Launderingmoney.com's Michael Hearns featured in the Daily Beast
There are many ways to hide corrupt cash, but for big amounts it’s hard to beat casinos and real estate
The Sinaloa drug cartel has long been the most powerful and sophisticated operation of its kind, a criminal enterprise that reaches into 24 of Mexico’s 32 states and as many as 50 countries. But for all its military-style sophistication and expansive taproots, the billion-dollar organization keeps bumping up against a basic, old-world problem: how to move cash.
The cartel sells most of its drugs in the United States to addicts who often pay for their heroin fixes in wads of singles and fives. That eventually adds up to more than $20 billion that has to make its way back over the border every year, which is a logistical nightmare: One kilogram of cocaine translates into three kilograms of cash. Smugglers shoehorn stacks of bills into air mattresses, washing machines, cereal boxes, and anything else with a cavity and decent odds of sneaking past border guards—but the sheer glut of greenbacks mandates savvier solutions.
Which is how Sinaloa got interested in clothing and teddy bears from China.
In recent years, according to the U.S. Drug Enforcement Administration, massive amounts of cash from narcotics sales have flowed into businesses in Los Angeles’ fashion district as part of what’s known as the black market peso exchange. This is how money laundering works in the age of hard-charging international trade. Those California businesses use the drug proceeds to purchase cheap clothing and footwear in bulk from China. The goods are stored in warehouses in L.A., then driven to Mexico or shipped to Colombia. Cartel operatives at these destinations sell the items at profits that the drug lords then pocket as legitimate revenue.
In one variation of this scheme, runners dropped off bags containing up to $100,000 at the L.A.-based Angel Toy Company. The toy company’s Chinese executives then deposited this in the company bank account in quantities of less than $10,000 at a time, to avoid triggering what’s known within banks as a Suspicious Activity Report. Then the toy-company operatives wired money to a factory in China to purchase stuffed animals and dolls, which were then shipped to Colombia, where another party facilitated their sale.
Trade-based money laundering is only the latest iteration in what is now a massive and growing global problem. Tsunamis of cleansed money—unleashed by Russian oligarchs, from Taiwanese counterfeiters, from corrupt governments in Africa and Eastern Europe, and many more illicit sources—now roil around the planet in immense quantities. The UN Office on Drugs and Crime estimates that between $800 billion and $2 trillion in dirty money gets laundered annually.
These offenses are hardly victimless. A report released in August by the Financial Accountability and Corporate Transparency (FACT) Coalition points out that when criminals successfully cash in on their enterprises through money laundering, it exacerbates society’s deepest problems (PDF). “We see it in our communities: the opioid, methamphetamine, and cocaine epidemics are devastating,” the report says. “Financial fraud, fraud in government contracting, identity theft, and worse endanger individuals and our communities and waste taxpayer dollars. Terror finance and sanctions-busting threaten national security.”
Some of the illegitimate currency is now moving through new digital channels like cryptocurrency, but many of the practices simply represent new variations on old methods.
Michael Hearns, who spent 10 years investigating drug cases as an undercover South Florida police detective and now works as a lecturer and consultant in anti-money laundering tactics and terrorism funding, likens the situation to football. “The technology has changed since leather helmets,” he says, “and the players are a little bigger, a little faster, but it’s the same plays in the playbook. It’s still a forward pass. The foundational principles never change.”
Money laundering happens in three stages. First comes what’s known as placement—moving the money, which is what smugglers have long been tasked with doing. Next is layering, in which the launderer takes steps to distance the money from its problematic past, by channeling it through investments or disguising it as teddy bears. Finally, there’s integration, in which the criminal proceeds are flowed back into the legitimate economy.
Within these steps there are limitless possibilities. “There’s a saying that money laundering is only limited by the criminal’s imagination,” says John Cassara, a former U.S. Treasury agent who has written three books on money laundering and terror financing. “And it really is true.”
If you were a money launderer today, you might consider a few of these options.
Buy bricks of gold. This has long been and likely always will be a popular option, says Cassara, because gold holds its value and can be melted down. “It can change forms,” he says. “Then there’s no serial number, no way you can trace it.” In one investigation he worked on, called Operation Meltdown, New York City jewelers liquified gold for Colombian drug dealers, then reshaped it as everyday objects like tools, trailer hitches, and auto parts. The items, spray-painted black to complete the camouflaging, were shipped to Colombia where the gold was resold for cash.
Hit up a casino. In a single month in the summer of 2015, employees at the River Rock Casino Resort in British Columbia accepted more than $13 million worth of $20 bills from high-roller Asian VIP clients believed to be connected to illegal activity, according to a government report into anti-money laundering report released in September (PDF). These clients dropped off cash on or just off the casino property “at unusual times, generally late at night,” the report said. Other players were allowed to make buy-ins of $500,000 without filling out large cash transaction reports, required for amounts of $10,000 or more—money that could then be laundered as casino winnings. Macau last year tightened regulations on its $29 billion casino industry, the world’s largest, after it earned a reputation as a Chinese laundering haven.
