Money Laundering – The Next Banking Scandal ?

Square Mile Magazine  –  April 2011

Once a year, in nearly every major City firm, an unspeakably horrible punishment is meted out by sadistic bosses to their stressed-out employees. All City workers dread this annual torture but they have no choice but to endure it if they are to remain working in the finance industry. When I was a stockbroker I looked into whether it constituted ‘cruel and unusual punishment’ but found the European Union’s legislation on this matter to be woefully inadequate. 

I am, of course, referring to the City’s annual money laundering test.

There appeared to be no escaping this despicable punishment until I realised in 2004 that anyone in a senior position at my bank was secretly getting their graduate trainee to do it for them. Henceforth, I simply demanded that our team grad sit dutifully at my computer and take this surprisingly difficult web-based exam whilst I underwent much more demanding challenges – like seeing how many banknotes I could slip into Ebony’s G string without security being called. I subsequently never had to undertake the necessary soul-destroying revision ever again.

This seemed a pretty damn smart thing to do …that was until I decided to write a City-based thriller about money-laundering (as well as Colombian drug cartels and gun-toting hit men.) As I spent hours researching the subject last year I cursed the woeful ignorance that my laziness had engendered!

I also despaired at the lack of knowledge that every senior banker must also have about this pernicious practice as a result of their idleness because I think it leaves our banks wide open to abuse. In fact, I genuinely believe that money laundering could be the next big scandal facing the finance industry. After the sub-prime debacle and the recent Wall Street insider trading prosecutions it’s about time investigators revisited this classic bit of financial skulduggery! Those recent scandals have also ensured there are a lot more City regulators around seeking out malpractice, which increases the chances that banks engaged in money laundering will get caught. Indeed, we’ve already found out that the despots who were deposed by the ‘Arab Spring’ have been squirreling away much of their ill-gotten gains in British firms and, on this count, our supposedly clean banks have got previous. Most of the $1.6bn looted from Nigeria by the family of the former dictator Sani Abacha was found in reputable British banks (especially Barclays). I think it’s a question of when, not if, that serious questions are raised about the ethics of working with blood-thirsty tyrants (and I’m not talking about your head of capital markets here) as well as global drug dealers and international white slave traders.

So, whether you want to be ahead of the curve regarding this upcoming issue or you’re once again facing the tedious ordeal of the annual money laundering test read on and discover …

Everything You’ve Wanted to Know about Money Laundering but were too Afraid to Ask

What the hell is money laundering?

Put simply it’s giving dirty money the appearance of having been earned legitimately. This is done so that its dodgy owners can’t be prosecuted (as the crooked source of their tainted money has been obscured) and so that that once-bent money is rendered easier to move around and more difficult for the authorities to confiscate. The IMF estimates that money laundering comprises 3-5% of the world’s GDP. Since the World Bank estimates world GDP in 2007 was $72.3 trillion we’re talking about something like $2.17 – $3.61 trillion per year e.g. roughly enough to keep Elton John in flowers for at least six months! Whatever method is chosen to launder money, it generally involves three processes: Placement (moving the tainted cash somewhere else or changing it into another form), Layering (moving the ‘placed’ money into other institutions to further obscure its origins) and Integration (returning the now seemingly kosher money to the legitimate economy).

Surely London can’t be involved in such naughtiness?

