Member only
Episode
99

Money Laundering

Oct 20, 2020
How Stuff Works
-
18
minutes
Crime
Corruption
Economics
The Mafia
Terrorism

It's the way that criminals take dirty money and clean it, turning it into beautiful, clean money that appears to have been earned completely legally.

Discover how this is done, how much of a problem this really is, and how this process supports the criminal underworld.

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Transcript

[00:00:00] Hello, hello hello, and welcome to English Learning for Curious Minds, by Leonardo English. 

[00:00:11] The show where you can listen to fascinating stories, and learn weird and wonderful things about the world at the same time as improving your English.

[00:00:21] I'm Alastair Budge and today we are going to be talking about money laundering, the process that criminals go through to take illegal money and make it look like it’s legal.

[00:00:34] Just in case we need a disclaimer here, I should of course say that neither I nor Leonardo English endorses any of the activity that we’re going to describe here because, well, it's illegal and deeply damaging to society.

[00:00:48] But just because it’s criminal, it doesn’t mean we shouldn’t try to understand it, and indeed the dirty world of money laundering is pretty fascinating.

[00:01:00] So without further ado, let’s get started.

[00:01:04] I guess you’ve heard of money laundering, you’ve seen it in movies, you’ve read about cases of big banks getting hit with huge fines, but you might not know how it really works, and how vital it is to how the criminal underworld works. 

[00:01:21] Indeed, without money laundering, the incentives to commit crime would be greatly reduced, and the fact that money can relatively easily be washed through the financial system and actually used by criminals is a large incentive for people to commit crime. 

[00:01:39] If you couldn’t actually use the money you had made through crime, would you want to commit the crime in the first place? 

[00:01:46] Probably not.

[00:01:48] For anyone, not just modern-day criminals, hiding the origins of money is nothing new. 

[00:01:55] Pirates would try to hide the origins of their treasure. 

[00:01:59] Chinese merchants thousands of years ago would hide money through different companies in order to avoid the government seeing it, in order to avoid tax.

[00:02:10] But the term ‘money laundering’, and the concept is normally thought to have originated in the US in the 1920s. 

[00:02:20] Al Capone, the famous gangster, used a series of laundromats, shops with washing machines, to launder the proceeds of his criminal activities, to make his money seem legal.

[00:02:35] Back then, the idea was quite simple.

[00:02:38] Al Capone’s gang would make its real money through criminal means: illegal distribution of alcohol, gambling, prostitution, extortion, all sorts of things that were illegal at the time.

[00:02:51] These activities generated a lot of cash. They made a lot of money.

[00:02:56] Al Capone couldn’t just go to the bank with this cash, because even back then, a bank might ask where all this money had come from.

[00:03:05] So, Capone owned a series of laundromats, which would report much higher sales than they really had. 

[00:03:14] Essentially if they did $500 in ‘real’ sales that day, they would add another $500 to their accounts, so it looked like they had done $1000.

[00:03:25] Every day dirty money would be recorded by the laundromat as a sale, and by doing this every day, at the end of the month that laundromat would record a bumper profit, and it could be paid out to Capone and his gang. 

[00:03:40] If the authorities asked him to show where his money came from, he could say that he was the owner of a profitable chain of laundromats, and as the legal owner he was allowed to take the profits.

[00:03:53] Indeed, when Capone was finally caught, he wasn’t sent to prison for any of his hundreds of gangster crimes - financing murder, extortion and prostitution. 

[00:04:04] He was sent to prison for tax evasion.

[00:04:08] So the term ‘laundering’ is thought to have come from Al Capone, the first celebrity gangster to have taken dirty money and made it clean.

[00:04:18] This was almost 100 years ago now, and while how money laundering works has evolved and become more sophisticated, the general principle remains pretty similar.

[00:04:30] Criminal activity generates money, criminals make money from crime, and they need a way to take that money and be able to use it to buy stuff.

[00:04:40] Now, for small amounts, this isn’t such a problem. 

[00:04:44] Paying for something with $20, $50, or $100 in cash isn’t going to arouse much suspicion, people aren’t going to get suspicious if you pay $100 in cash.

[00:04:58] But when criminals start making more and more money, many fall into the trap of wanting to live an ever more luxurious lifestyle, and needing larger amounts of money to make bigger purchases.

[00:05:11] That car, that boat, that house, you need to be able to say where you got the money to pay for it, and that’s where money laundering comes in.

[00:05:21] It’s the process of taking dirty, criminal money and turning it into beautiful, clean, fresh currency that looks as if it has been earned through completely legal means.

[00:05:34] There are three steps to this: placement, layering, and integration.

[00:05:41] Placement is putting this money into the financial system. 

[00:05:46] Now, before this step the criminal money probably doesn’t exist anywhere in the legal financial system.

[00:05:54] If it’s cash, from drugs, prostitution, weapons sales, or whatever criminal activity it might be, this money exists outside the financial system. 

[00:06:05] Maybe it’s in suitcases in your wardrobe, maybe it’s hidden in barrels in the ground, it’s outside the system.

