How Money Laundering Works Part II

How to launder money

by Philip Brewer

 

Money laundering is not a simple concept. It's two simple concepts, because there are two different--in fact, nearly completely opposite--activities that are called money laundering. Here's how to do both of them.

Classic Money Laundering

The classic money launderer was someone who had illicit income--drug dealer, jewel thief, con man--and worried that he'd get the Al Capone treatment and be convicted of tax evasion even if the government couldn't pin any of the underlying criminal activity on him.

If the illicit income is small--and especially if you also have a straight job that you do pay taxes on, there's no need to do any money laundering. For example, suppose you work in some cube farm that pays most of what you need to live on, but you also turn the occasional trick to bring in a hundred dollars a week. You probably don't need to launder that money. Cut down on the amount of cash you take from your paycheck and use the money from hooking to make up the difference. As long as you still take some cash from your paycheck, the government would have a hard time proving that your cash expenses exceed what you're taking from legitimate sources.

But suppose that illicit income is a bit larger. Once you've got more than a few hundred dollars a week--more than can be conveniently hidden in your ordinary cash expenses--you've got a problem. As soon as you do anything with the money--spend or invest it--it might well come to the attention of the tax man.

The solution--classic money laundering--is to create a business to ostensibly earn that money. Any business that brings in a good deal of cash will do. You run the business as usual during the day. Then, after closing, you feed in your day's illicit receipts, pretending that they'd been received by the business. In due course the business pays its taxes and all the tax man can see is that you're running an unusually profitable business.

Now, the tax man may well take an interest in such a profitable business, so it's best if it'd be hard to prove that you couldn't be doing the business you're paying taxes on. A bar, for example, wouldn't be the best choice, because you wouldn't have ordered enough booze to pour all the drinks your books will say you've sold. Coin operated laundries and car washes are classics, because the only way to prove that you hadn't actually done all that business would be to have an undercover agent surveil your place for weeks, counting every coin inserted by every customer. (Although agents have been known to subpoena the water bill and try to make the case that way.)

Modern Money Laundering

The other thing sometimes called money laundering is when you have some big lump of cash that you'd rather not have people find out about. Sometimes it's an effort to keep the money from the tax man (literally the opposite of classic money laundering), other times the goal is to keep it from coming to the attention of someone else who might feel like they have some claim to the money--an ex-spouse, a creditor, the guy who owns the land where you found the bag of gold coins in the culvert.

In this kind of money laundering, the point is to make the money disappear. This is the sort of money laundering where you might make use of foreign banks, shell companies, and so on.

There are two parts to these strategies. First, you need to make the money disappear. Second, you need to make it reappear in some gradual fashion that doesn't bring it to the attention of whoever you're trying to hide it from.

Disappearing and Reappearing the money

Disappearing the money

The easiest way to disappear the money, especially if it's already cash (as opposed to, let's say, silver bullion or a winning lottery ticket) is to just stash it in a safety deposit box. You miss out on any investment income, but it's safe and you know where to find it.

If you really want to be able to invest the money, get it overseas. If it's an amount that you can just carry with you, buy a vacation package to the Cayman Islands or visit your family roots in Europe and take a little side trip to Switzerland or Austria or Liechtenstein.

There are plenty of fancy, complex ways to get the money overseas, that mostly require an accomplice. The most basic is an invoice scam. Establish a business that imports or exports something. Meet with your customer or supplier and arrange with him to either over-pay or under-bill, and then to have your counterpart deposit (most of) the excess into your foreign bank account. An ongoing scheme is good, because the guy knows that the lucrative cash flow will stop if you find out the money isn't getting deposited as it should, but you can also work this as a one-shot deal if your counterpart can be trusted.

Banks used to help their good customers get money discretely overseas, but nowadays there are a bunch of laws against such things, and bankers are particularly averse to going to jail for their customers. Expect them to refused to get involved and to rat you out.

