The Washing Machine: How Money Laundering and Terrorist Financing Soils Us
By: Nick Kochan
Posted June 5, 2005
Published by Thomson, www.thomson.com
(ISBN 1-58799-159-4) 256 Pages,
US $29.95, UK £ 19.99, CAN $44.95
A complex global network transforms money coming from the illicit sale of drugs (including cigarettes), arms, or human slaves into respectable, invest-able, untraceable wealth. Add in corrupt politicians, tax evasion and fraud in global corporations (like Enron, Tyco and WorldCom), and the complicity of giant financial institutions (like Bank of New York, Citibank and the Bank of Credit and Commerce International), it becomes dramatically clear just how severe the problem of dirty money really is.
Implicating everyone from global corporations and banks, to drug cartels, the mafia, oligarchs, dictators, arms dealers, terrorists, and traffickers in human body parts, The Washing Machine (June 2005,
Texere, a product line of Thomson Professional Business, $29.95) is a no-holds-barred, meticulously researched and comprehensive real life “thriller” that illustrates the paths of black market money. Veteran financial investigative journalist Nick Kochan names names, then considers what is being done to stem the tide. He spent thousands of hours interviewing law enforcement on the front lines and combing through tens of thousands of pages of documentation, as he delved into the tangled web of dirty money.
Says Kochan, “Those who secretly manipulate the sources and movement of money affect the security of nations and the wealth of people. We are all victims. Money laundering affects everybody who participates in the world’s economy… Dirty money is a tax on the global economy as well as a threat to the stability of the weaker parts of the global system.”
Kochan’s research reveals some surprising insights:
The red flags of criminal moneymaking differ from those thrown up by terrorist moneymaking. Solving the problems will require different institutions and strategies addressing each.
Existing financial laws and practices designed to identify dirty money are ineffective at addressing high-level, well-financed and sophisticated criminal activity operating through large companies and banks.
If such powerful corporate and governmental interests are at stake, just how effective will global policing be? Laws are on the books, but implementation and cooperation remain problematic.
Nick Kochan is an acknowledged expert in financial crime and an experienced investigative journalist who has written about numerous complex frauds. He was a member of London’s Sunday Times business team that investigated the Guinness scandal, and he coauthored The Guinness Affair. His work has appeared in the Economist, Financial Times, The Banker, and The Observer. With many sources in government, finance, law enforcement and police services domestically and internationally, Kochan’s connections were critical for this book. He was educated at The University of Cambridge before embarking on a journalistic career. His other books include Ann
Widdecombe; Gordon Brown; The World’s Greatest Brands; and Bankrupt: The BCCI Fraud.
The following is an excerpt from the book The Washing Machine
Copyright © 2005 Nick Kochan
World at risk
Our security depends on it. Our way of doing trade with trust is based on it. Global economic activity with nations relies on it. Money must be earned and spent fairly and openly. By the same token, money that is earned illegally or is unaccountable, must be excluded from the economic system. Its possessors must be apprehended. That is the money laundering mantra. Those who wage the war against economic crime are working harder than ever to stem the tide of black money as acquisitive crime threatens to get out of control.
The criminal who possesses black money and wants to pass it off as legitimate must fabricate an explanation to make the source look genuine. These tricksters make friends with corrupt elements in the financial system. They will hide their money so that it becomes untraceable to those who may want to hunt it. As more people or financial institutions handle money with dirty origins, those origins can be lost. And criminals are caught and convicted by the dirty money they possess.
So who are the elements in our society who close their eyes to criminal money? Most are those who committed the crime in the first place. There are four key groups. They are global corporations engaged in fraud; corrupt governments and their politicians who accept bribes; organized criminals who trade in drugs and other illegal goods; and terrorists. These are nebulous forces, and there will be those who say much talk of global money laundering is fuelled by paranoia and even hysteria. But tyrants have triumphed by having their money laundered, drug gangs have ruined countries by passing their money through complicit banks, terrorists have waged wars on the financial system to fund their outrages and companies have made themselves available to organized criminals in a Faustian laundering pact. Laundering is as sinister as it is ubiquitous.