[00:06:13] You need to get it into the financial system.

[00:06:17] This can be done in different ways. Maybe it’s like Al Capone, and it’s a case of putting it into a business like a laundromat.

[00:06:26] The preferred types of businesses for money launderers are ones that use cash, and service-based ones. 

[00:06:34] Strip clubs, laundromats of course, hairdressers, and any business where it’s easy to just add some more money to it every day without too many questions being asked.

[00:06:46] And almost the ultimate business to use for this ‘placement’ stage is one where you can immediately swap your money for something that is as good as money. 

[00:06:56] A casino.

[00:06:58] Casinos are a money launderer’s best friend. 

[00:07:02] You can go in there with a bag of dirty cash, exchange it for chips, go out and do a bit of gambling if you like, then exchange the chips back for legal cash a few hours later. 

[00:07:15] You’ll even get a piece of paper from the casino saying that this money is ‘gambling winnings’ and Bob’s your uncle, you can suddenly explain to the government where you got all that money. You can even put it into a bank, and if anyone asks any questions, you have the proof that you won it in a casino.

[00:07:36] There’s a video from a Canadian casino of a Chinese customer coming in with a hockey bag full of Canadian dollars and exchanging it all for casino chips

[00:07:48] He comes in and passes this bag to the cashier, who puts it through the money counting machine, and it takes a whole ten minutes to count all the cash.

[00:08:00] It’s pretty mad to watch.

[00:08:03] So, that’s the first stage, get the illegal money into the money system in the first place.

[00:08:09] It’s the most dangerous part of the process, because it’s the part where it’s hardest to explain where the money originally came from. 

[00:08:18] “A friend gave it to me” doesn’t quite work when you’re talking about hundreds of thousands of dollars.

[00:08:24] Our second stage is what’s called ‘Layering’.

[00:08:29] This stage has become much more important in recent years, as anti-money laundering authorities have got smarter and smarter. 

[00:08:38] What happens during this ‘layering’ phase is that the money is moved around and around, as anonymously as possible to try and hide where it came from in the first place.

[00:08:50] This can be achieved in all sorts of ways, but as a general rule, the more anonymous the money trail is, the better.

[00:08:59] This means that money is often moved through countries with pretty loose regulations, often small islands - places like the Caymans, Panama, but also countries in the EU like Malta or Cyprus. 

[00:09:15] The money is moved through shell companies, companies that only exist on paper and whose owners are hidden, and it’s moved from company to company all across the world so that it’s almost impossible to trace where it actually came from.

[00:09:33] If you’ve listened to the episode on 1MDB and the missing Malaysian billions, the money from this huge fraud was laundered in exactly this way.

[00:09:44] But it’s not just small banks in tax havens that enable this. In recent years there have been dozens of scandals about some of the biggest banks in the world enabling money laundering, either actively or passively.

[00:10:00] From UBS to HSBC, Barclays to Goldman Sachs, huge American, Swiss, and British banks in countries that you might not necessarily associate with money laundering have all been accused of helping criminals and in most cases, have paid large fines for doing so.

[00:10:21] So that is ‘layering’, the second step in the process, moving the money around so much that it’s hard for anyone to see where it actually came from.

[00:10:31] Our final step is the bit that the money launderer has been waiting for, the payday, and it’s called ‘Integration’.

[00:10:40] Now that the money is ‘clean’, that it is so far removed from its dirty origins, it can be returned to its owner, and put back into the financial system in the form of assets.

[00:10:54] Whether that’s a house, a business, or some other financial investment, now that the criminal is able to buy that asset with ‘clean’ money there is not much that the government can do about it. 

[00:11:08] Pablo Escobar was famously just the owner of a taxi company, but one that generated hundreds of millions of dollars. 

[00:11:17] Walter White, if you have seen the series Breaking Bad, ran a very profitable car wash.

[00:11:23] And if the money laundering has been done correctly, then it’s very hard for the police to actually prove anything.

[00:11:32] But if there is one thing that seems to be a recurrent theme with criminals, is that they get greedy

[00:11:40] If they got away with transferring an extra $500 a day into a business, then why not try to transfer $1000, then $2000, and so on. 

[00:11:50] If they got away with claiming that a small hairdresser made $500,000 in profit one year, why not try to claim it made $800,000 the next year.

[00:12:01] And eventually the money laundering police do cotton on, they suspect that there’s something fishy going on, they start to look more closely at every single transaction, suddenly the suspected criminal is being watched like a hawk, and then they end up in prison.

[00:12:19] The reality is though that most money laundering is never caught.

[00:12:24] It’s thought that money laundering accounts for up to 5% of global GDP, so that’s between $800 billion and $2 trillion dollars.

[00:12:36] Because we don’t actually know how much it is, or where it comes from, it’s difficult to figure out exactly what activities make up this money, but it’s thought that most of it comes from drug cartels, terrorist syndicates, and the ultra-rich, the 0.01%.

