MONEY LAUNDERING – WHERE BIG BUSINESS AND ORGANISED CRIME MEET
No doubt readers have recently seen reports suggesting the global elites have hidden some $21 trillion in offshore accounts to avoid paying tax. This practice of offshoring funds is also used by criminals and the various mafia-type organisations to launder their illegal gains from large scale criminal enterprises. It is tempting to think there is some difference between ‘legal’ business and ‘illegal’ criminal enterprises, but both resort to the same techniques to hide funds from the authorities, and therefore the public. Indeed, I was told by an investigating magistrate in Sicily – home of Cosa Nostra, the model for all other mafias – that if big business cooperated with the authorities, organised crime would quickly become a “thing of the past”.
To understand the scope and subtleties of money laundering (ML) techniques, it’s useful to briefly examine the history and development of offshore financial centres, tax havens and related investment vehicles and business practices used by so-called legitimate institutions for tax avoidance and tax evasion.
In the early 20th century, the Vestey Brothers had monopoly control over the British meat market. In 1921, an attempt to avoid tax on their multinational business empire, they created an offshore trust to hide the profits from the Argentinian authorities. So began the offshore business revolution. Since the 1920s a bewildering range of offshore centres and financial instruments have been created by a burgeoning professional sector of lawyers, accountants and investment bankers in league with politicians, the super-rich and transnational corporations.
A tax haven or offshore business centre is a virtual location providing services favourable to business and international investors. The French term is paradis fiscal and the Spanish say paraiso fiscal. It has been suggested that the word “haven” has been confused or linked to the word ‘heaven’ and this explains the reference to paradise. Nicholas Shaxson defines a tax haven as,
A place seeking to attract business by offering politically stable facilities to help people or entities get around the rules, laws and regulations and jurisdictions elsewhere.
Havens provide secrecy combined with regulations designed to block investigations and requests for exchange of information from other jurisdictions. For this reason they are known as secrecy jurisdictions. Tax havens, as their name suggests, also offer zero or very low rates of tax. Another important aspect of havens is that the services provided are for non-residents of the state – local residents have to pay normal rates of tax. Tax havens tend to have large financial services sectors compared to their ordinary economy. In a report in 2007, the IMF claimed the UK was a major offshore location. 50% of global trade passes (on paper) through tax havens, and 50% banking assets and 33% of direct foreign investment by transnational corporations is routed offshore. 85% of international banking and bond issues take place offshore. In 2010, the IMF estimated that 33% of global GDP is found on the balance sheets of financial centres of small islands.
Peter Lilley explains how International Business Companies (IBC), used legally by multinationals, are abused by professional criminals. An IBC is an anonymously-owned corporate vehicle that does no business in the state it is licensed in giving a range of benefits to owners. IBCs can be created quickly and cheaply, there is virtually no paperwork, they have limited liability and are not restricted in terms of the activities it can conduct. Many offshore centres offer these facilities. The owners of the IBC can open anonymous bank. Likewise, the bearer shares – documents recording the company’s owner are anonymous and solicitors or others may stand in as another line of defence. Lilley points out that it is cheap and easy to buy an offshore bank licence from tax havens. This can be done over the Internet.
Multinational corporations benefit greatly from the accounting technique of “transfer pricing” which creates a complex paper trail crossing several secrecy jurisdictions. Corporations transfer money, goods and services between subsidiaries to further cloud matters. Most of the world’s biggest corporations pay little tax in the areas where they conduct most business. This has global ramifications. Christian Aid suggest developing countries lose up $180 billion yearly due to the practice of transfer pricing as 2/3 of cross-border trade occurs within multinationals. In addition, it is obvious this practice is useful for criminals eager to launder the proceeds of crime.
Shaxson claims there are roughly 60 secrecy jurisdictions made up of four main groups. First come the British, concentrated on the City of London, with a network based on colonial connections. Next come European states such as Luxembourg, Liechtenstein, Monaco, The Netherlands and Switzerland. The US has its own economic sphere of influence, centred on Manhattan with rings of smaller states similar to the British. Finally there are individual states offering services. 50% of tax havens are connected to the City of London.
Shaxson identifies three tiers or layers of the UK offshore network. Guernsey, Jersey and the Isle of Man form the closest ring, British Overseas Territories, including the Cayman Islands, Gibraltar, Bermuda and the British Virgin Islands, form the second, and the outer ring consists of former territories such as Hong Kong, Ireland, Dubai, the Bahamas and Singapore. Finally, in the outer ring, South Pacific island state Vanuatu developed an offshore centre with Barclays Bank. Perhaps half of all global banking assets are held by this combination of British offshore accounts and assets controlled by the City of London. And where there is money and secrecy, there is Transnational Organised Crime (TOC).
