LocalCurrent Commentary
Money Laundering:The Methods (Part II)
In light of the currentdebate on money laundering, Cayman Net News, as a Public Educationservice, continues the series on money laundering, the first partof which appeared in the issue of Friday, August 23.
Today, money is wherever the computer says it is.
A large bank can have a mainframe computerin any given country and move the money from one part of the computerto another part of the computer, and then the money is somewhereelse.
We live in a world where there is nothingleft of the notions of criminal jurisdiction with regard to money.
In essence, the rule in successful moneylaundering is always to approximate, as closely as possible, legaltransactions.
As a result, the actual devices used arethemselves minor variations on methods employed routinely by legitimatebusinesses.
In the hands of launderers, transfer-pricingbetween affiliates of transnational corporations turns into phonyinvoicing; inter-affiliate real estate transactions become reverse-flipproperty deals; back-to-back loans turn into loan-back scams;hedge or insurance trading in stocks or options becomes matched-or cross-trading; and compensating balances develop into the so-calledunderground banking schemes.
The most common laundering tool is the internationalbusiness corporation (IBC), where a government allows people toset up a business with no obvious owner, no need to report tothe government, and no obviously responsible officer, directoror employee. Once incorporated, they then go out into the worldand open bank accounts.
They become the way in which impunity isachieved. The concept here is that once one of these corporationshas been set up, you cannot get behind it; and if you cannot getbehind it, there is no way to find out whose money it is processingunless someone confesses and delivers a paper to you.
A second widely used tool is the offshoretrust. We now have trusts called asset protection trusts.
With such trusts, you cannot find out whothe beneficiary is, or who the grantor of the trust is.
The validity of the trust cannot usuallybe successfully challenged because the courts will not recognizeany challenge after a certain period of time, which has usuallyelapsed before the need for a challenge because apparent.
There is an international convention ontrusts but the Cayman Islands have not signed it. When a trustin one country is married to an international business corporationin another country, law enforcement loses all ability to tracefunds and assets.
In addition to offshore trusts more sophisticatedtechniques can be run with the aid of stock or commodity brokers.
The person seeking to launder money buysspot and sells forward, or the reverse. One transaction recordsa capital gain, the other a capital loss.
The broker destroys the record of the losingtransaction and the launderer exits with the money now appearingas capital gains.
The cost is the double commission plus anyhush money demanded by the broker.
Property deals are also similar. Someoneseeking to wash money purchases a piece of property, paying withformal bank instruments and legitimately earned money for a publiclyrecorded price that is much below the real market value.
The rest of the purchase price is paid incash under-the-table. The property is then resold for the fullmarket value and the money recouped, with the illegal componentnow appearing to be capital gains on a real estate transaction.
In many cases, there is a symbiotic relationshipbetween offshore financial centres and free trade zones. The importanceof this relationship is that it allows money launderers to combinethe use of banks with IBCs and other apparently legitimate tradingcompanies.
The implementation of free trade agreementsand regional compacts creating trading and economic zones thattranscend national borders could increase the use of internationaltrade as a mechanism for laundering the proceeds of criminal organizations.
The impact of the liberalization of borderand other customs controls liberalized banking procedures andfreedom of access within those zones creates additional potentialrisks. Laundering operations are located within legitimate businesses,with real inventories and substantial sales.
Indeed, laundered money can be used to buylegitimate goods that are then resold in the home country, providinga legitimate source of income.
Equally notorious, in response to the cashtransaction reporting systems, are the multiple schemes launderershave devised to get around the reporting rules: prior conversionof cash to checks through formal or informal check-cashing services;breaking cash deposits down to sums below the reporting threshold;securing an exemption from reporting; and even bribing bank staff.
Funds can be repatriated through a debitor credit card issued by an offshore bank.
Withdrawals from ATM machines or expendituresusing the card can be settled either by automatic deduction froma foreign bank account or by the card holder periodically transferringthe required funds from one foreign bank account to another.
Debit cards are superior from the pointof view of confidentiality. However, even an ordinary credit cardcan be turned into a debit card by being secured through the depositof collateral with the issuing bank.
Although secured credit cards were initiallyintended to give persons who were deemed bad credit risks theadvantages of a credit card, such as reserving hotel rooms orrenting cars, they can also be very useful to anyone seeking tolower their financial profile.
Bills incurred in the place of residencecan be settled by an offshore bank or even more discretely byan offshore company.
In fact, people seeking to use at home illegal money held abroadneed not even bother to work through their own offshore accountsand shell companies. There are firms that advertise their willingnessto handle all of their clients' major payments such as utilitybills, automobile, and mortgage payments.
The client makes a deposit from his/heroffshore account to that firm's offshore account and sends billsor payment instructions to the firm.
Visibility can be reduced through the useof a payable-through account. Instead of securing a license tooperate in one country, a foreign bank can open a correspondentmaster account with a bank in the host country and allow its clientsto draw checks on the bank's master account.
The account remains legally in the nameof the foreign bank.
Some offshore financial institutions generatefalse invoices, bills of lading, end-user certificates and otherforms of documentation that give the appearance of legitimacyto a variety of illicit transactions ranging from fraud to armstrafficking.
Over-invoicing using false documents canbe an excellent cover for moving the proceeds of drug traffickingand other crimes, while false invoices, bills and receipts canbe used for a variety of tax frauds.
The person whose funds are to be moved doesnot have to assume the risk personally. There are professionalcourier networks that will handle the job and guarantee delivery.
Sometimes couriers possess diplomatic passports,so they and their effects are at least partially immune from searchand, in any event, such couriers may be subject to little morethan deportation if caught.
Confidentiality plays a key role in theability to maintain such accounts.
There are accounts protected by both officialbank secrecy acts and the informal device of nominee ownershipin which the nominee and the beneficial owner are connected bycivil contract and/or simply a bond of trust rather than by aformal attorney-client privilege. These are different from FormB type accounts since the bank has little or no control over theuse of nominees.
On the other hand, since there is no client-attorneyprivilege, there is nothing to prevent the nominee from revealinginformation about the beneficial owner of the account.
There are owner-held accounts that are codedso that only the top management of the bank knows who the beneficialowner is, and secrecy laws prevent the management from revealingthat information. These are especially effective if the country'sbank secrecy law also forbids the bank to reveal information evenif the client requests lifting of bank secrecy. It is the welfareof the banks, not of the clients, that is really at issue.
In any event, it should be possible forthe authorities in a jurisdiction to judge whether a client makinga request to lift bank secrecy is being subject to a proper criminalprocess or is being harassed for purely political reasons beforeagreeing to waive secrecy.
In some instances, criminals will open anaccount in one jurisdiction but with instructions for any incomingfunds to be transferred immediately to another location. Additionally,the bank will be instructed that, in the event of inquiries, bankofficials in the second location must be informed. When they areso informed, these officials have instructions that the moneyshould be transferred elsewhere.
These schemes, known as "walking accounts",pose serious problems for law enforcement efforts aimed at seizing"dirty money". The first account is simply the initialdepository, and money moves in to it and then immediately movesout. The function of the account is, essentially, to act as anearly warning mechanism to identify any inquires by law enforcementand to set off further countermeasures to protect the money.
It is not that bank secrecy blocks informationflows but that it gives those affected by the search time to movetheir funds to other jurisdictions.
It is the potential delay between targetingthe foreign account and getting local permission to investigatethat is the problem, not bank secrecy per se. Finding the accountsis not easy, freezing them takes administrative time and delayand the forfeiture is less likely and in low or no amounts whenthe money moves fast enough.
Next: Money Laundering: The Crackdown(Final)