[00:12:55] And while money laundering is often considered a ‘white collar’ crime, a non-violent crime that doesn’t really hurt anyone because all it’s doing is moving money around from place to place and in some cases avoiding tax, money laundering is really the grease that enables the criminal wheels to turn.

[00:13:15] Without a way of being able to actually get the money at the end of it, the incentive for criminal activity would be greatly reduced, and so one must assume, if you can clamp down on the parties that enable money laundering, then this can have as great if not greater impact as cracking down on the people on the other side of the criminal activity, whether it’s the ones trafficking drugs onto the streets of Europe or buying AK47s to engage in terrorist activities.

[00:13:47] Of course, the authorities throughout the world are, to varying degrees, trying to do everything they can to crack down on money laundering, but as things like the Panama Papers have shown, it is really hard.

[00:14:01] The global financial system is structured so that it’s very easy, no matter how dirty the origins of the money, to put it into the financial system and quickly move it all over the world so that it becomes invisible and can be taken out clean and fresh somewhere else.

[00:14:20] When cryptocurrencies first became ‘mainstream’, or at least semi-understood and you started hearing about them on the news, one of the common complaints waged at them was that they were making life easier for criminals to move money around. 

[00:14:38] A criminal could turn their dirty drug money into bitcoin, buy a gun on the dark web with that bitcoin, and this was all completely anonymous

[00:14:48] This was the fear at least. 

[00:14:50] It’s partly true, in that a bitcoin wallet doesn’t have your name and house address on it, but the impact of bitcoin and cryptocurrencies on the world of money laundering has been minimal, it’s been absolutely tiny.

[00:15:06] Indeed, using cryptocurrency to launder money is a pretty dumb idea because bitcoin transactions leave a permanent record that is impossible to get rid of, so you can always see where a bitcoin came from, even if you can’t see the name of the individuals.

[00:15:26] So, for the purposes of money laundering, where the entire aim is to hide where the money came from, bitcoin and cryptocurrencies are not a great idea at all.

[00:15:37] As the old saying goes, cash is king. 

[00:15:41] Cash is beautifully anonymous. It has no history, it won’t tell you where it came from, it won’t tell you whose hands it passed through, for what goods and services, and when.

[00:15:52] And cash still makes up the vast majority of criminal payments.

[00:15:56] If cash is king, money laundering is its twin brother that takes a $20 bill exchanged on the street between a drug addict and a dealer, deposits in a friendly bank somewhere in the United States, then it flows to Panama, then to the Cayman Islands, then to Malta, back to the Cayman Islands, probably a few more times around the globe, getting cleaner and more anonymous with every stop, until it finally spins out of the global financial laundromat to be deposited at well-known global bank, and spent in the fashionable nightclubs of New York, London, or Paris.

[00:16:33] Clean as a whistle.

[00:16:37] Ok then, that is it for the murky world of money laundering.

[00:16:42] I hope it's been an interesting one, and that you've learnt something new about this deep, dark underworld of white collar crime.

[00:16:50] There are evidently loads of different ways that criminals launder money, and we’ve only touched on a few of them, but I hope it’s given you an idea of some of the ways in which it works.

[00:17:03] As always, I would love to know what you thought of this episode. You can head right in to our community forum, which is at community.leonardoenglish.com and get chatting away to other curious minds.

[00:17:15] I Imagine you don't have that much personal experience with money laundering but nevertheless, I can't wait to hear what you have to say.

[00:17:23] You've been listening to English Learning for Curious Minds, by Leonardo English.

[00:17:27] I'm Alastair Budge, you stay safe, and I'll catch you in the next episode.

[END OF PODCAST]


Continue learning

Get immediate access to a more interesting way of improving your English
Become a member
Already a member? Login

[00:00:00] Hello, hello hello, and welcome to English Learning for Curious Minds, by Leonardo English. 

[00:00:11] The show where you can listen to fascinating stories, and learn weird and wonderful things about the world at the same time as improving your English.

[00:00:21] I'm Alastair Budge and today we are going to be talking about money laundering, the process that criminals go through to take illegal money and make it look like it’s legal.

[00:00:34] Just in case we need a disclaimer here, I should of course say that neither I nor Leonardo English endorses any of the activity that we’re going to describe here because, well, it's illegal and deeply damaging to society.

[00:00:48] But just because it’s criminal, it doesn’t mean we shouldn’t try to understand it, and indeed the dirty world of money laundering is pretty fascinating.

[00:01:00] So without further ado, let’s get started.

[00:01:04] I guess you’ve heard of money laundering, you’ve seen it in movies, you’ve read about cases of big banks getting hit with huge fines, but you might not know how it really works, and how vital it is to how the criminal underworld works. 

[00:01:21] Indeed, without money laundering, the incentives to commit crime would be greatly reduced, and the fact that money can relatively easily be washed through the financial system and actually used by criminals is a large incentive for people to commit crime. 

[00:01:39] If you couldn’t actually use the money you had made through crime, would you want to commit the crime in the first place? 

[00:01:46] Probably not.