Those who perpetrate bankruptcies, frauds, huge share scams and bogus schemes like Enron and WorldCom -- not to mention executives at the Bank of New York, Citibank, and the Bank of Credit and Commerce International involved in laundering scandals -- exploit the crevices within the financial systems of which they are themselves integral, even cartelistic parts. Launderers who work inside the gate undermine structures of governance and trust. Economic systems rely on the integrity of those who administer them and those who regulate them. When these key roles are shown to have been suborned by bankers in smart suits, as well as crooks and conmen, all participants in the economic system are weakened.
Global corporations are in many ways the most powerful, and certainly the wealthiest of the three groups listed above. Criminals need the services provided by global corporations especially banks and other financial institutions, to move and clean their money. Criminals and corrupt politicians in developing countries and the former Soviet Union look to Western banks for a huge array of devices that include offshore companies and tax structures, false names for their bank accounts, and lawyers and accountants for their complex financial structures. Some banks will provide them willingly, satisfying the authorities with the formalities of due diligence that have increased in volume in recent years in response to the perceived terrorist threat to the economic system.
Global corporations are driven by competitive pressures to spread into risky new markets and deal with unknown and possibly criminal counterparties. When doing business in many parts of the world contact with corruption and illegality is hard to avoid. Organized criminal groups grow and feed off the enforcement vacuum in many developing countries and these groups have reached positions of such political and economic power that they can determine the conditions under which Western companies do business within their markets. Trade with these criminal entities becomes a condition of entry into the market or country.
These criminal groups also extract a price for their collusion and the world's largest global banks and businesses move illegal wealth at the behest of launderers, creating a money laundering merry-go-round that sneaks black cash between the crevices of corporate and banks' anti-money laundering systems.
Huge financial ingenuity may be employed to create these deceptions but launderers understand the system at least as well as those who work in it legitimately, and often better. They use the language and instruments of the legitimate system to explain the provenance of their wealth. They are capable of sending stolen money along the same byways as legitimately gained wealth, harnessing technical developments such as the global electronic movement of money and complex financial derivatives. By diverting funds across borders or within financial or governmental institutions, they dodge police who challenge the validity or history of their illegal financial documents or instruments. Their corrupt money mingles with the hard-earned funds of genuine citizens who pay their taxes and trust their banks.
But however it comes about, when dirty wealth is moved, the bank participates in a theft, even if it has been duped by a criminal who is skilled at hiding the source of his funds. The maker of the corrupt or fraudulent money and the financial institution who helps moves it are equally complicit in a process, where both parties are conspirators, in both parts of the activity.
The processes that are apparently lawful are corrupted the more the corporation abuses the trust placed in its systems. The Western way of doing business and moving wealth becomes increasingly suspect as more criminal money is moved into the system. Turning the blind eye to the dubious transaction has become the norm for business in many parts of the world. Corporations benefit from money laundering by investing dirty money for fraudsters as well as hiding it in off-shore accounts. Either way, they will be beneficiaries when they gain a fee, paid from crooked funds.
The fruits of money laundering find most fertile ground where corruption is rife. Corruption not only puts dirty money into the hands of politicians through bribery, but corrupt politicians are exposed to extortion from
mafiosi. Those hoodlums may be small-time hoodlums or they may be oligarchs (including most dramatically, but not exclusively, Russians) at the other. The two forms of black money-transfer link together in a vicious cycle of corruption.
Hoodlums that have obtained great wealth can make their position sustainable. The intelligent ones can acquire the trappings of honesty. They are in our midst and have achieved the status where they are considered 'upright citizens'. Money launderers operating on this global scale have great intellectual ability. They are also intriguing and complex personalities. Friends of Victor Bout say he is charming, very talented and gregarious. He hobnobs well with powerful politicians, attracting admiration and trading favors with aplomb. Other Russian money launderers have demonstrated considerable intellectual ability in an academic context before turning their cerebral firepower towards breaking down the financial system's controls.
Western institutions have been content to treat with mafia, intelligence agencies and private individuals who have gained access to newly privatised state industries in countries experiencing economic and political change. The speed and efficiency with which the West has absorbed capital released from the bankrupt former Soviet Union over the last decade is a remarkable case study in how financial manipulation can be institutionalized. Established banks in the West collaborated with some dubious operators in Russia in a systematic process of pillaging that took place under the noses of politicians both in Russia and in the United States.