Reappearing the money

Now we're basically back into classic money laundering territory.

If you stashed a duffel bag full of cash it in a safety deposit box (or under your bed), all you need to do is pull out a few bills now and then when you're heading out for a night on the town. You can raise your standard of living modestly. Alternatively, you could increase the amount that's going into your 401(k) and then use the cash to keep your standard of living about the same--gradually turning the hidden money into above-board money.

If you've got the money overseas somewhere, bring it back in some way that makes it legit. The easiest would be to create an overseas company that then hires you to do something. You do whatever it is and send an invoice whenever you want some cash. You can also reverse the invoice scam that let you get the money overseas in the first place--now you under-pay (or over-bill), while making up the difference out of your foreign bank account. A third option is a fake loan where you "borrow" the money and then simply fail to pay the money back.

Instant disappear-reappear cycles

If you can't wait to reappear the money gradually, and the amount involved isn't too big, you can always use a simple casino scam. Go to a casino and buy some chips. Do a little low-risk gambling. (For example, bet each chip, one at a time, on red. Do that 20 or 30 times and you'll have about the same amount you started with.) Get a few more chips and repeat. Play a few different games (blackjack, craps, slots). Ideally, go to several different casinos and repeat the whole process there. Eventually, cash in all your chips and go home with a story about how you won a bunch of money at roulette. Pay taxes on your winnings.

Laws Involved

There are lots of laws against money laundering as a general category and against specific techniques used in money laundering.

If your income is already illegal, breaking one more law may not expose you to much additional risk, but it might, and it might give the government a case that they can prove, rather than one they can't.

You're required to report cash or other bearer instruments (travelers checks, for example, but not gold coins or checks payable to a specific individual) that you carry into or out of the US. Similarly, banks are required to report large transactions (and to keep records of smaller ones).

If you have a foreign bank account, you're required to report it on your taxes each year. Also, if your foreign investments make any income, you're required to pay taxes on it each year (not just when you bring the money back).

Every time you don't declare the income, don't pay the tax due, lie on a form, or fail to file a required form, you're committing a crime.

All these money laundering crimes have large fines and long prison sentences. I recommend against them. I also recommend against expecting anyone else to be willing to commit these crimes for you--expect that any accomplices are really either Federal agents, or else will call Federal agents at the first opportunity.

Why criminals want to "launder" proceeds?

1) to increase profits
2) to appear legitimate
3) to evade taxes
4) to avoid prosecution
5) to avoid seizure of accumulated wealth

The principal objective of money laundering is to convert cash into some other form of asset in order to conceal its illegal origins. A criminal group's efforts to launder the proceeds from their crimes may come to your attention at any stage of its placement, layering or integration into the financial system.

" Placement: The launderer introduces the illegal profits into the financial system. This may be done by breaking up large amounts of cash into less conspicuous, smaller sums that are then deposited directly into a bank account, or by purchasing a series of monetary instruments (like cashier's cheques and money orders) that are then collected and deposited into accounts at other locations.

" Layering: The launderer engages in a series of conversions or movements of funds to distance them from their source. The funds may be channeled through the purchase and sale of investment products, or the launderer may simply wire the funds through a series of accounts at a number of different banks. In some instances, the launderer may disguise the transfers as payments for goods or services, thus giving them a legitimate appearance.

" Integration: The illicit funds re-enter the legitimate economy. The launderer may choose to invest the funds into real estate, luxury assets, or business ventures.

Money Laundering Methods

" Structuring ("smurfing"): Smurfing is possibly the most commonly used money laundering method. It involves many individuals who deposit cash into bank accounts or buy bankdrafts in amounts under $10,000 to avoid the reporting threshold.

" Bank Complicity: Bank complicity occurs when a bank employee is involved in facilitating part of the money laundering process. Bank complicity is becoming increasingly difficult for criminals to use following the introduction of the Canadian Bankers Association's policy, procedures and training (see Canadian Bankers Association ).

