Money laundering is the process of moving money from the illegitimate to the legitimate economy. The crime of money laundering consists of knowingly disguising the source, origin or ownership of illegal funds.
Any criminal transactions are carried out in cash and the function of the money launderer is often to translate these small sums into a larger, more liquid sum which will be difficult to trace and more easy to invest. Money laundering has emerged on a massive international scale with the globalization of the world economy and the internationalization of organized crime.
Money earned in one region can, with increasing facility, be transferred to another part of the world, preventing its eventual recovery by law enforcement. With the globalization of organized crime activity, money is earned in all regions of the world and must be collected, consolidated and moved.
This growth has been facilitated by new technologies, the increasing movement of goods and people globally and the declining significance of borders. A large number of professionals, including lawyers, accountants and bankers, have emerged to provide services to this criminal and corrupt clientele with large amounts of money at their disposal. Not involved in the original act, these professionals help perpetuate criminal and corrupt activities through their services. Organized crime groups have particularly benefited from the expansion of global financial markets. They have exploited the differential regulatory regimes and the possibility of moving money across jurisdictions rapidly in order to hinder detection by taking advantage of the discrepancies between country based regulatory systems.
They seek out locales that are less regulated with respect to international anti-money laundering laws. These havens, frequently offshore banking centers, provide both banking and corporate secrecy. They also provide secrecy for the trusts, which are used to hide large-scale assets that are often illegally diverted from the companies controlled by organized crime groups. In 1996 economists of the International Monetary Fund (IMF) suggested that 2 percent of global GDP (gross domestic product) was related to drug crime and the laundered sums associated with corruption and tax evasion would be an even larger percentage. The share of the world’s economy would be even higher today for several reasons as many forms of organized crime have grown in this period and the countermeasures have failed to dent the profits of this activity except at the margins.
Much laundered money has been invested in dollarized accounts and other strong currencies where it has escaped significant losses through currency devaluations in origin countries. In offshore regimes where financial capital is untaxed, its growth is faster than that of money that is part of taxed and regulated regimes. The range of businesses and financial institutions used to launder money has proliferated with the profits and the growing sums which need to be laundered. Among the institutions employed are large banks, offshore banks and financial institutions, currency exchange and wire transfer businesses, stock brokerage houses, gold dealers, casinos, insurance and trading companies.
The ability to safeguard the proceeds of transnational criminal activity, tax evasion and corruption have served as significant incentives for the growth of this activity. There is limited risk and few deterrents for the money launderers and the professionals who aid their activities. The limited seizures that do take place are merely “one more cost of doing business.” The international efforts sponsored by the Organized for Economic Cooperation and Development (OECD) to limit offshore havens and to sanction countries that facilitate money laundering have yet failed to sharply curtail money laundering.
Sources of Laundered Millions
Laundered money derives from the full range of illicit activities linked to organized crime such as narcotics and arms trafficking, trafficking in human beings, extortion, gambling, counterfeiting of money and goods, trafficking in endangered species and stolen art and automobiles. Often, corrupt government officials move the bribes they have received or the money they have embezzled to offshore locations for security. Much of this cannot be treated as laundered money in many countries because these corrupt activities are not predicate offenses to money laundering.
The need to have a pre-existing criminal offense under many criminal codes, is a major deterrent to effective money laundering investigations. The laundering techniques of organized crime groups have become increasingly sophisticated. Experts are retained who have the capacity to disguise the source of funds and make them look legitimate. For this reason organized crime groups have increasingly penetrated into legitimate economies and financial markets.
Such operators have laundered the assets from these diversified investments as well as from the original illicit activities. The money laundering associated with high level governmental corruption has received more attention in the post-Cold War era. Corrupt leaders launder money derived from multiple sources: siphoned out of the national treasury; diverted from foreign assistance; pay offs from foreign investors or contractors working on development loans from multilateral organizations and proceeds from privatization.
The wave of privatizations in the 1990s in many parts of the world has contributed to the increased deposit of funds in unregulated offshore accounts. In the transitional period from governmental ownership to private ownership when there is limited transparency, many of the insiders have managed to appropriate significant resources of privatizing firms and have through elaborate trust agreements, consistent with the laws of the locale, parked very valuable national resources in financial tax havens. The money laundering associated with the privatization process has also resulted in large and visible cases of international money laundering investigated such as the Raul Salinas case from Mexico and the Pavel Lazarenko case from Ukraine. Investigations into each of these cases, by Swiss and American authorities, as well as other governments, has totaled in the hundreds of millions of dollars. In the Salinas case, pay offs from drug traffickers were commingled with pay offs for beneficial privatizations of key state-owned industries.