[00:01:48] For anyone, not just modern-day criminals, hiding the origins of money is nothing new. 

[00:01:55] Pirates would try to hide the origins of their treasure. 

[00:01:59] Chinese merchants thousands of years ago would hide money through different companies in order to avoid the government seeing it, in order to avoid tax.

[00:02:10] But the term ‘money laundering’, and the concept is normally thought to have originated in the US in the 1920s. 

[00:02:20] Al Capone, the famous gangster, used a series of laundromats, shops with washing machines, to launder the proceeds of his criminal activities, to make his money seem legal.

[00:02:35] Back then, the idea was quite simple.

[00:02:38] Al Capone’s gang would make its real money through criminal means: illegal distribution of alcohol, gambling, prostitution, extortion, all sorts of things that were illegal at the time.

[00:02:51] These activities generated a lot of cash. They made a lot of money.

[00:02:56] Al Capone couldn’t just go to the bank with this cash, because even back then, a bank might ask where all this money had come from.

[00:03:05] So, Capone owned a series of laundromats, which would report much higher sales than they really had. 

[00:03:14] Essentially if they did $500 in ‘real’ sales that day, they would add another $500 to their accounts, so it looked like they had done $1000.

[00:03:25] Every day dirty money would be recorded by the laundromat as a sale, and by doing this every day, at the end of the month that laundromat would record a bumper profit, and it could be paid out to Capone and his gang. 

[00:03:40] If the authorities asked him to show where his money came from, he could say that he was the owner of a profitable chain of laundromats, and as the legal owner he was allowed to take the profits.

[00:03:53] Indeed, when Capone was finally caught, he wasn’t sent to prison for any of his hundreds of gangster crimes - financing murder, extortion and prostitution. 

[00:04:04] He was sent to prison for tax evasion.

[00:04:08] So the term ‘laundering’ is thought to have come from Al Capone, the first celebrity gangster to have taken dirty money and made it clean.

[00:04:18] This was almost 100 years ago now, and while how money laundering works has evolved and become more sophisticated, the general principle remains pretty similar.

[00:04:30] Criminal activity generates money, criminals make money from crime, and they need a way to take that money and be able to use it to buy stuff.

[00:04:40] Now, for small amounts, this isn’t such a problem. 

[00:04:44] Paying for something with $20, $50, or $100 in cash isn’t going to arouse much suspicion, people aren’t going to get suspicious if you pay $100 in cash.

[00:04:58] But when criminals start making more and more money, many fall into the trap of wanting to live an ever more luxurious lifestyle, and needing larger amounts of money to make bigger purchases.

[00:05:11] That car, that boat, that house, you need to be able to say where you got the money to pay for it, and that’s where money laundering comes in.

[00:05:21] It’s the process of taking dirty, criminal money and turning it into beautiful, clean, fresh currency that looks as if it has been earned through completely legal means.

[00:05:34] There are three steps to this: placement, layering, and integration.

[00:05:41] Placement is putting this money into the financial system. 

[00:05:46] Now, before this step the criminal money probably doesn’t exist anywhere in the legal financial system.

[00:05:54] If it’s cash, from drugs, prostitution, weapons sales, or whatever criminal activity it might be, this money exists outside the financial system. 

[00:06:05] Maybe it’s in suitcases in your wardrobe, maybe it’s hidden in barrels in the ground, it’s outside the system.

[00:06:13] You need to get it into the financial system.

[00:06:17] This can be done in different ways. Maybe it’s like Al Capone, and it’s a case of putting it into a business like a laundromat.

[00:06:26] The preferred types of businesses for money launderers are ones that use cash, and service-based ones. 

[00:06:34] Strip clubs, laundromats of course, hairdressers, and any business where it’s easy to just add some more money to it every day without too many questions being asked.

[00:06:46] And almost the ultimate business to use for this ‘placement’ stage is one where you can immediately swap your money for something that is as good as money. 

[00:06:56] A casino.

[00:06:58] Casinos are a money launderer’s best friend. 

[00:07:02] You can go in there with a bag of dirty cash, exchange it for chips, go out and do a bit of gambling if you like, then exchange the chips back for legal cash a few hours later. 

[00:07:15] You’ll even get a piece of paper from the casino saying that this money is ‘gambling winnings’ and Bob’s your uncle, you can suddenly explain to the government where you got all that money. You can even put it into a bank, and if anyone asks any questions, you have the proof that you won it in a casino.

[00:07:36] There’s a video from a Canadian casino of a Chinese customer coming in with a hockey bag full of Canadian dollars and exchanging it all for casino chips

[00:07:48] He comes in and passes this bag to the cashier, who puts it through the money counting machine, and it takes a whole ten minutes to count all the cash.

[00:08:00] It’s pretty mad to watch.

[00:08:03] So, that’s the first stage, get the illegal money into the money system in the first place.

[00:08:09] It’s the most dangerous part of the process, because it’s the part where it’s hardest to explain where the money originally came from. 

[00:08:18] “A friend gave it to me” doesn’t quite work when you’re talking about hundreds of thousands of dollars.