" Money Services and Currency Exchanges: Money services and currency exchanges provide a service that enables individuals to exchange foreign currency that can then be transported out of the country. Money can also be wired to accounts in other countries. Other services offered by these businesses include the sale of money orders, cashiers cheques, and travellers cheques.

" Asset Purchases with Bulk Cash: Money launderers may purchase high value items such as cars, boats or luxury items such as jewelry and electronics. Money launderers will use these items but will distance themselves by having them registered or purchased in an associate's name.

" Electronic Funds Transfer: Also referred to as a telegraphic transfer or wire transfer, this money laundering method consists of sending funds electronically from one city or country to another to avoid the need to physically transport the currency.

" Postal Money Orders: The purchase of money orders for cash allows money launderers to send these financial instruments out of the country for deposit into a foreign or offshore account.

" Credit Cards: Overpaying credit cards and keeping a high credit balance gives money launderers access to these funds to purchase high value items or to convert the credit balance into cheques.

" Casinos: Cash may be taken to a casino to purchase chips which can then be redeemed for a casino cheque.

" Refining: This money laundering method involves the exchange of small denomination bills for larger ones and can be carried out by an individual who converts the bills at a number of different banks in order not to raise suspicion. This serves to decrease the bulk of large quantities of cash.

" Legitimate Business / Co-mingling of Funds: Criminal groups or individuals may take over or invest in businesses that customarily handle a high cash transaction volume in order to mix the illicit proceeds with those of the legitimate business. Criminals may also purchase businesses that commonly receive cash payments, including restaurants, bars, night clubs, hotels, currency exchange shops, and vending machine companies. They will then insert criminal funds as false revenue mixed with income that would not otherwise be sufficient to sustain a legitimate business.

" Value Tampering: Money launderers may look for property owners who agree to sell their property, on paper, at a price below its actual value and then accept the difference of the purchase price "under the table". In this way, the launderer can, for example, purchase a $2 million dollar property for $1 million, while secretly passing the balance to the seller. After holding the property for a period of time, the launderer then sells it for its true value of $2 million.

" Loan Back: Using this method, a criminal provides an associate with a sum of illegitimate money and the associate creates the paperwork for a loan or mortgage back to the criminal for the same amount, including all of the necessary documentation. This creates an illusion that the criminal's funds are legitimate. The scheme's legitimacy is further reinforced through regularly scheduled loan payments made by the criminal, and providing another means to transfer money.

What is "willful blindness"?

"… wilful blindness arises where a person who has become aware of the need for some inquiry declines to make the inquiry because he does not wish to know the truth. He would prefer to remain ignorant. The culpability [in wilful blindness]… is justified by the accused's fault in deliberately failing to inquire when he knows that there is reason for an inquiry." R. v. Sansregret (1985) 45 CR (3d) 193

- Example of wilful blindness: A salesperson encounters a customer who wants to buy a consumer good or service with $25,000 cash. The customer produces a gym bag containing $25,000 in $20 and $50 bills. In the vast majority of modern Canadian commerce, this is not a normal business transaction, and this method of payment is highly unusual. Though the salesperson instantly suspects something is out of the ordinary, they chose to ignore their suspicion so as not to jeopardize an easy sale.

- By ignoring such key money laundering indicators, an individual may have directly participated in an illegal process.

- Preventive strategies for small and medium businesses


When dealing with your customers, ask yourself these questions:

" How well do I know this customer?
" Does the transaction make sense considering the customer's profile?
" Do I fully understand the transaction the customer wishes to complete?
" Am I comfortable with this transaction?
" Is this the usual method for conducting this type of business transaction?

If in doubt, there may be a possibility that your customer is using your business to launder money.
Record keeping requirements for small and medium businesses

The Proceeds of Crime (Money Laundering) and Terrorist Financing Act requires that a report be filed with the Financial Transactions and Reports Analysis Centre (FINTRAC). FINTRAC receives, analyzes, assesses and discloses financial intelligence on suspected money laundering, terrorist financing, and threats to the security of Canada.

