The Washing Machine: Money, Crime and Terror in the Offshore System

Duckworth
£8.99; 256 pages
ISBN 0715636111

Click to buy

Seasoned investigative journalist and financial expert Nick Kochan takes readers deep inside the world of money laundering - a highly sophisticated, trillion-dollar, global business that poses a serious threat to Western economies.

Profiling the perpetrators and the investigators, Kochan gives a mesmerising inside look, explaining the methods employed by international criminals and terrorists to turn dirty money into untraceable wealth, as well as examining the methods and resources available to the law enforcement agencies in their fight to stop this corrupt financial pipeline. But is it a losing battle? Taking readers deep into the heart of the battle, The Washing Machine reveals that the forces of globalisation and a lack of true international co-operation are playing directly into the hands of the criminals. In the hands of the author, the sophistication of the laundering schemes become understandable and fascinating, and the characters and stories woven into that explanation are vividly brought to life as they engage in operations on an often mind-blowing scale.

Chapter 3: Merchant of Death and Chapter 6: Diamonds: A Launderers Best Friend deal with the inside financial story behind blood diamonds - as portrayed in the current Warner Bros movie of that name starring Leonardo DiCaprio.

This updated edition has a foreword on David Mills and the Berlusconi affair.

Previously published in 2005 in hardback by Thomson.

Brief contents

Section One: Criminal Oligarchy
When Russia cast off the Communist system, Western financial institutions moved in with the help of Russian Mafia, oligarchs and local corrupt institutions. American banks became conduits for illegal money, which moved under the world's anti-money laundering radar.

Individuals who are financially creative harness established systems to their illicit purposes. Often brilliant schemes are devised to deceive the authorities. Here we see the Russian genius for deception and black wealth creation.

Section two: Terrorist Anomalies
The terrorist may leech off the launderers' schemes. He is a counterparty to deception, but not necessarily a deceiver himself. The money he needs for his purposes is small and much is 'legally' earned or donated by supporters. However, Al Qaida and the IRA have their own money making, and money hiding schemes, described here in detail. These may ensure longevity and additional security risk.

Section Three: Black markets
Criminal gangs and cartels in Cali or the United States exploit loopholes in the financial and legal loopholes to transport dirty money earned from the sale of drugs and cigarettes. Vast fortunes have accrued to those who are ruthless and cunning. The largest players in the global market are sometimes the most apparently prestigious.

Section Four: Bad banks
Banks are the carriers of the dirty money, as well as clean, and the more they have explored markets in the developing world, the more they have had to treat with criminal elements and corrupt governments. When Blue chip bank meets famous politician bearing gifts, the greed imperative poisons discrimination.

Section Five: What the World's Doing about Money Laundering
Politicians are reaping the fruits of their belief in free markets. The removing of constraints on currency controls and the opening of world markets to corporate pressures put power into the hands of those that could not be trusted. Breakthroughs on a political level have poisoned trust and confidence in markets. The men who have to row back the political tide are reactive not proactive, they are willing policemen in small teams, under financed, under-resourced.

Politicians saw their dependence on these authorities in the wake of September 11. Few believe they can hold back the tide of liberated markets and black money.

Money laundering: Global scourge
An extract from Nick Kochan's latest book - The Washing Machine

Our security depends on it. Our way of doing trade with trust is based on it. Global economic activity with nations relies on it. Money must be earned and spent fairly and openly. By the same token, money that is earned illegally or is unaccountable, must be excluded from the economic system. Its possessors must be apprehended. That is the money laundering mantra. Those who wage the war against economic crime are working harder than ever to stem the tide of black money as acquisitive crime threatens to get out of control.

The criminal who possesses black money and wants to pass it off as legitimate must fabricate an explanation to make the source look genuine. These tricksters make friends with corrupt elements in the financial system. They will hide their money so that it becomes untraceable to those who may want to hunt it. As more people or financial institutions handle money with dirty origins, those origins can be lost. And criminals are caught and convicted by the dirty money they possess.

