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How Money Laundering Works

        Money | Scams

Money-laundering Methods


­In 1996, Harvard-educated economist Franklin Jurado went to prison for cleaning $36 million for Colombian drug lord Jose Santacruz-Londono. People with a whole lot of dirty money typically hire financial experts to handle the laundering process. It's complex by necessity: The whole idea is to make it impossible for authorities to trace the dirty money while it's cleaned.

There are lots of money-laundering techniques that authorities know about and probably countless others that have yet to be uncovered. Here are some of the more popular ones:

  • Black Market Colombian Peso Exchange This system, which the DEA calls the "largest drug money-laundering mechanism in the Western Hemisphere" [ref], came to light in the 1990s. A Colombian official sat down with people in the U.S. Treasury Department to discuss the problem of U.S. goods being illegally imported into Colombia using the black market. When they considered the issue alongside the drug-money-laundering problem, U.S. and Columbian officials put two and two together and discovered that the same mechanism was achieving both ends. This complex setup relies on the fact that there are businesspeople in Colombia -- typically importers of international goods -- who need U.S. dollars in order to conduct business. To avoid the Colombian government's taxes on the money exchange from pesos to dollars and the tariffs on imported goods, these businessmen can go to black market "peso brokers" who charge a lower fee to conduct the transaction outside of government intervention. That's the illegal importing side of the scheme. The money-laundering side goes like this: A drug trafficker turns over dirty U.S. dollars to a peso broker in Colombia. The peso broker then uses those drug dollars to purchase goods in the United States for Colombian importers. When the importers receive those goods (below government radar) and sell them for pesos in Colombia, they pay back the peso broker from the proceeds. The peso broker then gives the drug trafficker the equivalent in pesos (minus a commission) of the original, dirty U.S. dollars that began the process.
  • Structuring deposits Also known as smurfing, this method entails breaking up large amounts of money into smaller, less-suspicious amounts. In the United States, this smaller amount has to be below $10,000 -- the dollar amount at which U.S. banks have to report the transaction to the government. The money is then deposited into one or more bank accounts either by multiple people (smurfs) or by a single person over an extended period of time.
  • Overseas banks Money launderers often send money through various "offshore accounts" in countries that have bank secrecy laws, meaning that for all intents and purposes, these countries allow anonymous banking. A complex scheme can involve hundreds of bank transfers to and from offshore banks. According to the International Monetary Fund, "major offshore centers" include the Bahamas, Bahrain, the Cayman Islands, Hong Kong, Antilles, Panama and Singapore.
  • Underground/alternative banking Some countries in Asia have well-established, legal alternative banking systems that allow for undocumented deposits, withdrawals and transfers. These are trust-based systems, often with ancient roots, that leave no paper trail and operate outside of government control. This includes the hawala system in Pakistan and India and the fie chen system in China.
  • Shell companies These are fake companies that exist for no other reason than to launder money. They take in dirty money as "payment" for supposed goods or services but actually provide no goods or services; they simply create the appearance of legitimate transactions through fake invoices and balance sheets.
  • Investing in legitimate businesses Launderers sometimes place dirty money in otherwise legitimate businesses to clean it. They may use large businesses like brokerage firms or casinos that deal in so much money it's easy for the dirty stuff to blend in, or they may use small, cash-intensive businesses like bars, car washes, strip clubs or check-cashing stores. These businesses may be "front companies" that actually do provide a good or service but whose real purpose is to clean the launderer's money. This method typically works in one of two ways: The launderer can combine his dirty money with the company's clean revenues -- in this case, the company reports higher revenues from its legitimate business than it's really earning; or the launderer can simply hide his dirty money in the company's legitimate bank accounts in the hopes that authorities won't compare the bank balance to the company's financial statements.

­Most money-laundering schemes involve some combination of these methods, although the Black Market Peso Exchange is pretty much a one-stop-shopping system once someone smuggles the cash to the peso broker. The variety of tools available to launderers makes this a difficult crime to stop, but authorities do catch the bad guys every now and then. In the next section, we'll take a look at two busted money-laundering operations.