TOCs produce, synthesise, smuggle and retail narcotics; they traffic people and run prostitution and manufacture pornography; they operate protection rackets, frauds, counterfeiting and copying scams; they murder and abuse, bribe and corrupt. All of this takes a great deal of money. We will look below in more detail at how criminals have learned from and copied legitimate multinational corporations in an attempt to become more efficient businesses. But first we will consider what has been described as the ‘most economically important function’ for a TCO – Money Laundering.
UNDOC describes ML
As the methods by which criminals disguise the illegal origins of their wealth to avoid the suspicion of law and not leave evidence of crime.
The Law Society says:
ML is a process by which the proceeds of crime and its true ownership are changed so the funds or goods seem to come from a legal source.
The United Nations estimates that TOC accounts for 2-5% of global GDP. If global GDP is approx $58 trillion then 2% is over $1 trillion and 5% is almost $3 trillion. The vast majority of this money must be laundered so a portion can be saved for the long term, some must be available for managers to use for working capital and new ventures, maintenance of facilities and wages – just like any other large organisation. We will now look at how ML has developed over the last century.
It has been suggested that the term “laundering” has both literal and metaphorical sources. As money derived from the proceeds of crime is thought of as “dirty” then by extension it becomes possible to clean it in some way. The French phrase blanchiment d’argent, meaning “bleaching the money” shows this idea clearly. It has been suggested that US mobsters in the 1930s purchased companies dealing in cash such as laundries and taxi firms to mix their illegal proceeds with legitimate takings. An associate of Al Capone, Meyer Lansky – reputedly the inspiration for a character in the film The Godfather – is credited with beginning modern malpractices.
While Capone was incarcerated for tax evasion in 1931, Lansky developed methods to get illegal money out of the United States in an effort to bring it back ‘dry-cleaned’. He worked with Swiss banks and moved money and valuable goods via Liechtenstein to Switzerland. The banks then lent the money back to Lansky’s associate in the U.S. who could use it legally. The scam was deepened by deducting the interest repayments for the loan from the Mob’s legitimate business incomes. He next opened casinos in Cuba and built up drugs, racing and gambling businesses. According to Shaxson, he built an offshore ML centre for the American Mafia, described as ‘an anti-Disneyland’, and the ‘most decadent spot on the planet’.
Lansky moved to Bermuda and developed his illegal schemes through bribery and corruption of local politicians. The British State did little to prevent organized crime development and casinos and ML boomed through the 1960s. When political change led to the Bahamas becoming independent in 1973 much of the illegal money moved to a nearby offshore facility in the Cayman Islands. This became an important centre for money laundering. Lansky died in 1983 and escaped all criminal charges laid against him. Apparently he once claimed that TOC he was associated with were bigger than US Steel.
According to Lilley, there are three parts of the process in money laundering. The first is placement which involves getting the money into the system. There are many ways of doing this. Money can be invested into cash-rich, legitimate businesses especially casinos, bars, all retail outlets, restaurants and dealers of all kinds. Also fictitious companies can be set up and wholly falsified transactions can be created. The proceeds of crime can be in cash or many other forms. Because the criminal can be linked to the initial proceeds, this is the most dangerous time for the offenders. We will see below some examples of failed laundering schemes. The second stage in the process is termed “layering” and sometimes “commingling” or “agitation”. In this stage, criminals move the money about, both within institutions and to other institutions, across national boundaries and from one form to another.
Failed business tycoon and alleged Israeli spy Robert Maxwell laundered money, illegally earned in Bulgaria, via the Bank of Bulgaria to Credit Suisse. I met him once in Birmingham. Nasty piece of work with an expensive suit and egg stains on his tie!
From there it went to the Bank of Montreal, next to banks in Mexico and other South American countries, before crossing the Pacific Ocean and finishing in the Discount Bank of Israel. An expert in layer and techniques attempts to break the initial money up in to discrete pieces and send them off in different directions. The final stage involves taking the laundered funds out of the system for any purpose.