London, simply by dint of being one of the world’s financial centres, is without doubt one of the money laundering capitals of the world and the ‘Arab Spring’ is revealing that our fair city is none too fussy when it comes to accepting wonga from dubious characters. Mohamed Lyas, the head of the Libyan Investment Authority (that was based in Mayfair and used to own 3% of Pearson, the owner of the FT!) was revealed by Wikileaks to have told American diplomats that Libya’s lovely leaders favour London because of the ‘ease of doing business’ there and its ‘uncomplicated tax system’. Apparently, the sons of Egypt’s ousted leader, Hosni Mubarak, Alaa and Gamal ‘love (London) and keep a lot of money there’. Money laundering expert Martin Woods says that ‘New York and London have become the world’s two biggest laundries of criminal and drug money’ and a 2001 French parliamentary report highlighted ‘the great permeability of the British banking system’ and stated that the City is a ‘haven for terrorist money laundering’. Although one’s inclined to think that our cousins over the Channel were once again having a pop it is noticeable that between 1986 and 1998 only 357 money laundering cases came to trial in London whereas Italy had 538 and the US had 2034 in 1995 alone! It’s also noticeable that some 200,000 ‘suspicious activity reports’ (SARs) are received each year by the UK’s SOCA (the Serious Organised Crime Agency) which, taking into account the tiny amount of prosecutions, suggests that their hit rate might be improved!

What’s it got to do with laundrettes?

Funnily enough the term money laundering does actually have something to with laundrettes. Apparently, the expression originated during prohibition in 1920’s America. Criminal gangs led by gruesome characters like Al Capone and Meyer Lansky disguised the dirty cash they made from selling bootleg hooch by abusing cash businesses like laundrettes. Interestingly, little has changed since those days and money launderers still often use cash-intensive and service-orientated businesses to legitimize their ill-gotten gains. Hotels, where guest numbers can be massively inflated, small restaurants, that somehow manage to serve hundreds of covers daily, and night clubs are classic fronts for cleaning up dodgy mullah. Of course, these days, sophisticated crims simply create ‘shell companies’ with an office in some dubious tax haven that involves nothing more than a crack-head kipping next to a single phone line. Complex transactions between these bogus companies are then used to disguise their money’s origins with launderers often using false invoices to cover their trail.

Beware the evil Smurfs!

I’m not talking about those diminutive blue fellahs – though I’ve always found them really creepy; hundreds of males and just one (admittedly very fit) girl … what’s that all about? No, I’m talking about a large group of normal-sized human beings who are used to divide a hefty amount of cash into lesser sums which can then be deposited into multiple bank accounts in amounts small enough not to raise suspicions (e.g. under ten grand in America). This process is called ‘smurfing’ … which is not, as some degenerates have suggested, a new form of sexual deviancy involving dwarfs and blueberry jam.

Commodity traders can be very dodgy people

I recently had lunch with a fine upstanding citizen who told me that he had felt obliged to leave his first City job after becoming aware that his small commodity-trading firm was heavily involved in laundering Russian mafia money. One employee used to fly weekly to and from Moscow carrying briefcases full of cash and another poor schmuck working there ended up with a bullet in his head! Apparently some of these fine firms are asked to massively over-invoice a dodgy counterpart for a shed load of some commodity they’ve bought off it. The commodity trader then deposits the excess in pre-arranged City banks on behalf of its counterpart. Tricky bastards!

It’s not just the house that always wins at casinos

Casinos have always been a crim’s best friend – how many coppers must have heard some masked hoodlum in a stripy jumper exclaiming ‘No, ‘occifer, I swear I won this four hundred grand in used notes after a lucky streak down at The Golden Nugget’? Well, that old scam also works on a grand scale, which is one of the reasons the American mafia built Las Vegas. Those once-sleazy casinos are now more like children’s playgrounds but word on the street is that internet gambling outfits and Macau have dutifully stepped into the vacuum.

Bureaux de change aren’t just useful for getting a few Euros

Purchasing travellers cheques under a sufficient value and then getting your old friends The Smurfs involved is a simple way of legitimizing tainted money. It is estimated that British Bureaux de Change launder up to £2.6bn annually and I happen to know a fair amount of them in West London that wouldn’t survive but for this source of business. Variants of this scam, but on a massive scale, were involved in the recent Wachovia scandal that rocked America’s law enforcement agencies (see box)