Both countries' political elites had reason to turn a blind eye to this criminal activity; Western politicians were still exercised by the Communist bogey and treated the launderers and conmen who came out from under the Russian dungheap when Communism expired, as legitimate entrepreneurs. Russian politicians were content to let the scams continue because they were corrupt and in the crooks' pockets. Those who were disturbed by what they saw had no means to reverse it because the country's administrative systems were in a shambles.
Intelligence agencies handling and distributing black money on behalf of their governments have the greatest opportunity to influence unstable regimes. Indeed, some argue that these shadowy groups are among the most active of all money launderers. The financial resources possessed by Oliver North, the architect of the Iran-Contra affair, puts him into the top echelon of money launderers, even though he was arguably guided by a political mission rather than personal enrichment.
Organized Gangs and 'Terrorists'
Organized criminal gangs have grown rich on the proceeds of the drugs trade or other contraband. This money has then been ploughed back into other criminal activity such as counterfeiting and the movement of people, the transportation of asylum seekers or economic migrants, and the trade in human body parts. The more established parts of organized criminal gangs seek to make investments in the 'legitimate' economy, by buying companies or real estate. The less established parts, the 'parvenus,' are likely to trade in illegal arms where commissions and profits are massive.
A key customer for arms and material are groups perpetrating political violence. These are easily defined as 'terrorists,' but definitions are difficult as the term can not be applied to groups seeking to overthrow illegitimate regimes. Definitions are equally problematic when describing terrorist money. This is because the money used by these groups may have legitimate origins -- for instance from individual charitable donations or government funds. Whatever the case, in recent years we have seen growing political pressure on law enforcers to intercept this form of money as its significance on the stability of the social and political system is so much more direct and evident.
The 'war against terrorism' as it was dubbed after September 11, led to new attack on the 'hidey holes' used by criminals involved in fraud and financial deception. But like so much of the Patriot Act, the authorities appear to have applied the machine gun -- kill everything -- approach other than the rifle approach aimed to thwarting terrorism. The red flags of criminal money-making differ from those thrown up by terrorist money-making, because the first shows exploitation of the financial system for acquisitive ends. Most terrorist money, on the other hand, is spent in the black market buying arms, while small amounts are used to support terrorists while they prepare an illegal act. The first form of purchase is not applicable to conventional anti-money laundering solutions because such deals take place only in the black market. The second are unlikely to trigger suspicion because the amounts are very small and the transactions unlikely to be particularly complex. Today's anti-money laundering policies are convenient and cheap for governments as they place most of the burden on the legitimate banking and financial system. However, as this short analysis demonstrates, they are of questionable relevance to terrorist financing.
Intelligence agencies working in conjunction with police are likely to be more effective in stopping terrorist trade than banks as they can intercept the money flows between donors and terrorist groups. These take place in the underground economy, and intelligence agencies may be able to spot suspicious movements of cash or other valuable items like diamonds by using other participants in the black economy as sources. For example criminal gangs in the jewellery industry might be persuaded to work with intelligence agencies in breaking the link between the terrorist donor and the operating terrorists on the ground. Those money flows may issue suspicious signals if the donor creates complex trails to divert attention from his interest in the terrorist group.
The Size of the Black Economy
The players in the money laundering merry-go-round are clear enough. But what sort of money do they handle, and where do they put it. The amounts are as vast as they are unquantifiable. Many inflated figures are proposed to scare governments, populations and bankers. But here are a few that may be more trustworthy. For example, The International Monetary Fund has estimated that drug use alone accounts for 5 percent of the global gross domestic product of some $33 trillion. That is some $1.65 trillion. Much of this acquired and laundered by organized criminal groups.
It is further estimated that $100 billion of illegal money moves annually from the 'undeveloped' world to the 'developed' world through illegal trade. This is pay into, or through global corporations.
These two numbers do not include the many unquantifiable figures like the value of trade in illegal arms, the payment of illegal commissions on those arms deals and the value of illegal trade in precious stones. They further do not include the amount spent by terrorists or the amount lost to the world's economy through fraud and counterfeiting. It would probably not underestimate the scale of the problem to say that $2.5 trillion is now swilling around the black economy as well as white.