Who must report to FINTRAC in Canada?

All financial entities, life insurance companies, securities dealers, foreign exchange outlets and money services businesses, which have detected a suspicious transaction, or conducted cash transactions or wire transfers in/out of Canada worth $10,000 and over. Records related to these transactions must be kept for a period of five years.

What information should be reported?

Information about the reporting entity as well as details about the person conducting the transaction.

When to file a report:

The deadline for reporting a suspicious transaction is 30 days after the transaction occurred. The deadline for reporting a cash transaction of over $10,000 is 15 calendar days after the transaction occurred.

Why report to FINTRAC?

If there are reasonable grounds to suspect that a transaction is related to a money laundering or terrorist financing offence, the law requires that a report be filed with FINTRAC.

How to file a report:

Information on how to report to FINTRAC can be found online at

www.fintrac.gc.ca

Impact of money laundering on society

The proceeds from crime that creep into the Canadian economy are staggering and affect all levels of society.

Money laundering can have devastating social consequences. Laundered funds provide financial support for drug traffickers, terrorists, arms dealers, and other criminals to operate and expand their operations. Investigations reveal that criminals manipulate financial systems in Canada and abroad to support a wide range of illicit activities.

For example, drug trafficking alone generates billions of dollars in illicit funds for criminal organizations every year. Businesses supported by the proceeds from crime create unfair competition and can bankrupt legitimate competition in the market.

If you suspect money laundering, Report it.

Disclosure provisions under Section 462.47 of the Criminal Code of Canada justify you to do this. This section ensures that when you file a report you will be protected from any civil or criminal liability, even if your suspicions prove to be wrong.

Call your nearest RCMP Proceeds of Crime Unit if you suspect illegal money transactions.

What we need from you

When contacting a Proceeds of Crime Unit concerning a suspicious transaction, you may be asked to provide specific information, such as:

1. Date, time, and location of the transaction.

2. Name, age, address, telephone number, description of the person(s) involved in the suspicious transaction and their associates.

3. The amount of the suspicious transaction.

4. Bank, credit card, or other personal information about the subject that might be available.

5. Description of vehicle and licence plate number associated with the suspicious transaction/activity.

6. The circumstances, details, and events that raised your suspicion.

7. The type of activity associated with the suspicious transactions (payment made by an unusually large volume of cash, use of nominees (associates), currency exchanged, smurfing, refining, undervaluing goods, loan backs).


Partners in identifying the proceeds of crime

Every year police investigations are launched as a result of information provided by members of the community. Law enforcement personnel consider this information vital to identify suspected money launderers.

One single indicator does not prove that a suspicious transaction is money laundering. A criminal or money launderer is typically identified from a combination of facts and events.

When you are suspicious of activities that may be connected to money laundering, you should inform your management and/or a law enforcement agency. Getting a second opinion can help you decide whether the activity is in fact money laundering.

Please report any suspicious business transactions, people, or organizations to your local RCMP detachment or any other local policing agency.

This booklet is available from the Royal Canadian Mounted Police Proceeds of Crime Unit nearest you.

Published by the Royal Canadian Mounted Police, Proceeds of Crime Branch (2006).

