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The analog, the digital and the corruption

Samiul Haque
12 May 2024 18:07:46 | Update: 12 May 2024 18:07:46
The analog, the digital and the corruption

As one of the most notorious gangsters in history, Al Capone had a vast criminal empire. But when he was tried for his crimes, the only crime he was convicted of was tax evasion. Capone made as much as $100 million a year ($1.4 billion in today's dollars), and in 1920, he even paid $5,00,000 per month (worth about $7 million today) to police to let him operate all his illegal activities.

Capone made all this money from illegal gambling, bootlegging (manufacture and distribution of alcohol), prostitution and extortion. However, when authorities were looking for the money, they did not find any because Capone had hidden the money through various investments in various businesses, so the illegal money could not be tied to him. He used the money in cash-only businesses like laundromats. In fact, the reason that we call money laundering by this term is because of the use of laundromats to hide the origin of money by Capone. Today money laundering is the term for any process that cleans illegally obtained money of their dirty criminal origins, allowing them to be used within the legal economy.

So, how does money laundering work? There are multiple ways, but all schemes share three basic steps: placement, layering, and integration. 

Placement is where illegally obtained money is converted into assets that seem legitimate. This is the stage when the money enters the financial system for the first time. In this step, the money may be deposited in a bank, added to the accounts of an existing business or disguised as a transaction.

The placement is usually achieved through a series of regular small transactions. It is often done by depositing funds into a bank account registered to an anonymous corporation or a professional middleman. This step is where criminals are often most vulnerable to detection since they introduced massive wealth into the financial system seemingly out of nowhere. 

The second step, layering, involves using multiple transactions to further distance the funds from their origin. This is the stage where the illicit money is put together with legitimate money or placed in constant motion. Layering usually involves generating so many intricate transactions that the dirty cash disappears into them. Illicit money can be used to gamble, then placed into stocks, then shuffled around in different currencies and then used to buy financial products like life insurance policies. Transferring between multiple accounts or purchasing tradable properties like expensive cars, artworks, or real estate are prime examples of layering.

Layering can work in dramatically different ways depending on the scheme. In all schemes, however, the purpose of the layering stage is to make it difficult for even a skilled accountant to differentiate between money that came from legal transactions and money that came from funds that were placed for laundering.

The third and last step is integration. Integration is the stage where the money re-enters the legitimate economy. When the money appears to come from legal businesses or investments, or the trail has become too difficult to follow, the money can then be placed into larger-scale investments.

Integrated cash is often placed into luxurious assets, properties, long-term investments, and new businesses. Integrated cash may be used to purchase assets that can be used to facilitate future money laundering more safely.

Money laundering is a global issue which affects economies across the world. It is estimated that up to five per cent of global GDP is laundered each year, amounting to $2 trillion. According to a report by the United Nations Office on Drugs and Crime, the bulk of this money, ranging between $200 billion and $500 billion, is generated from drug-related activities and is circulated through various channels looking for good ""laundromats"".

There are multiple ways to launder money, but famous ones are the cash business scheme and the smurfing scheme.

The cash business scheme is one of the most used and popular schemes for laundering large amounts of physical cash. Even today, there are a lot of businesses who handle most of their transactions in cash. Illicit cash can be inserted into these transactions at a fast or slow pace. Laundering money through cash-intensive businesses was the preferred method of the famous gangster Al Capone. He evaded investigators for years by funnelling the money his crimes generated through his small empire of laundromats. The term money laundering was coined by the agents investigating him. The placement for a cash-intensive business scheme involves direct cash payments to the owner or manager of the establishment. The money to be laundered for the day is brought to the premises of the business. It stays in a safe place until it can be added to profits for the day through one of several methods. When the money is laundered through cash businesses, the layering stage takes place when fake transactions are slipped into the books throughout the day. These transactions may take the form of fake customers or through extra services tacked onto legitimate transactions, with the difference added from the placed money.

Cash-intensive business schemes often extract cash through daily profits. This scheme requires the money to be laundered kind of slowly, but a decent amount is ready every single day, so, it is making it more liquid for the launderer. Taxes are paid on the reported profits, and the money can now be used for any purpose.

