Money laundering is the way one takes money or an asset obtained illegally and circulates it back into use by creating the appearance that it was obtained through legal or legitimate means. In the case of fraud, embezzlers can steal and spend cash on themselves or pay bills easily enough, but only to a certain extent. It sounds easy (and even exciting!) to have more cash than you know what to do with, but what does one do when it gets into the tens and hundreds of thousands of dollars? It’s not a problem if you are from a wealthy family or hit the lotto, because you have reason to have it and hopefully the taxes have already been paid or withheld before you blow it all. Stolen money gets a little trickier.
In the 1970s, financial institutions were required to keep records regarding cash purchases in excess of $10,000 to assist the government in identifying money laundering activities. During the 80s (brought about primarily by drug trafficking) and into the 90s, the reporting requirements filtered all the way down to require anyone involved in a trade or business that receives cash in a single transaction of $10,000 or more to file a Form 8300 with the IRS. And since it took crooks about 30 seconds to figure out that they could just split up or spread cash payments to avoid the reporting, it further evolved to require businesses to be on the lookout for activity that could be considered ‘structured transactions’ that exceed the $10,000 limit. Hence, buying a Ferrari with a bagful of cash hasn’t been (legally) possible since the days of “Miami Vice.” Now, in order to buy that Ferrari “legit,” that dirty or stolen money needs to reinvent itself.
Money laundering has three basic steps: placement, layering and integration. Here’s how it works:
For placement, often, people will use a “front” (see my blog post on “Forensic Lingo”) to wash the money through. It could be a nightclub, a pizza place, or, yes, even a laundromat—usually an activity that is heavily cash based so that additional and large amounts of cash deposits won’t be questioned. After placement, layering occurs; the stage where the “washing” happens. The ill-gotten gains are mixed in with the activity of the legitimate business and recorded as additional sales into the accounting records. Now the cash, smelling spring-time fresh, is ready for integration into the legitimate economy. Monies can now be paid out as salaries, consulting fees, donations or any other cost of operation, giving the criminal the appearance of a legal source of income to buy houses, boats, cars or other luxury items, plus the neighbors now think they have a successful entrepreneur living next door.
For more lessons in money laundering, you can also see how Ben Affleck accomplishes it in “The Accountant,” now in theatres…
Author: Richard C. Gordon, CPA/ABV/CFF, CFE, CGMA, Director of Forensic and Valuation Services