The punishment

The punishment for a violation of 18 U.S.C. § 1956(a)(1) is

- a fine of not more than $ 500,000 or twice the value of the property involved in the transaction, whichever is greater, imprisonment for not more than twenty years, or both. 18 U.S.C. § 1956(a)(1)
The punishment for a violation of 18 U.S.C. § 1956(a)(2) is

- a fine of not more than $ 500,000 or twice the value of the monetary instrument or funds involved in the transportation, transmission, or transfer, whichever is greater, imprisonment for not more than twenty years, or both. 18 U.S.C. § 1956(a)(2) For the purpose of the offense described in18 U.S.C. § 1956(a)(2)(B), the defendant's knowledge may be established by proof that a law enforcement officer represented the matter specified in 18 U.S.C. § 1956(a)(2)(B) as true, and the defendant's subsequent statements or actions indicate that the defendant believed such representations to be true. 18 U.S.C. § 1956(a)(2).
The punishment for a violation of 18 U.S.C. § 1956(a)(3) is

- a fine under this title imprisonment for not more than 20 years or both. 18 U.S.C. § 1956(a)(3).
For purposes of 18 U.S.C. §§ 1956(a)(3) and (2), the term "represented" means any representation made by a law enforcement officer or by another person at the direction of, or with the approval of, a Federal official authorized to investigate or prosecute violations of this section. 18 U.S.C. § 1956(a)(3).
In addition to the criminal penalties, there are civil penalties owed to the United States for violations of 18 U.S.C. §§ 1956 or 1957. The penalty in this situation is not more than the greater of

- the value of the property, funds, or monetary instruments involved in the transaction, 18 U.S.C. § 1956(b)(1)(A); or $ 10,000. Id. § 1956(b)(1)(B).
Furthermore, a district court dealing with foreign persons can issue a pretrial restraining order or take any other action necessary to ensure that any bank account or other property held by the defendant in the United States is available to satisfy a judgment. 18 U.S.C. § 1956(b)(3).

Finally, a district court dealing with a foreign person can also appoint a Federal Receiver to collect, marshal, and take custody, control, and possession of all assets of the defendant, wherever located, to satisfy a civil judgment under this subsection, a forfeiture judgment under 18 U.S.C. §§ 981 or 982, or a criminal sentence under 18 U.S.C. §§ 1956(a) or 1957, including an order of restitution to any victim of a specified unlawful activity. 18 U.S.C. § 1956(b)(4).

Definitions:

- "knowing that the property involved in a financial transaction represents the proceeds of some form of unlawful activity" means that the person knew the property involved in the transaction represented proceeds from some form, though not necessarily which form, of activity that constitutes a felony under State, Federal, or foreign law, regardless of whether or not such activity is specified in 18 U.S.C. § 1956(c)(7). 18 U.S.C. § 1956(c)(1).

- "conducts" includes initiating, concluding, or participating in initiating, or concluding a transaction. Id. § 1956(c)(2);

- "transaction" includes a purchase, sale, loan, pledge, gift, transfer, delivery, or other disposition, and with respect to a financial institution includes a deposit, withdrawal, transfer between accounts, exchange of currency, loan, extension of credit, purchase or sale of any stock, bond, certificate of deposit, or other monetary instrument, use of a safe deposit box, or any other payment, transfer, or delivery by, through, or to a financial institution, by whatever means effected. Id. § 1956(c)(3).

- "financial transaction" means (A) a transaction which in any way or degree affects interstate or foreign commerce (i) involving the movement of funds by wire or other means or (ii) involving one or more monetary instruments, or (iii) involving the transfer of title to any real property, vehicle, vessel, or aircraft, or (B) a transaction involving the use of a financial institution which is engaged in, or the activities of which affect, interstate or foreign commerce in any way or degree. Id. § 1956(c)(4).

- "monetary instruments" means:

coin or currency of the United States or of any other country, travelers' checks, personal checks, bank checks, and money orders, Id. § 1956(c)(5)(i), investment securities or negotiable instruments, in bearer form or otherwise in such form that title thereto passes upon delivery. Id. § 1956(c)(5)(ii); the term "financial institution" includes- any financial institution, as defined in 31 U.S.C. § 5312(a)(2) of title 31, United States Code, or the regulations promulgated thereunder, Id. § 1956(c)(6)(A); and any foreign bank, as defined in section 1 of the International Banking Act of 1978 (12 U.S.C. 3101). 18 U.S.C. § 1956(c)(6)(B).