An example of the whole process is the Colombian black market peso/dollar exchange scam, which has been estimated to launder $6 billion drug profits p.a. (from a total $40 billion for Mexico as a whole). Colombian exchange brokers deposit pesos in the accounts of traffickers working in the US. These are exchanged for tainted dollars. This money is moved into separate accounts and U. S goods are bought to be smuggled back into Columbia, often through Venezuela and Panama, thus avoiding taxes.
We have seen above how the global proceeds of TOCs could be between $1-3 trillion: that amount of money takes a lot of laundering. Criminal organisations have been very creative in their efforts to rehabilitate their tainted money and have been assisted to a great extent by the attitudes of financial institutions, state agents and professionals including accountants and lawyers. The organisations have also recruited professionals and bribed and corrupted politicians and legal agents to further their illicit business ends.
According to David Southwell, TOC and multinational corporations have several common characteristics. Because both organisations attempt to become more efficient and professional and have highly dedicated staff they are successful at expanding to gain a greater market share whatever the competition. Both wield power and influence that is equal to or greater than that of a small nation state. Both types of organisation succeed by a mixture of ruthlessness and business sense. Both groups have strong command structures, are able to formulate effective policies and are able to survive in hostile political and social cultures. In addition, both organisations exist outside state boundaries giving them flexibility and some immunity from assets sequestration. Finally, both groups use violence when they consider it in their interests. Violence and aggression by organised crime is well documented, but oil companies and drinks manufacturers, among many others, have been indicted in courts for violence towards indigenous people and union members respectively.
We will now look at some actual examples of ML by TOCs. Unfortunately, it is not hard to find reports of ML crimes. Below are brief details of a major corporate offender and then some smaller cogs in the criminal machine that were in the news recently. It is worth remembering that some claim 99.9% of ML offences are never prosecuted. If that is true, then the cases below are drawn from 0.1% of the actual crime committed.
In one of the biggest ML crimes ever, the Wachovia bank of Miami, Florida, was fined $160 million – the equivalent of 2% of annual profits. The offences took place between May 2004 and 2007. The bank laundered proceeds from the Mexican Sinaloa cocaine cartel to the value of $378 billion – a figure equal to a third of Mexican GDP. The prosecution was bought by the United States DEA after whistle-blowing by an English employee of the bank based in London. Martin Woods, an ex-Metropolitan Police officer, was the senior anti-ML officer at the London branch. He flagged up suspicious transactions of Mexican casa de cambios (currency exchanges) and the paying-in of large value travellers’ cheques. Instead of being rewarded by his employers, Woods was hounded and eventually left his job with depression. Eventually he received a letter of commendation from the American authorities.
A British money launderer and professional gambler was jailed for seven years for his part in a £60 million mobile phone VAT fraud. The offender used gambling on horses to cover his ML crimes. Mobile phones and computer chips were imported and VAT was illegally claimed: the goods were resold and the VAT claimed back again. A customs officer and banker were also jailed for their part in the conspiracy. In another case, two men were charged with ML and conspiracy after drugs and cash to the value of £200,000 were recovered in Leicester. Similarly, five people were arrested and charged with ML and drugs offences after cannabis and £10,000 in cash were found in two raids at Newcastle.
In other recent cases, a solicitor from Wales was jailed for four years for ML and perverting the course of justice after obtaining mortgages and other financial products illegally for his drug-dealing friend, and police in Scotland have claimed that organised criminal gangs have been buying up nurseries and childcare facilities. Officers have already detected criminals involved in security firms and taxi companies and warn that criminal gangs are always on the lookout for cash rich businesses to manipulate.
Finally, a man was convicted of running a significant number of prostitutes working from 35 brothels spread across the United Kingdom. Young women and girls worked in these establishments, one was aged just 15. Many were trafficked to Britain from Nigeria and South America. Thomas Carroll has been ordered to pay £2 million or face a further 10 years in jail. Apparently the offender has decided to sell four Welsh properties, three houses in South Africa and four cars including two top-of-the-range Mercedes. Carroll is already serving a seven year term for vice and ML offences. His wife and daughter were also jailed for ML crimes.
The Financial Action Task Force (FATF) is an intergovernmental organization responsible for developing and promoting policies to combat money laundering. The task force monitors and reviews states parties’ progress in implementing the necessary measures. FATF began in 1989 and reviews its mission every five years. FATF made 40 recommendations which created a complete set of measures and provisions to cover justice and law enforcement, the financial industry, regulation and international cooperation.
SOCAs Financial intelligent Unit (FIU) has responsibility for organizing the Suspicious Activity Reports (SARs) regime. UKFIU receive and then dispatch 200,000 SARs annually to local police forces, local authorities and government departments.