Diamonds and gold are better than cash

On March 16, 2007 what the US government called ‘the largest single drug cash seizure the world has ever seen’ occurred in Mexico City. Some $207m in cash was found hidden in some Chinese Meth chemist’s house. This character went on to claim that he had been forced to safeguard the wedge for the Mexican president’s slush fund – a claim so preposterous that one can’t help concluding that he’d been getting high on his own supply! This case showed the problems inherent in having huge stacks of cash hanging around and helps explain why gold and diamonds are very often used to store and move around ill-gotten gains. Both are easy to move across borders because they’re amongst the most compressed forms of wealth in the word and a vibrant global market makes them appropriate for scams involving false invoicing. There is a story going round that when Mubarak fled Egypt his plane was too heavy to take off because of the amount of gold on it and that subsequently some of it had to be simply left on the runway! In one week in December 2001, as it became obvious that the Yanks were coming, Al-Qaeda apparently smuggled $10m worth of gold into Pakistan and then into Dubai.

 Dubai doesn’t just want to break the record for having the tallest tower

The new advert for the UAE proudly claims that ‘In Dubai every day is an opportunity’ and, apparently, that is particularly true if you’re a mobster, drug trafficker or dodgy diamond trader! In 2008 the US state department issued a report warning that the UAE is ‘particularly susceptible’ to money laundering and it has long been alleged that Dubai has a permissive attitude to smuggling. The US got very shirty after several of the terrorists involved in 9/11 were found to have had money wired to them from the UAE and the federation’s request for black marketers to voluntarily register themselves in 2008 was, funnily enough, not seen as hugely effective. Apparently the Russian mafia, whose unrestrained looting of their country has garnered hundreds of billions of dollars, can’t get enough of Dubai … and I hear it’s not just the scintillating cultural activities that are attracting them!

Only 9/11 made regulators take laundering seriously

Before 9/11 money laundering wasn’t seen as that big an issue by the US authorities and other agencies. After the attack policymakers came to realize that one of the best ways to prevent future catastrophic incidents was to deny terrorists the financial means of sustaining themselves, which in turn required better controls over the transfer of money. The 2001 Patriot Act tightened things up in America whilst the 2002 Proceeds of Crime Act did the same in the UK. It’s these kind of post-9/11 bits of legislation that require bankers to sit those tedious tests … so when you’re next by your computer failing once again to hit the required 75% pass rate you know who to blame: Osama Bin Laden.

Without launderers capitalism could have ended!

Alright, I’m exaggerating a bit but according to Antonio Maria Costa, former head of the UN’s drugs and crime office, the proceeds from drugs and crime were ‘the only liquid investment capital’ available to banks on the brink of collapse during the recent financial crisis. Costa claims that ‘the banks exposed themselves to the criminal syndicates who had cash in hand’ and argues that there could have been more banking failures without this development. It seems rules don’t matter so much when your back’s against the wall!

UK Business Secretary Vince Cable told the BBC recently that his government would act against any British bank involved in helping the deposed Egyptian president, Hosni Mubarak, improperly move funds ‘but there clearly needs to be concerted international action’. That same get-out-clause is used to justify why nothing serious is done to reform our banking system post-credit crunch and why banks ultimately deal with corrupt tyrants (because there’s always somebody else who will otherwise). A leading money laundering expert, Nicholas Shaxson, talks about ‘the complicity with which Western countries help corrupt leaders in developing nations to loot their citizens’ and I believe this recent ‘Arab Spring’ could well reveal just how crooked our British banks can be when there’s a lot of cash to be made. Obviously, I’m praying that this upcoming scandal kicks off around 9th June, which just happens to be when my new book ‘Just Business’ is published!

There are a lot of nasty crims out there who don’t just rely on dodgy bankers’ complicity to clean up their dirty money; they also rely on nice bankers’ ignorance. So, if on the off chance you fall into the latter category perhaps this year – for the interests of the common good – you should consider giving your poor grad a break and actually take the annual money laundering test. It’s a tedious ordeal but when you’re next hassled by some leftie about being a selfish, greedy bankster you will be able to hold your head up high and simply retort that you’re actually in the front-line against international drug dealers and murderous terrorists! That’s worth a few hours revision isn’t it?

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