[00:08:24] Our second stage is what’s called ‘Layering’.

[00:08:29] This stage has become much more important in recent years, as anti-money laundering authorities have got smarter and smarter. 

[00:08:38] What happens during this ‘layering’ phase is that the money is moved around and around, as anonymously as possible to try and hide where it came from in the first place.

[00:08:50] This can be achieved in all sorts of ways, but as a general rule, the more anonymous the money trail is, the better.

[00:08:59] This means that money is often moved through countries with pretty loose regulations, often small islands - places like the Caymans, Panama, but also countries in the EU like Malta or Cyprus. 

[00:09:15] The money is moved through shell companies, companies that only exist on paper and whose owners are hidden, and it’s moved from company to company all across the world so that it’s almost impossible to trace where it actually came from.

[00:09:33] If you’ve listened to the episode on 1MDB and the missing Malaysian billions, the money from this huge fraud was laundered in exactly this way.

[00:09:44] But it’s not just small banks in tax havens that enable this. In recent years there have been dozens of scandals about some of the biggest banks in the world enabling money laundering, either actively or passively.

[00:10:00] From UBS to HSBC, Barclays to Goldman Sachs, huge American, Swiss, and British banks in countries that you might not necessarily associate with money laundering have all been accused of helping criminals and in most cases, have paid large fines for doing so.

[00:10:21] So that is ‘layering’, the second step in the process, moving the money around so much that it’s hard for anyone to see where it actually came from.

[00:10:31] Our final step is the bit that the money launderer has been waiting for, the payday, and it’s called ‘Integration’.

[00:10:40] Now that the money is ‘clean’, that it is so far removed from its dirty origins, it can be returned to its owner, and put back into the financial system in the form of assets.

[00:10:54] Whether that’s a house, a business, or some other financial investment, now that the criminal is able to buy that asset with ‘clean’ money there is not much that the government can do about it. 

[00:11:08] Pablo Escobar was famously just the owner of a taxi company, but one that generated hundreds of millions of dollars. 

[00:11:17] Walter White, if you have seen the series Breaking Bad, ran a very profitable car wash.

[00:11:23] And if the money laundering has been done correctly, then it’s very hard for the police to actually prove anything.

[00:11:32] But if there is one thing that seems to be a recurrent theme with criminals, is that they get greedy

[00:11:40] If they got away with transferring an extra $500 a day into a business, then why not try to transfer $1000, then $2000, and so on. 

[00:11:50] If they got away with claiming that a small hairdresser made $500,000 in profit one year, why not try to claim it made $800,000 the next year.

[00:12:01] And eventually the money laundering police do cotton on, they suspect that there’s something fishy going on, they start to look more closely at every single transaction, suddenly the suspected criminal is being watched like a hawk, and then they end up in prison.

[00:12:19] The reality is though that most money laundering is never caught.

[00:12:24] It’s thought that money laundering accounts for up to 5% of global GDP, so that’s between $800 billion and $2 trillion dollars.

[00:12:36] Because we don’t actually know how much it is, or where it comes from, it’s difficult to figure out exactly what activities make up this money, but it’s thought that most of it comes from drug cartels, terrorist syndicates, and the ultra-rich, the 0.01%.

[00:12:55] And while money laundering is often considered a ‘white collar’ crime, a non-violent crime that doesn’t really hurt anyone because all it’s doing is moving money around from place to place and in some cases avoiding tax, money laundering is really the grease that enables the criminal wheels to turn.

[00:13:15] Without a way of being able to actually get the money at the end of it, the incentive for criminal activity would be greatly reduced, and so one must assume, if you can clamp down on the parties that enable money laundering, then this can have as great if not greater impact as cracking down on the people on the other side of the criminal activity, whether it’s the ones trafficking drugs onto the streets of Europe or buying AK47s to engage in terrorist activities.

[00:13:47] Of course, the authorities throughout the world are, to varying degrees, trying to do everything they can to crack down on money laundering, but as things like the Panama Papers have shown, it is really hard.

[00:14:01] The global financial system is structured so that it’s very easy, no matter how dirty the origins of the money, to put it into the financial system and quickly move it all over the world so that it becomes invisible and can be taken out clean and fresh somewhere else.

[00:14:20] When cryptocurrencies first became ‘mainstream’, or at least semi-understood and you started hearing about them on the news, one of the common complaints waged at them was that they were making life easier for criminals to move money around. 

[00:14:38] A criminal could turn their dirty drug money into bitcoin, buy a gun on the dark web with that bitcoin, and this was all completely anonymous

[00:14:48] This was the fear at least. 

[00:14:50] It’s partly true, in that a bitcoin wallet doesn’t have your name and house address on it, but the impact of bitcoin and cryptocurrencies on the world of money laundering has been minimal, it’s been absolutely tiny.

[00:15:06] Indeed, using cryptocurrency to launder money is a pretty dumb idea because bitcoin transactions leave a permanent record that is impossible to get rid of, so you can always see where a bitcoin came from, even if you can’t see the name of the individuals.

