The Flow of Illicit Funds
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The Flow of Illicit Funds

A Case Study Approach to Anti–Money Laundering Compliance

Ola M. Tucker

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eBook - ePub

The Flow of Illicit Funds

A Case Study Approach to Anti–Money Laundering Compliance

Ola M. Tucker

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About This Book

In The Flow of Illicit Funds, Ola M. Tucker provides professionals with a holistic understanding of the modern money laundering system using recent case studies. Through this unique perspective, compliance professionals and students will gain a broader understanding of the process of money laundering and how to better detect and deter it.

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Facts, Figures, and Misconceptions about Money Laundering

Efforts to combat money laundering are fairly recent, having begun only in the late twentieth century; however, the practice of laundering illicitly derived gains has been around since ancient times. Although laundering techniques have evolved over time, the biggest changes arose in just the past few decades. These transformations have coincided with the emergence of AML legislation and increased regulatory controls at financial institutions, to which criminals responded by adapting their methods. The development of new technologies, such as mobile devices; advancements in communications, such as the rise of the internet and social media; and an increasingly global and interconnected financial system have made this evolution in money laundering possible.
Present-day laundering schemes are highly sophisticated and complex operations that span jurisdictions. They are run by powerful transnational criminal syndicates, ruthless terrorist organizations, violent drug cartels, and other organized groups that generate vast sums of illicit profits in need of legitimizing. The masterminds behind these enterprises are savvy “criminal-preneurs” who manage their illegal ventures similar to Fortune 500 corporations: they diversify, form strategic alliances, and make calculated, risk-based, and profit-driven business decisions. For example, the infamous Colombian drug lord and leader of the Medellín Cartel, Pablo Escobar, considered himself an entrepreneur and even compared himself to automobile tycoon and founder of the Ford Motor Company, Henry Ford.1 At one point, Escobar’s cartel controlled as much as 80 percent of the international cocaine trade. In fact, he was named on Forbes’ list of international billionaires for seven years straight, from 1987 until 1993—quite an amazing feat considering his humble origins as the son of a poor Colombian farmer.2 One of the tactical alliances Escobar formed, and that helped grow his empire, was with the Ochoa family. Escobar and the Ochoas collaborated on such deals as the manufacturing, distribution, and marketing of their cocaine, much like in the operation of a legitimate business. Similarly, criminal groups have increasingly geared this resourcefulness, ingenuity, and enterprising approach to exploit corporate structures and offshore accounts, to take advantage of financial institutions, to abuse cryptocurrencies, to collude with powerful and corrupt political figures, and to manipulate the global trade system (e.g., trade-based money laundering [TBML]).
Criminal organizations and terrorist groups occasionally even engage in philanthropic efforts, such as funding schools and hospitals, when it suits them. Besides his ruthlessness, Pablo Escobar was also paradoxically known for his charity, earning the nickname “Robin Hood” because he funded social programs and housing projects, among other things, to benefit the poor. Similarly, terrorist groups have been known to invest in social work, primarily as a means to advertise their cause and gain popular support.3 Thus, many of the money laundering schemes that criminal and terrorist groups use reflect the same shrewd business acumen they apply to their profit-focused criminal pursuits.
Modern money launderers leverage both the legitimate and illegitimate economies to disguise their financial transactions, making it impossible to distinguish between their licit and illicit funds. They capitalize on new developments and technologies such as the dark web and virtual currencies. And they are nimble, adapting quickly and changing course as necessary to elude law enforcement and avoid detection. Critically, and perhaps most importantly, they understand the value of anonymity. As a result, the money laundering techniques they use today can be exceedingly intricate and complex, making financial trails frustratingly difficult to trace and unravel.
News reports illustrate the global scope and diversity of money laundering now. Russian hackers and other cybercriminals deploy malware on personal, company, and government computers and then launder their illicit gains, all of which is done anonymously and entirely online, with the pecuniary rewards far outweighing any perceived risk. Unscrupulous kleptocrats, oligarchs, and corrupt politicians amass vast amounts of wealth through grand corruption and then use the extensive network of resources at their disposal to launder it. Transnational criminal organizations exploit the legitimate financial and trade systems to route illegal profits across the globe undetected for their use in the furtherance of other crimes. Terrorist networks also engage in various illegal activities, from counterfeiting to narcotics and human trafficking, to fund their growing operations. To launder those funds, they then employ a similarly diverse array of methods, including using both traditional and nontraditional financial transfer systems such as shell companies, front businesses, and hawalas (an ancient and informal method of transferring money, particularly across borders, whereby local agents collect or disperse funds or goods on behalf of friends, relatives, or other associates and that is based on trust that any future obligations will be settled accordingly). Many of these money laundering schemes wouldn’t have been possible just a few decades ago.
Notably, reports of money laundering tend to focus on the perpetrators and the funds. Such accounts rarely, if ever, mention the casualties involved. But the fact is that money laundering is far from a victimless crime. Fueled by greed and facilitated by corruption, money laundering has devastating socioeconomic consequences on developing and developed countries. It is a form of illegal capital flight that drains countries of revenue. Characterized by vast outflows of assets and/or capital from a particular country, region, or city, capital flight has negative economic repercussions in the area from which the funds dissipate. These illicit financial flows disproportionately impact those who are least able to handle it, further stripping impoverished nations and ordinary citizens of critically needed resources and leading to even greater inequality. In this manner, crime and corruption breed further crime and corruption, resulting in a devastating cycle. Therefore, money laundering presents a much bigger humanitarian threat than is initially perceived or generally recognized.


