Money laundering is a process whereby one or more financial transactions are carried out in order to disguise or conceal the identity behind, the source of, and/or the destination of money. Usually this is undertaken to obscure connections with crime, and also to prevent payment of taxation, although the latter is generally a lesser objective; much laundering does take place through legitimate companies, and as a result, launderers incur tax bills.
There are many examples of money laundering in history, especially in the Early Modern Period when gold and silver ingots were being replaced in most large transactions by coins. When Elizabeth I was asked for money to pay for the “Northern Lords” who were fighting Mary, Queen of Scots, she ordered Lord Burghley to pay them in coins excepting those that had her head on them to obscure her involvement in an attempt to overthrow her cousin. During the American Civil War, the Confederates often had to disguise the payments being made to agents overseas, especially with payment for the manufacture of the CSS Alabama. The decrease in the use of cash and the increase in the amount of banking transactions made money laundering harder to some extent, but it rapidly took the form of “shell companies,” many of which were located in tax havens or countries with strict laws against disclosure, such as Switzerland.
During Prohibition in the United States in the 1920s, with vast profits being made from the illegal sale of alcohol, it was necessary to disguise the source of income. Accountants established companies that transferred funds back and forth, working through a number of private shell companies, a number of holding companies, and making heavy use of “offshore” bank accounts. Although Switzerland, Liechtenstein, and Luxembourg became places for money to be stored and/or laundered, a number of legal jurisdictions also encouraged this, with British companies and individuals using the Channel Islands (Jersey and Guernsey) and the emergence of extensive banking industries in a number of Caribbean island groups such as the Bahamas, the British Virgin Islands, and the Cayman Islands.
Gangsters Al Capone and Meyer Lansky became associated with money laundering in the press, but the word was first coined by the British newspaper The Guardian when, in the run-up to the 1972 election campaign, U.S. President Richard Nixon’s Committee to Re-elect the President (CREEP) was involved in transferring illegal campaign contributions to Mexico and then bringing them back to the United States through a company operating in Miami. The money that is to be laundered became known as “dirty money,” and the final money, after it has been laundered, is known as “clean money.”
To try to restrict money laundering in the United States, any “significant cash transaction” has to be reported by banks to the Financial Crimes Enforcement Network, along with any suspicious activities. This is done primarily to prevent the evasion of income taxes and other forms of taxation. This involves the authorities then checking on the payment of large amounts of cash into any bank account. To prevent unnecessary investigations into businesses that generate large amounts of coins each week, such as shops, some businesses can obtain a license to allow them to deposit cash. As a result some money laundering involves bringing money from illegal sources and paying it into an account of a legitimate cash business. This, obviously, means that income tax will have to be paid. In fact, one of the main means of money laundering is through using an existing legitimate business.
Other methods of money laundering are using cash obtained from illegal sources to buy gold coins, diamonds, gold, real estate, works of art, expensive postage stamps, and the like that are, at a later stage, sold to realize the money. This can work for a small number of transactions, but is not convenient for regular laundering. Another common method of money laundering involves using a casino—somebody uses the money to be laundered to buy casino chips and then cashes them in for a check from the casino, claiming that the money represents winnings.
More sophisticated forms of money laundering involve establishing companies specifically to launder money and then using them to transfer money back and forth between countries. If a government or tax authority is trying to investigate, the money launderer relies on the fact that one of the links in the chain will remain secret. Gradually, more and more countries have had to provide better regulation for their banking sector, and this has forced people to “park” what is known as “dirty money” or “hot money.” With the new homeland security programs introduced after September 11, 2001, the United States and other allied governments have massively increased the requirements for reporting international transactions to allow them to keep track of suspicious transactions.
- Margaret E. Beare and Stephen Schneider, Money Laundering in Canada: Chasing Dirty and Dangerous Dollars (University of Toronto Press, 2007);
- Thomas J. Biersteker and Sue E. Eckert, eds., Countering the Financing of Terrorism (Routledge, 2008);
- Charles Doyle, Money Laundering: Federal Criminal Law (Nova Science Publishers, 2008);
- Financial Action Task Force, Third Mutual Evaluation Report Anti-Money Laundering and Combating the Financing of Terrorism: Singapore (Financial Action Task Force, 2008);
- Doug Hopton, Money Laundering: A Concise Guide for All Business (Gower, 2006);
- Paul Hynes, Nathaniel Rudolf, and Richard Furlong, International Money Laundering (Sweet & Maxwell, 2008);
- Nick Kochan, The Washing Machine (Thomson, 2005);
- Peter Lilley, Dirty Dealing: The Untold Truth About Global Money Laundering (Kogan Page, 2003);
- Guy Stessens, Money Laundering: A New International Law Enforcement Model (Cambridge University Press, 2009);
- Ann Woolner, Washed in Gold: The Story Behind the Biggest Money-Laundering Investigation in U.S. History (Simon & Schuster, 1994).
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