Being rewarded makes us feel good. When exposed to a rewarding stimulus, the brain responds by increasing release of the neurotransmitter dopamine. Deep within we all hope to receive some sort of payoff for the good that we do. Truth be told, in our working life, there is usually no satisfying payoff. However, there seems to be an exemption. According to the US Department of Justice there is one industry that rewards its employees for their hard work, the money laundering industry. It accumulates more money than the electronics industry, the entertainment industry and the pharmaceutical industry combined.

Now you may be thinking, ….. wait ! …… money laundering, ….. isn’t that illegal ? Minor technicality. However, it is exactly this technicality that leads governments globally to try to suffocate this flourishing industry, whilst others’ strategy is to bypass the defences and become the most successful human beings on earth.

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By Norbert Braspenning

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What is it all about?

Money laundering is the disguising of the existence, nature, source, ownership, location, and disposition of property derived from criminal activity. The criminal is trying to disguise that the funds exist, where they came from, how he acquired them, who owns them, and where they are located.

The objective of money laundering is to get illegal funds back into a legitimate financial system. Inherent in the laundering process, is the requirement that the origin and ownership of the funds or assets be concealed. There is an intent to disconnect the funds from the origin and owner. At the same time, the owner has to maintain control over the funds, so an indirect connection will continue to exist.

The International Monetary Fund estimates that between 2% and 5% of the world’s GDP is involved in the laundering of ill-begotten gains. In financial terms, some criminal groups are so wealthy that they are more powerful than small nations. If we define “money” as “anything of value”, lots of goods and services (including real estate, jewels, precious metals, and on-line accounts) can be used in money laundering.

As an example of new forms of value – consider a drug dealer willing to trade airline or hotel loyalty points for illicit drugs. Another challenge is that banks and the international banking system are no longer at the centre of transactions. Consider virtual currencies such as Bit-coin.

Triple-V

Money laundering is all about volume, velocity, venue. How do you quickly move large amounts of cash?  How can you disguise value? How can you exploit locations, venues, that provide privacy protection?

According to the Task Force on Financial Integrity and Economic Development (2010), “up to $1 trillion in illicit money is drained from developing countries each year.” Still, most money from street thugs and extortion comes in form of cash. This illegally obtained cash must be laundered to look as if it comes from legitimate sources. The size of the problem is massive and with such large amounts involved, determined people will figure a way to beat the system. But how?

Money Laundering Stages

Money laundering consists of three stages – placement, layering, and integration.

  • Placement of funds into a financial institution is the initial step in the process. It is at this step that legislation has been developed to prevent launderers from depositing or converting large amounts of cash at financial institutions or taking cash out of the country. Money laundering schemes are most often detected at this stage.
  • If the placement of the initial funds goes undetected, financial transactions can be designed in complex patterns in order to prevent detection. This stage of the process is referred to as layering, and represents the most difficult area of detection. The more layers, the harder it is to trace the funds, particularly if the money is moved offshore.
  • The final stage in the laundering process is the integration of the money back into the economy in such a way as to make it appear to be a legitimate business transaction.

There are other instances where an individual seeks to launder funds just to disguise the location.  For example, if you want to hide funds from your spouse pending a divorce,  hide money from judgment or bankruptcy creditors. Laundering can also be used to make many types of illegitimate income (such as through fraud; kickbacks, bribery; securities manipulation) appear legitimate.

The corporate angle: Shell Companies

For persons or companies looking to launder money, or hide their income from taxing authorities a traditional technique has been to move the money offshore – move the money to jurisdiction with lower taxes, beneficial lax laws, and low tax enforcement. Likewise, money laundering often involves hiding the money under a new identity. Sometimes, it is easier to create a new identity, one not tied to the money launderer offshore. Of course, creating a new identity and opening an offshore bank account is just the start. The next question becomes one of how to get the money into and out of the offshore bank account. One technique for moving money includes the use of shell companies. The term “shell company” generally refers to a business entity with no significant assets or ongoing business activities. Shell companies formed for both legitimate and illicit purposes typically have no physical presence other than a mailing address, employ no one, and produce little to no independent economic value. They may also be known as international business companies, personal investment companies, front companies, or “mailbox” companies.

Shell companies are generally used as a “pass through” to allow another company or business to smoothly move financial assets from one place to another. Or it may simply serve as a “sleeper cell,” sitting dormant until its owners need it. None of this is illegal, and many major companies and household brands have set up and use shell corporations, for example in order to protect trade secrets. Irrespective, recent scandal have put shell companies and anonymous business entities back in the spotlight.

The revelations like the Panama papers have prompted politicians to demand that regulators (and consequently banks) clamp down shell companies. According to leading Asian journal “The Nikkei Asian Review” roughly 30% of the offshore firms exposed by aforementioned papers, have been established by intermediaries located in Hong Kong and China. This is not necessarily with bad intent.

Chinese enterprises often register their headquarters at tax havens when they list on Wall Street or other stock markets outside the Chinese mainland. This – so  called – re-registering to offshore locations is a way to raise foreign capital, and completely legitimate.

But there are other usages as well. Chinese Multinational corporations engaged in joint ventures with non-Chinese companies need to seek a governing law for the agreements that stipulate their cooperation. However, neither party wants to concede the “home ground advantage”. Consequently they set up a company in – for example – the British Virgin Islands. That way you have an English-speaking jurisdiction that has British law. Also see the article on offshore ethics.

How to avoid misinterpretation and stereotyping; the push for transparency

Multinational corporations listed on Wall Street or other stock markets, have a wide range of publication and reporting obligations. The insights provided through this disclosure, especially when use of shell companies is made, is paramount. Especially to avoid people to come to wrong conclusions when assessing a corporate structure.

The benefit of the shell company is greatly compounded when it is privately held and the underlying ownership can be obscured or hidden. Lack of transparency can be a desirable characteristic for some legitimate use of shell companies, but it is also a serious vulnerability that can make some shell companies ideal vehicles for laundering money. So even though shell companies are not in themselves illegal, and they do have legitimate business purposes, they are a main component of the underground economy, especially those based in tax havens. So to avoid misinterpretation and stereotyping by those that fail to thoroughly research: be prepared, be transparent!

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