Considering the generally unscrupulous nature of such enterprises, it’s hardly surprising that investigators have frequently nosed into Donald Trump’s casinos—and found plenty of similarly problematic issues. CNN reported earlier this year, for example, that the Trump Taj Mahal Casino in Atlantic City violated money laundering rules 106 times in its first 18 months of operation in the 1990s.
Locate a friendly—or incompetent—banker. Or an entire bank, and look in Taiwan. Cyber thieves who swiped $170 million from the Union Bank of India then used a Taiwan bank to launder some of the loot. And in August, U.S. authorities levied a $180 million fine on the Taiwanese state-run Mega Financial Holding Co. for slipshod enforcement of money laundering rules. “What the examiners found,” the report says, “was extremely troubling.”
Regulators spotted conflicts of interest with compliance officers, insufficient anti-money laundering training for half of the clerks, and transaction-monitoring systems that weren’t translated from Chinese, and thus unlikely to flag any potentially troubling deposits. Regulators subsequently found similar problems at the bank’s Chicago branch.
The Panama Papers, a massive document leak that exposed tax evasion and money laundering tactics at a global level, revealed lax banking as a huge issue, says Joel Lange, managing director for Dow Jones Risk & Compliance, which provides screening software to help business clients detect and avoid money laundering. “The story being told is disappointing in a way, because we have all these money laundering laws passed, and at the end of the day it’s all about financial institutions turning a blind eye to the potential for this bad behavior,” he says.
Buy some real estate. Money launderers have poured cash into real estate markets in places like Florida, Arizona, and California—to the tune of $104 billion between April 2014 and March 2015, according to the FBI. One Canadian official recently sounded alarms in Vancouver after identifying $57.1 million worth of residences purchased in the city’s pricey Point Grey district. Which might not have raised any eyebrows, except that the buyers claimed to be students. Reporting no income.
This is reportedly an area of significant interest for special counsel Robert Mueller, tasked with investigating the Trump campaign’s possible links to Russia. Donald Trump Jr. spoke in 2008 about the onslaught of Russian money into the family’s business portfolio, and the American Constitution Center for Law and Policy has gone as far as to suggest that the family’s real estate empire “is fueled by money laundering.”
Invest in a developing country run by a corrupt government. Panama was famous for this under Manuel Noriega, who rolled out the nation’s welcome mat to Colombian drug money, but it was recently taken off the Financial Action’s Task Force’s “grey list” of nations that aren’t doing enough to halt money laundering. The action has now moved elsewhere, to China (see below) and parts of Eastern Europe, to name two locations. In September, the U.K.’s Guardian revealed that the Azerbaijan government ran a secret $3 billion money laundering and lobbying operation through a block of mysterious British entities.
Start selling phony Rolexes. The world’s greatest source of dirty money is China, says Cassara, who has extensively studied that nation’s economy. Much of that is driven by narcotics and human trafficking, smuggling, and counterfeiting and intellectual property-right infringement—that $460 billion torrent of fake Gucci bags and Nike shoes churning through the world marketplace. Part of the reason: The government allows citizens to convert only $50,000 to foreign currencies each year, which has a predictable effect. “A variety of money laundering techniques are used to circumvent the restrictions,” according to the U.S. State Department.
Go crypto. Virtual currencies like bitcoin are increasingly of interest as laundering tools, for obvious reasons. Although cryptocurrency transactions are recorded, they can be anonymized via a “tumbler,” a service that alters the owner’s identity by swapping the tokens with those of other people seeking obscurity. This one has regulators and lawmakers nervous. In June, Florida Gov. Rick Scott signed a bill that incorporates cryptocurrency into the state’s money laundering act, by classifying the likes of bitcoin as “monetary instruments.” Steps like this one have left many would-be early adopters wary, says Hearns, the former undercover cop. “No one at the moment is buying kilos of cocaine with bitcoin,” he says.
How to combat all of this? Banks and lawmakers have tightened regulations across the board, egged on by the Financial Action Task Force, an intergovernmental body created to choke off money laundering and terrorist financing; the FATF recently updated its 40-point prevention plan. But the new rules have little effect if they’re not enforced, and Cassara asserts that for every hundred-dollar bill laundered by the Mexican cartels, law enforcement recovers a mere 25 cents. “To be caught and convicted for money laundering,” he says, “you have to be either really stupid or really unlucky.”
https://www.thedailybeast.com/from-teddy-bears-to-trump-towers-heres-how-money-laundering-works