[00:15:26] So, for the purposes of money laundering, where the entire aim is to hide where the money came from, bitcoin and cryptocurrencies are not a great idea at all.

[00:15:37] As the old saying goes, cash is king. 

[00:15:41] Cash is beautifully anonymous. It has no history, it won’t tell you where it came from, it won’t tell you whose hands it passed through, for what goods and services, and when.

[00:15:52] And cash still makes up the vast majority of criminal payments.

[00:15:56] If cash is king, money laundering is its twin brother that takes a $20 bill exchanged on the street between a drug addict and a dealer, deposits in a friendly bank somewhere in the United States, then it flows to Panama, then to the Cayman Islands, then to Malta, back to the Cayman Islands, probably a few more times around the globe, getting cleaner and more anonymous with every stop, until it finally spins out of the global financial laundromat to be deposited at well-known global bank, and spent in the fashionable nightclubs of New York, London, or Paris.

[00:16:33] Clean as a whistle.

[00:16:37] Ok then, that is it for the murky world of money laundering.

[00:16:42] I hope it's been an interesting one, and that you've learnt something new about this deep, dark underworld of white collar crime.

[00:16:50] There are evidently loads of different ways that criminals launder money, and we’ve only touched on a few of them, but I hope it’s given you an idea of some of the ways in which it works.

[00:17:03] As always, I would love to know what you thought of this episode. You can head right in to our community forum, which is at community.leonardoenglish.com and get chatting away to other curious minds.

[00:17:15] I Imagine you don't have that much personal experience with money laundering but nevertheless, I can't wait to hear what you have to say.

[00:17:23] You've been listening to English Learning for Curious Minds, by Leonardo English.

[00:17:27] I'm Alastair Budge, you stay safe, and I'll catch you in the next episode.

[END OF PODCAST]


[00:00:00] Hello, hello hello, and welcome to English Learning for Curious Minds, by Leonardo English. 

[00:00:11] The show where you can listen to fascinating stories, and learn weird and wonderful things about the world at the same time as improving your English.

[00:00:21] I'm Alastair Budge and today we are going to be talking about money laundering, the process that criminals go through to take illegal money and make it look like it’s legal.

[00:00:34] Just in case we need a disclaimer here, I should of course say that neither I nor Leonardo English endorses any of the activity that we’re going to describe here because, well, it's illegal and deeply damaging to society.

[00:00:48] But just because it’s criminal, it doesn’t mean we shouldn’t try to understand it, and indeed the dirty world of money laundering is pretty fascinating.

[00:01:00] So without further ado, let’s get started.

[00:01:04] I guess you’ve heard of money laundering, you’ve seen it in movies, you’ve read about cases of big banks getting hit with huge fines, but you might not know how it really works, and how vital it is to how the criminal underworld works. 

[00:01:21] Indeed, without money laundering, the incentives to commit crime would be greatly reduced, and the fact that money can relatively easily be washed through the financial system and actually used by criminals is a large incentive for people to commit crime. 

[00:01:39] If you couldn’t actually use the money you had made through crime, would you want to commit the crime in the first place? 

[00:01:46] Probably not.

[00:01:48] For anyone, not just modern-day criminals, hiding the origins of money is nothing new. 

[00:01:55] Pirates would try to hide the origins of their treasure. 

[00:01:59] Chinese merchants thousands of years ago would hide money through different companies in order to avoid the government seeing it, in order to avoid tax.

[00:02:10] But the term ‘money laundering’, and the concept is normally thought to have originated in the US in the 1920s. 

[00:02:20] Al Capone, the famous gangster, used a series of laundromats, shops with washing machines, to launder the proceeds of his criminal activities, to make his money seem legal.

[00:02:35] Back then, the idea was quite simple.

[00:02:38] Al Capone’s gang would make its real money through criminal means: illegal distribution of alcohol, gambling, prostitution, extortion, all sorts of things that were illegal at the time.

[00:02:51] These activities generated a lot of cash. They made a lot of money.

[00:02:56] Al Capone couldn’t just go to the bank with this cash, because even back then, a bank might ask where all this money had come from.

[00:03:05] So, Capone owned a series of laundromats, which would report much higher sales than they really had. 

[00:03:14] Essentially if they did $500 in ‘real’ sales that day, they would add another $500 to their accounts, so it looked like they had done $1000.

[00:03:25] Every day dirty money would be recorded by the laundromat as a sale, and by doing this every day, at the end of the month that laundromat would record a bumper profit, and it could be paid out to Capone and his gang. 

[00:03:40] If the authorities asked him to show where his money came from, he could say that he was the owner of a profitable chain of laundromats, and as the legal owner he was allowed to take the profits.

[00:03:53] Indeed, when Capone was finally caught, he wasn’t sent to prison for any of his hundreds of gangster crimes - financing murder, extortion and prostitution. 

[00:04:04] He was sent to prison for tax evasion.

[00:04:08] So the term ‘laundering’ is thought to have come from Al Capone, the first celebrity gangster to have taken dirty money and made it clean.