The reports list any suspicious activity that could possibly hint at money laundering or terrorist funding methods. It is a requirement of the third European Union money laundering directive article 21 that each member state must create FIU to combat money laundering. Britain is also part of the Egmont Group – a global forum to exchange intelligence, promote cooperation and share training and expertise in the fight against the financing of terrorism and money laundering.
The legal approaches detailed above appear on paper to be robust and must surely challenge the criminal’s activities – at least that is what one would expect.
Yet according to the former head of the UNDOC, Antonio Maria Costa, $352 billion of illicit drug profits was laundered into the global economic system in 2008. He said, “The money from drugs was the only liquid investment capital. Liquidity was the banking system’s main problem.” He added that gangs often kept proceeds in cash or invested offshore to hide it from the law, but the banking crisis allowed criminals to invest their money in supposedly reputable organization. Evidence of the flow of money came from officials in the United States, Italy, Switzerland and Britain.
Peter Lilley is also critical and argues that cooperation between agencies and regulators involved in finance and corporate matters is inadequate. Even post-9/11, when things were supposed to be different, it is amazingly easy to open anonymous accounts and move money around the world out of the gaze of the authorities. But he sees no quick fixes and is pessimistic about the future. He notes that all serious crime leads to and from dirty money that was cleaned in the system. He ends his book with the phrase ‘the apocalypse is now!’
Nicholas Shaxson is also pessimistic. He notes the important work done in international, intergovernmental treaties and national legislation developed to defeat ML, but, in an echo of FATF’s 40 recommendations, offers his own 10 commandments/areas of urgent change. These include; pursuing transparency in international finance, prioritising the needs of developing countries, breaking the power of the City of London, reforming offshore regulations and tax havens and generally changing our business and financial cultures.
Another critic of the system is Norwegian-born Eva Joly, who has been lauded as Europe’s most successful prosecutor of fraud, and is also a leading figure in the French Green Party and an MEP. She was originally known for her decade-long investigation into the sleazy affairs of oil multinational ELF and the French establishment in the 1990s. Subsequently she has been an adviser to Icelandic government special prosecutor Olafur Hauksson, who is leading the criminal investigation into the financial meltdown in autumn 2008. Their work has been described as the largest white collar crime inquiry ever attempted anywhere in the world.
Joly’s investigation into slush funds and political corruption, both in France and in Gabon, resulted in the boss of SNCF and a former French foreign minister going to jail. She also named another 42 significant people as part of an alleged web of corruption. Even after years of investigation Joly considered she knew only fragments of the full picture. Money and resources were moved between tax havens which meant the investigators were always trying to catch up with the money launderers. She was assigned bodyguards due to death threats but decided to leave France and took up the post in Iceland.
In 2005, Joly created Network, a group of like-minded judges and investigators to come together to fight global corruption. She is campaigning for tougher European Union laws regarding tax havens and is said to be considering standing to become president of France. Joly says she’s going into politics to fight fraud on behalf of ordinary people. She thinks we must fight to prevent oligarchs taking all society’s money and resources, and asks that citizens wake up and stop living in a ‘collective illusion’. She claimed the former Nigerian dictator Abacha laundered millions through the city of London, and the banks that took his money must have known what they were doing. She cites the UK scheme of non-domicile tax breaks for super-rich foreigners as a ‘serious hole in European tax cooperation’.
Joly is critical of the lack of political will to confront economic crimes in many parts of the developed world. She notes that much of the suspect behaviour that took down Icelandic banks originated in London. She claims it is scandalous that the Serious Fraud Office in the UK is under pressure to cut staff or merge with other agencies to save money, when we need more resources to investigate economic crime and money laundering. Finally she suggests the cuts in services foisted on the British people would be unnecessary if the government regulated the City of London and closed the loopholes in the offshore markets it controls.
We have seen how ML is a central, if not the central, activity of TOC. Such money and power cannot be allowed to remain in the hands of those who promote violence, people trafficking, drug abuse, prostitution and other crimes, if we are to hope for a decent society in the future. But as Joly and others have found, the global financial system was not created for the benefits of the majority, but so that business elites could hide their fortunes, ill-gotten or otherwise. Also many think these practices continue because national intelligence agencies are involved and use organised crime as and when necessary. Surely with such an important issue as money laundering by transnational organised crime at stake, global security concerns must trump corporate and so-called national security: a new era of transparency in financial affairs is needed.
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