So who are the elements in our society who close their eyes to criminal money? Most are those who committed the crime in the first place. There are four key groups. They are global corporations engaged in fraud; corrupt governments and their politicians who accept bribes; organized criminals who trade in drugs and other illegal goods; and terrorists. These are nebulous forces, and there will be those who say much talk of global money laundering is fuelled by paranoia and even hysteria. 'The Washing Machine', Nick Kochan's investigative book on financial crime, shows that tyrants have triumphed by having their money laundered, drug gangs have ruined countries by passing their money through complicit banks, terrorists have waged wars on the financial system to fund their outrages and companies have made themselves available to organized criminals in a Faustian laundering pact. Laundering is as sinister as it is ubiquitous.

Copyright: Nick Kochan 'The Washing Machine, 2005

The Washing Machine
Observer, 5 June 2005

In explosive excerpts from his new book, Nick Kochan digs the dirt on how an army of criminals has broken into the world's financial system, and investigates the Square Mile's growing addiction to criminal cash

Money laundered through the world's financial system has now reached stratospheric levels, trillions rather than billions. Fresh figures from the International Monetary Fund put it at the $2 trillion mark. But when you include the cost of fighting money laundering, the number reaches $2.5 trillion. That is approaching 10 per cent of global GDP, according to the IMF.
These numbers indicate the amount of global crime where there is a financial component. That includes everything from tax evasion and very basic fiddles to money made from computer-game counterfeiting, people-smuggling and drug-dealing.

Big-time launderers pay heavily to deceive police, banks and tax authorities. They hire lawyers, accountants and bankers to make and launder illegal cash to ensure its entry into the legal economy.

City professionals are easily tempted. Many of those who co-operated with the corrupt Bank of Credit and Commerce International came from leading firms. When push came to shove, ethics went by the board and they joined the ranks of sleazy money launderers.

The offshore world provides the funnel for most offshore money. This reservoir of anonymous accounts and bogus banks is accessed by institutions for both genuine and illicit purposes. Money passes from account to account to acquire a genuine appearance. It is likely to reach the City of London after a long journey to obtain the City's stamp of blue-chip credibility. For many, that is the final stop. Taking peddlers of dirty money out of the system, and out of London, challenges the Financial Services Authority on a daily basis.

Identification checks on small-time bank customers keep compliance officers in jobs but yield few clues about laundering. An organised criminal worth his salt can mock up, or purchase, a utility bill or passport.

No wonder some suggest the checks are put there as a Revenue ploy to catch tax dodgers. Banks don't think the checks are funny. Sir John Bond, chairman of HSBC, was not laughing when he said his bank's annual compliance bill is £400m.

The bureaucracy that haunts the system is resented by the banks. Heavy spending on computers, software and staff yields few money laundering convictions. In theory, unusual payments or deposits, the surprise transfer of funds, or a suspect name will enable regulators, banks and investigators to intercept the money along the way. Red flags alert banks which, in turn, alert the financial police. In practice, the system is faster than the checks. Globalisation benefits all of us, crooks included.

Terrorist money taxes the system even more. Small amounts of charitable money raise no red flags in banks or police computers. At best, the money's source may yield a clue. Dispatches from a Middle Eastern or East African bank and bearing Islamic names might alert an official somewhere. Stopping it in mid-track is possible but catching the payee or the recipient almost impossible.

Electronic financial systems move too quickly for hide-bound compliance. This is reflected in the tiny amounts confiscated from terrorists. Breaking into the system today is no harder than breaking into a bank, and perhaps easier. The criminal who possesses black money fabricates an explanation to make the source look genuine. Corrupt elements in the financial system are persuaded by a good story. That story gains credibility in the telling. As more financial institutions handle money with dirty origins, those origins are lost.

Money launderers fall into four key groups: global corporations engaged in fraud; corrupt governments and their politicians who accept bribes; organised criminals who trade in drugs and other illegal goods; and terrorists. These are nebulous forces, and there will be those who say much talk of global money-laundering is fuelled by paranoia and even hysteria. But tyrants have triumphed by having their money laundered, drug gangs have ruined countries by passing their money through complicit banks, terrorists have waged wars on the financial system to fund their outrages and companies have made themselves available to organised criminals.

Those who perpetrate bankruptcies, frauds, huge share scams and bogus schemes such as Enron and WorldCom exploit the system's crevices. Structures of governance and trust are lost, undermining the integrity of those who administer a country's economy. When these key roles are suborned by bankers in smart suits, as well as crooks and conmen, participants in the economic system are weakened.