- "State" includes a State of the United States, the District of Columbia, and any commonwealth, territory, or possession of the United States. Id. § 1956(c)(8)

Sources: www.federalcrimes.com

The punishment Part II

18 U.S.C. § 1957 (2005).
Section 1957 is the second statute under which a prosecution for money laundering can occur.

The Crime

It is a violation of section 1957 for a person, in a certain set of circumstances, to "knowingly" engage, or attempt to engage, in a monetary transaction in criminally derived property that is of a value greater than $ 10,000 and is derived from specified unlawful activity. 18 U.S.C. § 1957(a).
The circumstances that apply to section 1957(a) are

- that the offense under this section takes place in the United States or in the special maritime and territorial jurisdiction of the United States, 18 U.S.C. § 1957(d)(1); or
- that the offense under this section takes place outside the United States and such special jurisdiction, but the defendant is a United States person (as defined in 18 U.S.C. § 3077), other than an employee or contractor of the United States who is the victim or intended victim of an act of terrorism by virtue of that employment. 18 U.S.C. § 1957(d)(2).

Furthermore, it is not an element of a violation of section 1957 that the defendant knows the offense from which the criminally derived property was derived was a specified unlawful activity. 18 U.S.C. § 1957(c).

The Punishment

- The punishment for a violation of section 1957 is a fine, imprisonment for not more than ten years, or both. 18 U.S.C. § 1957(b)(1).
Alternatively, the court may impose a fine of not more than twice the amount of the criminally derived property involved in the transaction.

Definitions

- "monetary transaction" means the deposit, withdrawal, transfer, or exchange, in or affecting interstate or foreign commerce, of funds or a monetary instrument (as defined by 18 U.S.C. § 1956) by, through, or to a financial institution (as defined in section 1956), including any transaction that would be a financial transaction under section 1956(c)(4)(B), but such term does not include any transaction necessary to preserve a person's right to representation as guaranteed by the sixth amendment to the Constitution, 18 U.S.C. § 1957(f)(1);

- "criminally derived property" means any property constituting, or derived from, proceeds obtained from a criminal offense, id. § 1957(f)(2); and

- "specified unlawful activity" has the meaning given that term in section 1956(c)(7). 18 U.S.C. § 1957(f)(3).

Case Law Interpreting Section 1957

An essential element of a violation of section 1957 is that the government must present evidence that the funds used in an illegal monetary transaction were the proceeds of criminal activity. See United States v. Cavin, 39 F.3d 1299, 1307 (5th Cir. 1994) (indictment charged the use of criminally derived funds to make rental payments on stocks and bonds, but government presented no evidence that the rental payments were proceeds of criminal activity).

In interpreting the language of section 1957, the term "criminally derived property" in section 1957(f)(2) is equivalent to the term "proceeds" under section 1956(a); in other words, they both mean funds obtained from prior, separate criminal activity. United States v. Savage, 67 F.3d 1435, 1441-42 (9th Cir. 1995).

The AUSA will have to prove that the following elements are met in a prosecution of a section 1957 violation:

- the defendant engaged or attempted to engage
-in a monetary transaction
-in criminally derived property that is of a value greater than $10,000
-knowing that the property is derived from unlawful activity and
-the property is, in fact, derived from "specified unlawful activity. United States v. Sokolow, 91 F.3d 396, 408 (3d Cir. 1996) (citing United States v. Johnson, 971 F.2d 562, 567 n.3 (10th Cir. 1992)).

However, there is not a "willfulness" component to the money laundering statute. Sokolow at 408. "[T]he statutory requirement that the underlying acts be performed 'knowingly' requires only that the act be voluntary and intentional and not that a person knows that he is breaking the law." Id. (quoting United States v. Hilliard, 31 F.3d 1509, 1518 (10th Cir. 1994) in the context of bankruptcy fraud).

Sources: www.federalcrimes.com

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