it to you in a bank account with them less a fee. The process usually takes three to six months.

Africa is also a problematic region for this but its banking sector is generally grossly underdeveloped and unsuitable for this type of money laundering activity.

Similar arrangements were made elsewhere in the world (Europe, the Americas) but improvements in AML laws and KYC policies have nearly eradicated the issue. While banks are still involved in money laundering, it is mostly as a passive part.

See Also

Blog Posts

International and Regional Organizations

  • FATF-GAFI
  • APGML – Asia / Pacific Group on Money Laundering
  • CFATF – Caribbean Financial Action Task Force
  • Eurasian Group – Belarus, India, Kazakhstan, China, Kyrgyzstan, Russia, Tajikistan, Turkmenistan and Uzbekistan.
  • ESAAMLG – Eastern and Southern Africa Anti-Money Laundering Group.
  • GAFILAT – Grupo de Acción Financiera de Latinoamérica.
  • GIABA – Inter Governmental Action Group Against Money Laundering West Africa.
  • MENAFATF – Middle East North Africa Financial Action Task Force.
  • Moneyval – Council of Europe.
  • Egmont Group

4 Comments on "Dark Side Part 2: Money Laundering"

  1. Bulgaria 😀 This is absurd. It must be in top 20 on the other side. Just take a peek here:

    https://bivol.bg/en/

    Most reputable source when it comes to past and ongoing criminal activities in Bulgaria.

  2. IMHO it’s highly unlikely to get charged with money laundering for petty tax evasion simply because they won’t be able to tie you with any (other) criminal activities. I’m sure it’s not unheard of though, especially in countries with aggressive tax authorities which are trying to set example by kicking small fish in the nuts while leaving large-scale criminal activities in financial institutions untouched. UK and Belgium immediately come to mind.

  3. Great post!
    Do you know if money laundering investigations are ever initiated by the tax authorities ie. payments doesn’t look suspicious to the bank when receiving the payments however look suspicious to the tax authority when looking at the company books?

    Thanks for the great blog!

    • Thanks!

      I mentioned this in the article: “Tax authorities rarely get involved in pure money laundering cases but will notify the FIU or law enforcement if a tax investigation turns out to involve suspicious activities.”

      If a tax authority is digging around in your finances and find signs of money laundering, this will be passed on the FIU or police.

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