[00:04:18] This was almost 100 years ago now, and while how money laundering works has evolved and become more sophisticated, the general principle remains pretty similar.

[00:04:30] Criminal activity generates money, criminals make money from crime, and they need a way to take that money and be able to use it to buy stuff.

[00:04:40] Now, for small amounts, this isn’t such a problem. 

[00:04:44] Paying for something with $20, $50, or $100 in cash isn’t going to arouse much suspicion, people aren’t going to get suspicious if you pay $100 in cash.

[00:04:58] But when criminals start making more and more money, many fall into the trap of wanting to live an ever more luxurious lifestyle, and needing larger amounts of money to make bigger purchases.

[00:05:11] That car, that boat, that house, you need to be able to say where you got the money to pay for it, and that’s where money laundering comes in.

[00:05:21] It’s the process of taking dirty, criminal money and turning it into beautiful, clean, fresh currency that looks as if it has been earned through completely legal means.

[00:05:34] There are three steps to this: placement, layering, and integration.

[00:05:41] Placement is putting this money into the financial system. 

[00:05:46] Now, before this step the criminal money probably doesn’t exist anywhere in the legal financial system.

[00:05:54] If it’s cash, from drugs, prostitution, weapons sales, or whatever criminal activity it might be, this money exists outside the financial system. 

[00:06:05] Maybe it’s in suitcases in your wardrobe, maybe it’s hidden in barrels in the ground, it’s outside the system.

[00:06:13] You need to get it into the financial system.

[00:06:17] This can be done in different ways. Maybe it’s like Al Capone, and it’s a case of putting it into a business like a laundromat.

[00:06:26] The preferred types of businesses for money launderers are ones that use cash, and service-based ones. 

[00:06:34] Strip clubs, laundromats of course, hairdressers, and any business where it’s easy to just add some more money to it every day without too many questions being asked.

[00:06:46] And almost the ultimate business to use for this ‘placement’ stage is one where you can immediately swap your money for something that is as good as money. 

[00:06:56] A casino.

[00:06:58] Casinos are a money launderer’s best friend. 

[00:07:02] You can go in there with a bag of dirty cash, exchange it for chips, go out and do a bit of gambling if you like, then exchange the chips back for legal cash a few hours later. 

[00:07:15] You’ll even get a piece of paper from the casino saying that this money is ‘gambling winnings’ and Bob’s your uncle, you can suddenly explain to the government where you got all that money. You can even put it into a bank, and if anyone asks any questions, you have the proof that you won it in a casino.

[00:07:36] There’s a video from a Canadian casino of a Chinese customer coming in with a hockey bag full of Canadian dollars and exchanging it all for casino chips

[00:07:48] He comes in and passes this bag to the cashier, who puts it through the money counting machine, and it takes a whole ten minutes to count all the cash.

[00:08:00] It’s pretty mad to watch.

[00:08:03] So, that’s the first stage, get the illegal money into the money system in the first place.

[00:08:09] It’s the most dangerous part of the process, because it’s the part where it’s hardest to explain where the money originally came from. 

[00:08:18] “A friend gave it to me” doesn’t quite work when you’re talking about hundreds of thousands of dollars.

[00:08:24] Our second stage is what’s called ‘Layering’.

[00:08:29] This stage has become much more important in recent years, as anti-money laundering authorities have got smarter and smarter. 

[00:08:38] What happens during this ‘layering’ phase is that the money is moved around and around, as anonymously as possible to try and hide where it came from in the first place.

[00:08:50] This can be achieved in all sorts of ways, but as a general rule, the more anonymous the money trail is, the better.

[00:08:59] This means that money is often moved through countries with pretty loose regulations, often small islands - places like the Caymans, Panama, but also countries in the EU like Malta or Cyprus. 

[00:09:15] The money is moved through shell companies, companies that only exist on paper and whose owners are hidden, and it’s moved from company to company all across the world so that it’s almost impossible to trace where it actually came from.

[00:09:33] If you’ve listened to the episode on 1MDB and the missing Malaysian billions, the money from this huge fraud was laundered in exactly this way.

[00:09:44] But it’s not just small banks in tax havens that enable this. In recent years there have been dozens of scandals about some of the biggest banks in the world enabling money laundering, either actively or passively.

[00:10:00] From UBS to HSBC, Barclays to Goldman Sachs, huge American, Swiss, and British banks in countries that you might not necessarily associate with money laundering have all been accused of helping criminals and in most cases, have paid large fines for doing so.

[00:10:21] So that is ‘layering’, the second step in the process, moving the money around so much that it’s hard for anyone to see where it actually came from.

[00:10:31] Our final step is the bit that the money launderer has been waiting for, the payday, and it’s called ‘Integration’.

[00:10:40] Now that the money is ‘clean’, that it is so far removed from its dirty origins, it can be returned to its owner, and put back into the financial system in the form of assets.

[00:10:54] Whether that’s a house, a business, or some other financial investment, now that the criminal is able to buy that asset with ‘clean’ money there is not much that the government can do about it. 