The Victims of Laundering
Those who secretly manipulate the sources and movement of money affect the security of nations and the wealth of people. We are all victims. Money laundering affects everybody who participates in the world's economy. It is a salutary thought that a large number of the currency notes that pass through our hands have been subject to laundering by crooks or their intermediaries, even though we may be using the money for quite legitimate purposes.
Dirty money is thus a tax on the global economy as well as a threat to the stability of the weaker parts of the global system. It is no exaggeration I say that the combined cost of money lost to governments through tax together with the cost to the economic system of imposing anti-money laundering controls amounts to 10 cents in every dollar of income.
When major financial or commercial institutions with a global reach handle criminal money, the wider economy is debased, and social and political structures devalued. Money laundering by criminal or terrorist groups also has far-reaching implications for the world's security.
However, perhaps the biggest losers are the ordinary inhabitants of developing countries. Skillful operators in the developing world apply the tools of finance to steal from their home countries. Wealth that has been criminally obtained, whether by bribery or fraud, needs to be hidden and moved if it is to be enjoyed or re-used. There are many reasons for this. Politicians in unstable countries fear that a government will be changed and their records and bank accounts examined; fraudsters are vulnerable to investigation by police or tax authorities.
Western financing schemes hollow out the wealth of poor countries, leaving behind economic deserts and volatile forces bent on political instability. This form of wealth transfer by deception benefits a few sharp or crooked entrepreneurs to the detriment of the larger economy. Ironically, it is most likely to occur in countries where there is least economic activity. If there were more economic activity in these countries, it might be argued there would be less scope or need for laundering as the financial system would be more dynamic and the regulators more powerful. So if the countries of Africa where diamonds are mined had their own viable diamonds markets, would sharp local operators need to ship them off to Antwerp or Beirut under the cover of bogus companies, to launder them?
Short term theft has long-term implications for these poor countries. As we have seen, mafiosi and oligarchs use their illegally gained prosperity stored outside the country in secret offshore centers to rebuild their local reputations, and so wipe out the evidence of how the wealth was obtained. The shrewdest will take political office and run their criminal businesses under the cover of legitimate authority. The most ruthless will use criminal gangs to create a rule of fear and extortion in economic sectors.
These scenarios are particularly ominous as they destroy trust in political and civilian leadership. Governments that are 'up for sale' to the highest bidder must be prone to terrorist or mafia intervention, as we saw in Afghanistan where an alliance between drugs dealers and terrorists brought us the Taliban and then Al Qaida.Vulnerable countries are also in hoc to international banks, that supported the leaders on their way up, and now extract their pound or dollar of flesh when their man is in charge.
Western governments and multilateral bodies have understood these dangers and sought to introduce some standards into banks' relationships with politicians and those close to them. These standards are embodied in the Wolfsberg Principles and all large banks subscribe to them. The implementation of such standards -- however patchy -- offers the best hope for poor countries eager to rebuild their economies without the depredations of mafia and their Western
Tax officials and police encounter these cheats and subject them to criminal trials. The penalties for money laundering, especially when drugs are involved, are very heavy. But in recent years, the financial police have turned their attention to another criminal use of the money-go-round. These are terrorists and others who perpetrate violence for political ends. Financial police -- tax officials, police detectives, customs agents, bank money laundering reporting officers and the like -- have been charged with examining suspicious money movements for terrorist links. This new dimension has dramatically raised the profile of economic crime and investigation from a discipline that was performed by a few specialized -- and often under-funded boffins -- to one that has come to pre-occupy every professional who handles money. Money laundering rules are their constant concern.
Today, the bank manager, the accountant, the lawyer, the estate agent, the seller of expensive yachts . . . you name it, is required to ask his customer about the source of his money. The money laundering mantra that prevails in this 'enforcement area' is the need to 'know your customer'. This process of acquiring 'knowledge' is performed by asking a series of questions about the bona fides of the money and the business activity which produced it. Clients interrogated in this way are often offended, whether or not they have anything to hide. It will also be argued that the time involved puts an additional cost on doing business and that is an economic burden on the economy. The inconvenience and bad feeling will be a small price to pay if this process of interrogation and due diligence succeeds in staunching the growing amounts of funds lost through acquisitive crime and fraud; allegedly two thirds of all reported crime is acquisitive. The 'know-your-customer' system, if it works effectively, not only puts the authorities on the tracks of those planning to behave dishonestly, but also deters would-be crooks from embarking on their schemes.