A major question is whether mechanisms will be made available in the future to deter such deposits and whether procedures will be established to make such sums more easily recoverable by the source country. As the corruption issue is no longer a taboo issue for employees of multilateral financial institutions, the significant money laundering associated with project and structural adjustment loans have become permissible topics of discussion.
For example, researchers at the IMF now acknowledge that they could observe the financial flows out of Haiti immediately after international loan funds flowed into the country. An investigator examining the diversion of a World Bank loan to Pakistan traced $30 million to a Swiss bank. Increasingly, the investigators of corruption in these international financial institutions must be trained to find money laundering because both bribe money and actual project loans wind up in the banking centers of Western countries.
Banks and Other Financial Institutions Engaged in Money Laundering
The types of financial institutions exploited for money laundering have proliferated as the reporting requirements on major banks have increased. Offshore banks have sprung up in many locales to service the demands of affluent clients who seek secrecy and an absence of reporting requirements. By the end of 1997, offshore locales housed more than half of all cross-border assets held globally. Very few countries have been active in taking measures to seize laundered assets.
The exceptions are the United States and Switzerland. However, the amount they have managed to freeze and confiscate has been very limited compared to the overall total of illegal monies in their financial markets. Many other major banking centers, such as those located in England and Germany, have thousands of suspicious transaction reports yet have comparatively few successful criminal prosecutions or confiscations of assets. Therefore, while there are significant risks of getting caught for smuggling drugs, there is much less chance of getting caught and losing the proceeds of drugs or other criminal proceeds. Most money laundering occurs in offshore banking centers, many of whose operations are less highly regulated than those in major banking centers.
Not all-offshore banks are laundering money. The most flagrant abusers are those offshore locales without any financial infrastructure or any regulatory mechanisms to monitor the banks or to track the transactions, which pass through their locale. In these situations individuals and businesses are exploiting the possibility of bank and corporate secrecy that these locales provide. Many parts of the Caribbean have established large legitimate banking services that are providing services to a large international clientele of legitimate businesses. This offers evidence to indicate that size and location are not absolute determinants of whether a financial institution is used as a laundering facility for the cleansing of questionable proceeds.
At present, there are different niches for different categories of money laundering. Drug dealers have the widest range of assets to dispose of and continuous financial flows, therefore they use all available financial instruments. There is significant differentiation in the market. For example, wire transfer businesses are used primarily by street level drug dealers, whereas the private banking services of major banks are available only to large-scale clients.
Offshore banks are used by individuals and groups engaged in a wide range of illicit and licit activities. There are increasing controls on large financial institutions, but recent cases have revealed that it is still possible to launder vast sums through major banks and through these banks offshore branches. Major American banks such as Citibank, the Bank of New York, and Union Bank of Switzerland (UBS), as well as their offshore branches, have figured prominently in recent investigations of money laundering. As one of the minority congresswomen on the United States House of Representatives Banking and Finance Committee commented, during the Bank of New York hearings, it was the failure to sanction Citibank in the Salinas case of drug money laundering which has perpetuated the problem. While such actions as a Geographic Targeting Order in the New York area has limited wire transfers out of small businesses, it remains continually possible to move large, questionable and illegal sums through the private banking operations of major banks.
The profits for the institutions and particularly for the officials of these divisions have made bankers often turn a blind eye. A recently released U.S. General Accounting Office (GAO) report, conducted by the investigative branch of the agency, examined the possibility of laundering money in the United States. The investigators traced US$800 million of such funds that had been moved into U.S. banks by one Russian. He did this by registering companies in the “offshore location” of the State of Delaware, which protects the anonymity of corporations. The money was subsequently moved into accounts in the private banking sector of Citibank. No legal action had been taken against the banks, any of the account holders or against the individual who had managed to move these funds of unknown origin through the American banking system. This investigation reveals how sophisticated money launderers can exploit significant loopholes in United States to move large amounts of questionable money through a leading American institution.
Money Laundering in the Mercosur
Money laundering is becoming an increasingly serious problem in several of the countries of the Mercosur. Part of this is related to the need of Colombian and Mexican drug lords to launder their money, and the greater facility with which they can do this in Spanish speaking countries. It also is due to the proliferation of offshore banks in Latin America and the Caribbean, which now represent 43% of the international total. The most visible manifestation of this phenomenon has been the construction of the resorts of Cancun that was done with drug money. Yet the use of hotels through which to launder money is not confined to Mexico, as the proliferation of luxury hotels in Argentina with limited clientele is further visible evidence of this problem. More difficult to detect and investigate is the money laundering through the Mercosur banking sector, shell companies, commodities brokerages and currency exchanges.
A joint investigation conducted by the Brazilian Federal Police, Central Ban