The financial washing machine

 

In explosive excerpts from his new book, Nick Kochan digs the dirt on how an army of criminals hasbroken into the world's financial system, and investigates the Square Mile's growing addiction tocriminal cashSunday June 5, 2005The ObserverMoney laundered through the world's financial system has now reached stratospheric levels, trillionsrather than billions. Fresh figures from the International Monetary Fund put it at the $2 trillionmark. 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. Thatincludes everything from tax evasion and very basic fiddles to money made from computer-gamecounterfeiting, 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 Creditand Commerce International came from leading firms. When push came to shove, ethics went by theboard and they joined the ranks of sleazy money launderers.The offshore world provides the funnel for most offshore money. This reservoir of anonymous accountsand bogus banks is accessed by institutions for both genuine and illicit purposes. Money passes fromaccount to account to acquire a genuine appearance. It is likely to reach the City of London after along 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 FinancialServices Authority on a daily basis.Identification checks on small-time bank customers keep compliance officers in jobs but yield fewclues about laundering. An organised criminal worth his salt can mock up, or purchase, a utilitybill or passport.No wonder some suggest the checks are put there as a Revenue ploy to catch tax dodgers. Banks don'tthink the checks are funny. Sir John Bond, chairman of HSBC, was not laughing when he said hisbank'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 tointercept 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, crooksincluded.Terrorist money taxes the system even more. Small amounts of charitable money raise no red flags inbanks or police computers. At best, the money's source may yield a clue. Dispatches from a MiddleEastern or East African bank and bearing Islamic names might alert an official somewhere. Stoppingit 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 thetiny amounts confiscated from terrorists. Breaking into the system today is no harder than breakinginto a bank, and perhaps easier. The criminal who possesses black money fabricates an explanation tomake the source look genuine. Corrupt elements in the financial system are persuaded by a goodstory. That story gains credibility in the telling. As more financial institutions handle money withdirty origins, those origins are lost.Money launderers fall into four key groups: global corporations engaged in fraud; corruptgovernments and their politicians who accept bribes; organised criminals who trade in drugs andother illegal goods; and terrorists. These are nebulous forces, and there will be those who say muchtalk of global money-laundering is fuelled by paranoia and even hysteria. But tyrants have triumphedby having their money laundered, drug gangs have ruined countries by passing their money throughcomplicit banks, terrorists have waged wars on the financial system to fund their outrages andcompanies have made themselves available to organised criminals.Those who perpetrate bankruptcies, frauds, huge share scams and bogus schemes such as Enron andWorldCom exploit the system's crevices. Structures of governance and trust are lost, undermining theintegrity of those who administer a country's economy. When these key roles are suborned by bankersin 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 blackmoney. Criminals and corrupt politicians in developing countries and the former Soviet Union look towestern banks for a huge array of devices including offshore companies and tax structures, falsenames 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 drivebanks to abuse. The taint of corruption is unavoidable when doing business in many parts of theworld. 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 underwhich western companies do business. Trade with these criminal entities becomes a condition of entryinto the country. Launderers understand the system at least as well as those who work in itlegitimately. The language of the legitimate system enables them to explain the provenance of theirwealth. Technical developments such as the global electronic movement of money and complex financialderivatives turn black money into grey.Police forces lack many of the means to pursue funds as they cross borders or move at speed roundfinancial or governmental institutions. Corrupt money mingled with legal funds complicates theissue.Corruption fuels money-laundering. Bribery puts dirty money into the hands of politicians, butcorrupt politicians are exposed to extortion from mafiosos. Those may be small-time hoodlums oroligarchs (including, most dramatically, but not exclusively, Russians). The two forms of blackmoney-transfer link together seamlessly.Money launderers operating on this global scale have great intellectual ability. They are alsointriguing and complex personalities. Other Russian money launderers have demonstrated considerableintellectual ability before turning their cerebral firepower towards breaking down the financialsystem's controls.Mafia who have gained access to newly privatised state industries in countries experiencingpolitical change are pursued by the West. Financial manipulation can be institutionalised, asdemonstrated by the speed and efficiency with which the West has absorbed capital released from thebankrupt former Soviet Union. Established banks in the West collaborated with some dubious operatorsin 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 moneylaunderers. The financial resources possessed by Oliver North, the architect of the Iran-Contraaffair 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 moreestablished 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 armswhere commissions and profits are massive.The cash economy is still the criminal's bulwark. Talk of 'dematerialisation', that is, turningmoney into digits and bytes, has not stopped the movement of dollar bills across borders the worldover. Couriers operating for drug dealers or terrorists are routinely caught with dollar bills orlarge-denomination euro notes strapped round their torsos. Launderers took a leaf from the drugdealers' book in devising systems for moving money.Groups perpetrating political violence are key customers for arms dealers. The red flags of criminalmoney-making differ from those thrown up by terrorist money-making, because the first showsexploitation 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 stoppingterrorist trades than banks. They are better-placed to understand the political strategy of theterrorist 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 systemthat they created has beaten them.Dirty businessThe 10 most common sources of laundered money. US $US 1.3 trillionItaly 150bnRussia 147bnChina 131bnGermany 128bnFrance 124bnRomania 115bnCanada 82bnUK 69bnHong Kong 63bnSource: John Walker Crime Trends Analysis· From The Washing Machine: How Money Laundering and Terrorist Financing Soils Us, by Nick Kochan,Texere, £19.95Guardian Unlimited © Guardian Newspapers Limited 2005http://observer.guardian.co.uk/business/story/0,6903,1499283,00.html