COVER

THE LAUNDERING GAME

CLEANING DIRTY MONEY IS CRUCIAL

HOLGER JENSEN October 23 1989
COVER

THE LAUNDERING GAME

CLEANING DIRTY MONEY IS CRUCIAL

HOLGER JENSEN October 23 1989

THE LAUNDERING GAME

COVER

CLEANING DIRTY MONEY IS CRUCIAL

The new emphasis in North American law enforcement on pursuing drug profits, as well as the drugs themselves, has made cash itself a liability. It is even bulkier and heavier than its value in such expensive drugs as heroin and cocaine and poses far greater logistical problems for the traffickers who accumulate it. A million dollars worth of $20 bills weighs 125 lb. and would fill a large suitcase. With a street value of $100 a gram, the 500-kg load of cocaine seized near Fredericton last April would have generated nearly three tons of $20 bills had it reached New York City.

There are two ways drug dealers get rid of their troublesome inventory: they either ship it out in bulk the same way the drugs were brought in, or they get it into the banking system. Either way, to protect the illegal proceeds the money eventually has to be laundered—its origins and ownership disguised— before it can be invested, converted to less suspicious assets or used to purchase expensive goods. The critical point occurs when the traffickers first try to put the money into the banking system. Said Insp. Bruce Bowie, officer in charge of the RCMP’s Anti-Drug Profiteering Section in Ottawa: “Once it gets in there and starts spinning around, it’s usually too late. ” According to police, there are several frequently used money-laundering techniques:

SMURFING: Designed to circumvent mandatory reporting requirements in American banks, traffickers employ so-called smurfs— couriers of innocuous appearance—to make large numbers of small transactions, always under the U.S. legal reporting limit of $10,000, at various financial institutions. The smurf will purchase either money orders or bank drafts, which are then deposited in a single bank account, usually abroad. Smurfs are also employed to convert small denominations to larger bills, a process known as refining.

LEGITIMATE BUSINESS: Traffickers often take over or invest in businesses that customarily handle a high volume of cash transactions.

Retail stores, restaurants and food markets are popular. The drug money is intermingled with legitimate revenues on a regular basis. While the apparent business profits produced by the drug money are subject to tax, the illicit funds are hidden within the legitimate income. For legitimate owners, a side benefit of the scam is that it artificially improves the sale price of the business because it ostensibly exhibits a far better cash flow than it really has. The danger, of course, is that enforcement agencies can usually identify unrealistic revenue figures.

FOREIGN CURRENCY EXCHANGES: By dealing with currency exchanges, the trafficker can avoid conventional banks. And because currency exchanges keep no records that would identify the customer, the audit trail is broken. The exchanges permit traffickers to buy bank drafts in a foreign currency, which are easily transported out of the country.

DAISY-CHAINING: Similar to corporate layering, through which ultimate ownership is disguised through a series of interlocking companies that legitimate firms use to reduce taxes, money launderers employ it as a way to legitimize income rather than hide it. The best money launderers form dummy corporations in a number of foreign jurisdictions, often using local lawyers as nominee owners. By layering, it becomes progressively more difficult to trace

drug money either forward to the ultimate recipient or backward to the crime. The basic requirement: an offshore tax haven with bank secrecy laws and little or no regulation on the setting up of foreign corporations.

BROKERAGE HOUSES: Having ensured the collusion of a foreign bank, the money launderer places an order for securities through the institution, stipulating that payment to the broker will be made by courier. Because brokerage houses will generally accept large cash deposits if they believe that they are

executing orders from a foreign bank, or an important customer of that bank, the drug trafficker will have the money delivered and is then free to sell the securities for cash at a later date.

DOUBLE-INVOICING: Another favorite taxavoidance method adopted by the drug trade, it involves a trafficking organization’s gaining control of corporate entities in two different jurisdictions. Then, one firm can order goods from the offshore corporation at inflated prices. The difference between the inflated price and the real value is deposited in another offshore account, sometimes even in a third jurisdiction. The domestic corporation, ostensibly charged high prices for the goods it purchases, can show a low level of profit, which also reduces high taxes payable in most Western countries.

REVERSE FLIP: The money launderer finds a co-operative property seller who agrees to a reported purchase price below the actual value and then accepts the difference under the table. That way, a launderer can purchase a $2million piece of property for $1 million, secretly passing the balance to the co-operative seller. After holding the property for a while, the launderer sells it for its true value of $2 million, thereby cleansing $1 million of illegal profits.

LOAN-BACK: Having established a corporation in a tax haven, a trafficker then purchases a business in his own country with a nominal

FROM LEFT, CLOCKWISE: TANNENBAUM/SYGMA; LENTZ/BLACK STAR; McQUAY/FIRST LIGHT; MILNE/FIRST LIGHT; LLOYD/FIRST LIGHT; GREG HOLMAN

1 Criminal syndicates in drug■ producing countries such as Colombia and Peru purchase the raw cocaine, refine it, and smuggle the white powder, usually by boat or airplane, to Western countries for sale.

LONDON

PARIS

HONG

KONG

3 Ideally, the drug dealers want to get ■ their profits into a stable banking system, like Canada’s, from which the money can be easily transferred electronically to foreign banks, usually in major cities like London, Paris or Hong Kong, where it is then retrieved by drug traffickers.

The street dealers generate massive revenues, handling the vast of cash generated by illegal drug profits is cumbersome. As a result, drug dealers have developed a number of enterprising ways to launder the illegal cash.

deposit. The balance is in the form of a loan from his secretly held offshore corporation. He is, in effect, borrowing his own money. Once he is set up in business at home, the launderer makes scheduled payments on the loan as if it had been legitimate—he not only repatriates illegal money, but also pays himself interest. He can even get a tax break by claiming those payments as business expenses.

UNDERGROUND BANKING: This is an effective form of money laundering because it usual-

ly involves individuals tightly bound by familial and ethnic ties that make it difficult for authorities in the West to detect. The system operates through a worldwide network of gold shops, money changers and trading companies, often controlled by the same family. A drug trafficker merely has to deposit his funds with a familyowned business in one country and withdraw them from a relative’s business in another country. Authorities believe that most Asian heroin money travels that route.

Still, one of the most challenging but surest ways to launder money is to buy a bank. In the early 1980s, a group of cocaine traffickers in Miami actually obtained control of a small bank,

which they then used to launder millions. And Peter Appleton, director of the Alliance for a Drug-Free Canada, opened one while visiting Panama, just to prove it could be done. “There are consultants who advertise their services in the paper,” he noted. And he added, “It cost $5,000 in legal fees and another $10,000 to capitalize it, but by the end of the day, I was the proud owner of Banco de Norte.”

Appleton shared an office with another Canadian, a money launderer who taught him the tricks of the trade. He too had a bank, which

consisted of a Telex, a telephone and a fax machine in an office building. Appleton says that heavily armed Colombian gentlemen would arrive with suitcases of money. The Canadian would then deposit the funds across the street in an account that his bank had with the Bank of Boston. He would then go back to his office and fax instructions for the money to be transferred to a bank in Curaçao. From there, it went to Switzerland. The banks each received a one-per-cent transfer fee and the Canadian launderer received a seven-per-cent commission. The banks—and authorities—did not know that drugs were involved.

Such bank-to-bank wire transfers are not regulated and are rarely questioned within the financial community. The transfers are the ultimate form of money laundering, because no one has figured out a way to regulate the transfers without crippling international commerce, which depends on the smooth flow of money. But with drug kingpins finding new ways to launder cash almost daily, efforts to regulate the transfers will increase.

HOLGER JENSEN