My local newspaper had an article about a financial advisor who committed fraud and was sentenced to 28 months in a Federal prison. The actual charges involved wire fraud and money laundering. The advisor convinced the victims to give him access to their bank accounts. Over a period of time he moved about $1.5 million to his own use.
The victims were highly paid professionals with a very busy life. They turned over control of their accounts to a financial advisor who would invest their funds and ensure that their bills were paid. They essentially allowed someone else to handle the “burden” of watching over their money. I suppose I understand how someone could turn over some aspect of their money to another person but they failed to follow one of my favorite cautions…..Trust, but verify. Were the bills getting paid on time? How were the reviews on this advisor? If the funds were being invested with a third party did they contact the investment company (not the advisor) to verify that the advisor maintains an account for customer funds there? If the investments are publicly traded did they compare the results the advisor claims with the reported market results?
And what is money laundering anyway? Most of us have a loose idea that it involves ways for criminals to get their ill-gotten gains into legitimate channels. The idea is to hide the origination of the money so that it cannot be traced back to the crime or criminals that were its source. Ultimately a successful money laundering process allows the criminal to openly use the funds as if they were obtained legally.
Essentially this laundry has three steps. First, is placement. In this step the criminal wants to blend the dirty money with clean funds. This was much easier in the past when a criminal could deposit large amounts of cash into a bank account. Now financial institutions must report large cash transactions to Federal authorities. In fact most industries now have reporting requirements for cash or unusual transactions including:
- Companies that sell money orders,
- Insurance companies,
- Credit card operators,
- Car, boat and aircraft dealers,
- Pawn shops
- Travel agencies
Some cash intensive businesses are used to place dirty funds. For example, a convenience store may have cash sales of $3,000 during the week but actually deposit $8,000 of cash in the bank. If the extra $5,000 is dirty money from a criminal enterprise the store has been able to place the crime related funds in the financial system.
Anyone engaged in a trade or business is supposed to report the receipt of over $10,000 of cash if it is part of a business transaction. The rules are complicated so if this applies to you go to www.IRS.gov and search for IRS Form 8300 if you have questions.
The next step is layering. At this point the goal is to mix the dirty funds with legitimate funds, hide the source of the funds and confuse authorities who may be trying to trace them. There are many methods but an example is the use of off-shore accounts in foreign countries. Most countries agree with the goal of eliminating money laundering and co-operate with international agencies to share information. Others have laws that allow criminals to open accounts and hide who the true owners are. Once funds are transferred into such accounts in these countries the ownership is lost. The criminals, using different names (often legitimate) then transfer funds to other similar accounts in these countries further hiding the ownership and source of the money.
With enough layering the source of the funds is lost and the criminals can start the last step, integration of the funds into a lawful status allowing the money to be used. In this stage the criminals use fronts such as legitimate companies to purchase property, invest the funds or pay expenses.
The discussion of the money laundering steps presented here are very simplified and there are thousands of variations of each step. In future blogs I will talk about the relationship between fraudulent activity, human trafficking, terrorist financing and drug dealing.