Global corporations have key roles in the laundering chain. They provide the services to move black money. Criminals and corrupt politicians in developing countries and the former Soviet Union look to western banks for a huge array of devices including offshore companies and tax structures, false names for their bank accounts, and lawyers and accountants for their complex financial structures.

Competitive pressures spread into risky new markets and deals with criminal counter-parties drive banks to abuse. The taint of corruption is unavoidable when doing business in many parts of the world. An enforcement vacuum found in many developing countries draws in the criminal fraternity.

The criminal who makes the break through into respectability can determine the conditions under which western companies do business. Trade with these criminal entities becomes a condition of entry into the country. Launderers understand the system at least as well as those who work in it legitimately. The language of the legitimate system enables them to explain the provenance of their wealth. Technical developments such as the global electronic movement of money and complex financial derivatives turn black money into grey.

Police forces lack many of the means to pursue funds as they cross borders or move at speed round financial or governmental institutions. Corrupt money mingled with legal funds complicates the issue.

Corruption fuels money-laundering. Bribery puts dirty money into the hands of politicians, but corrupt politicians are exposed to extortion from mafiosos. Those may be small-time hoodlums or oligarchs (including, most dramatically, but not exclusively, Russians). The two forms of black money-transfer link together seamlessly.

Money launderers operating on this global scale have great intellectual ability. They are also intriguing and complex personalities. Other Russian money launderers have demonstrated considerable intellectual ability before turning their cerebral firepower towards breaking down the financial system's controls.

Mafia who have gained access to newly privatised state industries in countries experiencing political change are pursued by the West. Financial manipulation can be institutionalised, as demonstrated by the speed and efficiency with which the West has absorbed capital released from the bankrupt former Soviet Union. Established banks in the West collaborated with some dubious operators in Russia under the noses of politicians both in Russia and in the United States.

Intelligence agencies, such as the CIA, handling and distributing black money for governments, influence unstable regimes. These shadowy groups are arguably among the most active of all money launderers. The financial resources possessed by Oliver North, the architect of the Iran-Contra affair in the 1980s, put him in the top echelon of money launderers.

The proceeds of the drugs trade or other contraband finance organised crime groups. The more established parts of organised criminal gangs seek to make investments in the 'legitimate' economy, by buying companies or real estate. The less established parts are likely to trade in illegal arms where commissions and profits are massive.

The cash economy is still the criminal's bulwark. Talk of 'dematerialisation', that is, turning money into digits and bytes, has not stopped the movement of dollar bills across borders the world over. Couriers operating for drug dealers or terrorists are routinely caught with dollar bills or large-denomination euro notes strapped round their torsos. Launderers took a leaf from the drug dealers' book in devising systems for moving money.

Groups perpetrating political violence are key customers for arms dealers. The red flags of criminal money-making differ from those thrown up by terrorist money-making, because the first shows exploitation of the financial system for acquisitive ends. Most terrorist money, on the other hand, is spent in the black market buying arms.

Intelligence agencies working in conjunction with police are likely to be more effective in stopping terrorist trades than banks. They are better-placed to understand the political strategy of the terrorist group.

Banks can see the upshot of the strategy in the form of a money movement from a suspicious source, but by the time they have seen the money move the banks have lost the plot. The financial system that they created has beaten them.

Dirty business
The 10 most common sources of laundered money. (US $)
US 1.3 trillion
Italy 150bn
Russia 147bn
China 131bn
Germany 128bn
France 124bn
Romania 115bn
Canada 82bn
UK 69bn
Hong Kong 63bn

(Source: John Walker Crime Trends Analysis)

Jack Blum
Former Special Council to the Senate Foreign Relations Subcommittee on Terrorism,
Narcotics & International Relations, USA

Louise Delahunty - Legal Week

Dr. Jonathan Dolhenty - The Radical Academy

Financial Times - Prof. Frank Partnoy

Forbes.com - Tatiana Serafin

Mark Galeotti
Director, Organized Russian & Eurasian Crime Research Unit, Keele University, UK

Chris Hamblin - Complinet

Hampstead & Highgate Express

Aaman Lamba - Blog Critics

Steven Martinovich - Enter Stage Right

Felix J. McKenna
Chief Bureau Officer, Criminal Assets Bureau, Dublin, Ireland

Rosalind Wright
Former Director, Serious Fraud Office, UK