The term smurfing refers to the practice of distributing small amounts of a larger cash amount to a series of partners who then deposit the money in incremental amounts. Smurfing is used to get around the currency reporting requirements that banks are required to observe in a lot of countries. Small quantities that come from many partners are less likely to trigger an automatic report. The placement stage starts with the cash being distributed through a network of people, smurfs, who can be trusted to deposit the money back again on schedule. Larger criminal organisations are more likely to use this strategy because they already possess a big network of obedient members. The layering stage for this type of scheme happens as the money is deposited back into one or many different accounts.

But this was the analogue way, the good old way. Right now, a large sum of money is laundered through NFTs. NFTs are like cryptocurrencies like Bitcoin and Ethereum but slightly different. NFTs, or Non-Fungible Tokens, that use blockchain technology to verify the owner of a specific image.

It does not matter that you or I could simply screenshot the image and keep it for ourselves. The fact that the blockchain verifies ownership means that the owner could sell the image and it'sit's verified that they have the right to do so. Because of this exclusivity, theoretically it means that the images have value.

But the real question is how do we determine how valuable the images actually are? As with the sale of physical art, the value of the image comes from how much another buyer is willing to pay for it. But with some NFTs getting purchased for millions of dollars, the question is how could another person possibly find another buyer who values it as highly?

The way NFTs are used to launder money is quite complex. First, the criminal mastermind sets up multiple accounts. Then, from one of those accounts, which is the legit one and has an actual bank account connected, he starts a bidding war on an art or painting he himself drew using Photoshop or Illustrator. The painting usually looks ridiculous to be sold at such a high amount. But in the bidding war, his other fake accounts start to bid on the art piece, making a seemingly ridiculous painting worth a lot of money. So, one of the fake accounts then buys the digital painting using the money from the illegal income, which was later transferred into crypto. As the fake account pays the legit account that hefty sum of money, that account converts the crypto into traditional currency and cash out using the bank. So, only one man using computers and the Internet and a few accounts can launder a large sum of money. And as that arena of the cyber world is hard to regulate, it is really tough for law enforcement agencies to ever catch the mastermind behind the operation.

In 2021, ""CryptoPunk 7804"", a computer generated artwork was sold for the equivalent of about $7.6 million in Ethereum. It was a record for any computer-generated artwork, according to Georg Bak, a curator at the Museum of Contemporary Digital Art. The price was five times the previous record for a CryptoPunk. This just goes to prove how head spinning that arena of the cyberworld is.

Banks, one of the most important institutions in society where people keep their money trusting that institution. But banks play a crucial role in helping criminals hide their money. For years, scammers, ponzi schemes, terrorist cells and drug cartels have been using international banks with questionable business practices to launder their money.

Criminals typically look for banks that have mismanaged anti-fraud and anti-money laundering units. Most banks have these programmes, but not all of them enforce them totally. Policies like anti-money laundering (AML) are in place that require the banks themselves to monitor their own transactions. Unethical banks can often just look the other way, even when they know transactions are coming from illegal sources. 

When the banks are multinational corporations, it becomes much more challenging to enforce the laws. If it is found that a bank is violating one country's laws, that country will have to charge the organisation with a crime or issue the bank a fine. Often, countries want to avoid criminal prosecution because of the challenging diplomatic lines between nations. The result of this is that many banks view fines as a slap on the wrist, and they really aren't incentivised to actually make any changes. Combating money laundering on an international scale is a challenging job. Banks aren't incentivised to act ethically, and governments are sort of powerless to stop them.

One head-spinning example of this problem can be found when examining the multinational bank HSBC. HSBC is a multinational bank headquartered in London, United Kingdom. The bank was founded in 1865 and has operations in over 60 countries around the world. HSBC is one of the largest banks in the world by total assets, and it is a major player in the global banking industry.

In 2012, HSBC Holdings was hit with a $1.9 billion fine for, most notably, serving as a conduit for Mexican drug cartels. The penalty, which was coupled with $665 million in civil penalties, exposed severe problems with the bank's compliance and anti-money laundering (AML) controls.

It ranks among the most significant fines ever imposed on a bank for breaking US law. HSBC laundered over $881 million for Mexico's Sinaloa and Colombia's Norte del Valle drug cartels. HSBC's weak AML controls led to illegal fund transfers and currency exchanges through their correspondent banking services.

As part of the 2012 settlement, the bank also admitted to violating US sanctions against Iran. For years, the bank had circumvented US sanctions in a variety of ways, going so far as to remove any reference to the country to hide the transactions.

The writer is a student of the Department of Mass Communication and Journalism at the University of Dhaka.