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.
The 10 most common sources of laundered money. (US $)
US 1.3 trillion
Hong Kong 63bn
(Source: John Walker Crime Trends Analysis)
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