Federal investigators suspect that Russian mobsters may have used the Bank of New York to launder as much as $10 billion over the last two years. What exactly is money laundering and how does it work?
In short, money laundering is the conversion of illegally obtained profits into funds that appear legitimate–that is, making “dirty” money “clean.” It is used by drugs traffickers, arms smugglers, and anyone else who needs to spend ill-gotten gains without arousing suspicion. White collar criminals and corrupt political leaders also frequently launder funds to avoid taxes or conceal embezzlement.
The simplest form of money laundering is combining criminal profits with earnings from a legitimate, cash-intensive business. For example, say a drug dealer wants to disguise $10,000 in monthly profits from cocaine sales. So, he buys a bar that takes in $50,000 a month–mostly in cash. At the end of each month, he slips an extra $10,000 into his till and reports $60,000 in bar revenue. Although his drug income is now taxable, it is worth that price to make the profits appear legal.
Larger amounts, like $10 billion, can’t just be slipped into the till. Laundering big sums generally involves three steps:
Placement: The cash proceeds (often thousands of small-denomination bills) enter the legitimate banking system. Many countries require that large cash transactions (in the United States, anything above $10,000) be reported to authorities. So, launderers often deposit proceeds piece by piece or export the money to countries with relaxed banking regulations.
Layering: The money is separated from its criminal origins through complex financial transactions. Often, funds will be transferred dozens of times through multiple accounts, companies, and countries, making the paper trail virtually impossible to follow.
Integration: The money returns to its original source, apparently as legitimate income.
There are countless variations on this pattern. One of the most common is the “loan-back” scheme, in which the launderer essentially borrows money from himself. First, he sets up a lending company in a country with few financial regulations. Then he fills its coffers with illegal profits, layered through multiple accounts. When the launderer wants to make a purchase in his home country, he simply “borrows” the money from the overseas lender. This money, once illegal, now appears to be a legitimate loan.