The need for the system to 'know its customers' has another, much more general context. The huge sums of money handled today by a machine or computer in a digital form has lowered levels of accountability and scrutiny and opened the way for abuse. When a criminal enters the system, computerization allows him to move greater amounts of money faster than was ever possible when money was in a intangible, note form. Interrogation of those participating in this 'immaterial' system introduces a personal element that has been lost as computers have taken over.
But will the imposition of today's money laundering regimes help to prevent orchestrated and elaborate abuse? Checks by banks may stop low-level fraud but, arguably, have much less impact on high-level and well-financed criminal activity.
Massive money laundering is likely to be performed by crooks and organized crime gangs operating through large companies and banks and it is highly unlikely the form-filling, 'tick-in-the-box' type controls involved in much anti-money laundering supervision will affect the well-financed and sophisticated crook.
Financial secrecy and manipulation are today viewed as the genie that escaped from the bottle during the free-wheeling 1980s and 1990s. Returning it to captivity is a vast task for law enforcement, let alone the governments that sponsor them.
Launderers menace a stable and fair society. The importance of keeping them outside the gate has never been greater. Likewise the need for a clearer and more focused system of regulation is paramount. Laws passed round the globe since September 11 (not to mention those passed before and largely ignored), have given the authorities greater powers to tap phones, investigate individual and corporate bank accounts and seize illegally obtained wealth. Enforcement authorities also now encounter fewer obstacles now than before September 11 to cross-border collaboration. They face an unprecedented opportunity to attack money laundering and seize criminal and terrorist wealth.
But there is a cost to society and the individual entailed in this extension of power. The rights to privacy from state intrusion have been diminished as a result of anti-money laundering powers. This has been accepted by governments round the world in the arguable interest of security and the greater good of society. As a result, money laundering is much more likely to be cited as a pretext for 'fishing expeditions' where the police seek to obtain confidential documents referring to an individual's financial affairs without a specific cause. Worse still, police authorities, acting on a governmental agenda, may seek to use money laundering legislation to gain evidence from banks to pry into the affairs of political dissidents. The very nebulousness of the money laundering controls and legislation risks obstructing efforts by those pursued by the authorities to challenge the validity of this process.
The world watches and awaits a clampdown that is commensurate with the risks it now faces from money launderers, corrupt governments, criminal gangs and terrorists. It is paramount that the law enforcement authorities attack not merely the small fry but the ring leaders of crime and the dirty dictators. If these heinous operators are stripped of their wealth and liberty as a result of the new money laundering regimes, few would deny they had served a worthy purpose. If, on the other hand, those new laws add to the cost of doing legitimate business without the payback in terms of a growing number of convictions, leading to improved levels of honesty and integrity, anti-money laundering will be regarded as no-more than dead letters. Criminals will march on and society will have been shown to be powerless in touching their illegal wealth and systems. The opportunity to turn back the march of the vicious and greedy gangs will have been lost, and respect for proper ways of doing business will be diminished. To say the very future of the economic system is at risk, is no exaggeration.
Copyright © 2005 Nick Kochan
About the Author
Nick Kochan is a professional writer, journalist, and financial researcher. He has written extensively on banking, bank fraud, business crime, politics, and intelligence matters. He is a columnist and contributor to many U.K. and international newspapers and magazines, including the Financial Times and The Economist.
Kochan is an accomplished broadcaster, regularly appearing on the BBC television and radio in the United Kingdom. He has addressed many conferences and business gatherings on his specialist topics and is an experienced public speaker. He has also served as a consultant to a number of United Kingdom and international corporations on political and economic risk.
Kochan was educated at Fitzwilliam College, in the University of Cambridge. He has written books about a number of financial scandals, including the collapsed Bank of Credit and Commerce International and The Guinness Affair. He wrote a report for The Economist Intelligence Unit about Corporate Government. Kochan has also written the biography of the British Chancellor of the Exchequer, Gordon Brown.