[00:11:08] Pablo Escobar was famously just the owner of a taxi company, but one that generated hundreds of millions of dollars. 

[00:11:17] Walter White, if you have seen the series Breaking Bad, ran a very profitable car wash.

[00:11:23] And if the money laundering has been done correctly, then it’s very hard for the police to actually prove anything.

[00:11:32] But if there is one thing that seems to be a recurrent theme with criminals, is that they get greedy

[00:11:40] If they got away with transferring an extra $500 a day into a business, then why not try to transfer $1000, then $2000, and so on. 

[00:11:50] If they got away with claiming that a small hairdresser made $500,000 in profit one year, why not try to claim it made $800,000 the next year.

[00:12:01] And eventually the money laundering police do cotton on, they suspect that there’s something fishy going on, they start to look more closely at every single transaction, suddenly the suspected criminal is being watched like a hawk, and then they end up in prison.

[00:12:19] The reality is though that most money laundering is never caught.

[00:12:24] It’s thought that money laundering accounts for up to 5% of global GDP, so that’s between $800 billion and $2 trillion dollars.

[00:12:36] Because we don’t actually know how much it is, or where it comes from, it’s difficult to figure out exactly what activities make up this money, but it’s thought that most of it comes from drug cartels, terrorist syndicates, and the ultra-rich, the 0.01%.

[00:12:55] And while money laundering is often considered a ‘white collar’ crime, a non-violent crime that doesn’t really hurt anyone because all it’s doing is moving money around from place to place and in some cases avoiding tax, money laundering is really the grease that enables the criminal wheels to turn.

[00:13:15] Without a way of being able to actually get the money at the end of it, the incentive for criminal activity would be greatly reduced, and so one must assume, if you can clamp down on the parties that enable money laundering, then this can have as great if not greater impact as cracking down on the people on the other side of the criminal activity, whether it’s the ones trafficking drugs onto the streets of Europe or buying AK47s to engage in terrorist activities.

[00:13:47] Of course, the authorities throughout the world are, to varying degrees, trying to do everything they can to crack down on money laundering, but as things like the Panama Papers have shown, it is really hard.

[00:14:01] The global financial system is structured so that it’s very easy, no matter how dirty the origins of the money, to put it into the financial system and quickly move it all over the world so that it becomes invisible and can be taken out clean and fresh somewhere else.

[00:14:20] When cryptocurrencies first became ‘mainstream’, or at least semi-understood and you started hearing about them on the news, one of the common complaints waged at them was that they were making life easier for criminals to move money around. 

[00:14:38] A criminal could turn their dirty drug money into bitcoin, buy a gun on the dark web with that bitcoin, and this was all completely anonymous

[00:14:48] This was the fear at least. 

[00:14:50] It’s partly true, in that a bitcoin wallet doesn’t have your name and house address on it, but the impact of bitcoin and cryptocurrencies on the world of money laundering has been minimal, it’s been absolutely tiny.

[00:15:06] Indeed, using cryptocurrency to launder money is a pretty dumb idea because bitcoin transactions leave a permanent record that is impossible to get rid of, so you can always see where a bitcoin came from, even if you can’t see the name of the individuals.

[00:15:26] So, for the purposes of money laundering, where the entire aim is to hide where the money came from, bitcoin and cryptocurrencies are not a great idea at all.

[00:15:37] As the old saying goes, cash is king. 

[00:15:41] Cash is beautifully anonymous. It has no history, it won’t tell you where it came from, it won’t tell you whose hands it passed through, for what goods and services, and when.

[00:15:52] And cash still makes up the vast majority of criminal payments.

[00:15:56] If cash is king, money laundering is its twin brother that takes a $20 bill exchanged on the street between a drug addict and a dealer, deposits in a friendly bank somewhere in the United States, then it flows to Panama, then to the Cayman Islands, then to Malta, back to the Cayman Islands, probably a few more times around the globe, getting cleaner and more anonymous with every stop, until it finally spins out of the global financial laundromat to be deposited at well-known global bank, and spent in the fashionable nightclubs of New York, London, or Paris.

[00:16:33] Clean as a whistle.

[00:16:37] Ok then, that is it for the murky world of money laundering.

[00:16:42] I hope it's been an interesting one, and that you've learnt something new about this deep, dark underworld of white collar crime.

[00:16:50] There are evidently loads of different ways that criminals launder money, and we’ve only touched on a few of them, but I hope it’s given you an idea of some of the ways in which it works.

[00:17:03] As always, I would love to know what you thought of this episode. You can head right in to our community forum, which is at community.leonardoenglish.com and get chatting away to other curious minds.

[00:17:15] I Imagine you don't have that much personal experience with money laundering but nevertheless, I can't wait to hear what you have to say.

[00:17:23] You've been listening to English Learning for Curious Minds, by Leonardo English.

[00:17:27] I'm Alastair Budge, you stay safe, and I'll catch you in the next episode.

[END OF PODCAST]