Although it’s impossible to pinpoint precisely when the practice of money laundering first began, it most likely dates back far longer than one would guess. In fact, an early form of money laundering has been around for millennia.
In his book Lords of the Rim: The Invisible Empire of the Overseas Chinese, historian Sterling Seagrave recounts how over three thousand years ago, Chinese merchants hid the wealth and spoils they acquired through trade to avoid their confiscation by rulers.4 The methods Seagrave describes, including converting profits into more easily transferable forms, moving assets across borders, and reinvesting wealth for subsequent use, are surprisingly similar to the ones money launderers utilize in modern times.
Money did not yet exist at the time of Seagrave’s account (the first known coins did not appear until somewhere around 600 BC); thus, the practice of money laundering, or at least the basic principles behind it, predates the existence of money. How is it possible to engage in money laundering if no money is involved? The answer is because anything of value that constitutes the proceeds of crime can be laundered. Even though the mention of criminal proceeds may conjure up images of suitcases full of stolen cash, criminal proceeds can take the form of any tangible good (e.g., art, antiques, diamonds, drugs, tablets) or intangible good (e.g., personally identifiable information, bank account numbers, intellectual property).
In ancient China, just as in other places, products such as tea, spices, silver, and gold, among others, were often traded through barter. Therefore, if the Chinese merchants were dealing in stolen or otherwise illicitly acquired goods or commodities, they could have theoretically laundered these goods by converting them into a different form, hiding them for later use, or otherwise disguising them while retaining control and ultimately benefiting from their ownership. Similarly, ancient people engaged in an early form of tax evasion, a crime closely related to money laundering, by concealing their ownership of certain objects or misrepresenting the true value of artifacts to avoid their taxation, or even seizure, by sovereigns.
There are also accounts dating to the Middle Ages of merchants and moneylenders evading newly enacted laws against usury by disguising their illegally obtained income from the state. Likewise, it has long been known that pirates commonly concealed their plunder and probably engaged in laundering gold and other valuable loot for centuries. However, until more recently, laundering itself wasn’t considered a crime. Rather than the attempt to hide the product of a crime, it was the underlying crime—for example, theft or usury—that was the focus of punishment.5
In contrast to the practice of money laundering, the etymology of the phrase is much more recent, having come into modern usage less than a century ago. The term as we commonly know it today is popularly thought to have originated during the Prohibition era of the 1920s when Al Capone and other Italian mobsters were said to have used laundromats to commingle legal profits with illegal earnings from bootlegging (and other crimes such as extortion, gambling, and prostitution), thus disguising the origin of their illicit proceeds. This theory has largely been discredited, however, as it is more likely that the term was applied retrospectively. Instead, the phrase appears to have originated in a newspaper article published in 1973 in Britain’s Guardian newspaper, which apparently used it in print for the first time in a story on the Watergate scandal. The Guardian article used the phrase to describe the laundering of campaign contributions that were improperly received by Nixon’s reelection campaign. These donations were reportedly delivered to the White House in bags of cash and later hidden in offshore banks, outside the reach of US subpoena power.6
Ironically, just three years earlier, President Nixon had signed into law the Bank Secrecy Act (BSA) of 1970, which was the first piece of US legislation designed to fight money laundering and remains the primary anti– money laundering law in the United States today. Notably, although the term “money laundering” appears in later amendments to the BSA, the phrase did not appear anywhere in the act as it was originally written. Primarily a record-keeping and reporting statute, the act imposed regulatory requirements on US banks (and, through subsequent amendments, on other covered financial institutions). At the heart of the legislation was concern over illegal drug proceeds and the illicit use of foreign bank accounts in countries with banking secrecy laws, as such activities enabled organized crime in the United States.
The phrase “money laundering” first surfaced in the American judicial system in 1982 when it was referenced in the case United States v. $4,255,625.39.7 That proceeding was a civil forfeiture...

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