Money Laundering 101

SEC Whistleblower Program , Tax Fraud

One of the drawbacks of earning or spending money illicitly is that it is hard to use this money for legitimate purposes, except in small amounts. If I make a small amount of cash from selling drugs, I can spend this cash fairly freely. I can probably even deposit small amounts of it into my bank account without raising any red flags. If I make tens of thousands of dollars in cash from selling drugs, I can’t simply bring it to the bank, nor can I use it to buy a new car at the local dealership. Large cash transactions raise all sorts of red flags among legitimate businesses and banks. Once law enforcement or the IRS get interested in the source of your windfall of cash, they will ultimately want to see a paper trail explaining where the money originated from.

The same goes for digital transactions- large unexplained wire transfers from international accounts will have mandatory reporting requirements and more than a few questions. Spending large amounts of money is just as difficult- withdrawing huge sums of cash and spending it without a paper trail is risky business, and it had better be accounted for properly if the regulatory authorities take an interest. If you want to give someone a massive bribe, you’ll need to report the expense as something, otherwise the books won’t be balanced. Thus, those with large amounts of money from illicit activities- whether its drug dealing, tax fraud, bribery, whatever- inevitably find themselves with the age-old problem of how to launder the money, turning “dirty” money into “clean” money.

Money can be transferred as a currency (hard cash), a tangible good (diamonds, gold, a car), or an electronic transfer. In decades past, before electronic transfers became accessible to everyone, the preferred method of money laundering was with cash or tangible assets. Most of us have probably seen the movie Casino or are at least familiar with the scam- an organized crime family uses a casino to launder money. Casinos take in huge amounts of cash- let’s say $5 million a day in cash, which they report, then take to the bank. Now a Mafioso starts coming in every day with suitcases of cash, to the tune of $1 million a day. The casino simply pretends that the full $6 million is legitimate proceeds from gamblers, and so long as they are smart about it the casino is now turning $1 million a day of dirty mob money into clean money held by the casino, who can then find ways to distribute the clean money back to the mob. On the recent TV drama Breaking Bad, the methamphetamine manufacturing protagonists used a nail salon and later a car wash to turn dirty cash from drug sales into clean money. These are tried-and-true methods of laundering money for those in the cash-only drug trade (and other black market goods and services).

Corporations seeking to launder money have a totally different set of problems, and therefore very different methods. Nearly all business-to-business transactions are done electronically, moving digital currency from one bank account to another. This creates a permanent record of the transaction, and so the transaction must appear to have a legitimate business purpose. Furthermore, a business needs to account for every dollar earned and spent in their books- a $10,000 bribe can’t simply disappear from the books, it needs to be recorded as something seemingly legitimate and then the cash is used to pay the bribe. The company can account for the expenditure as payment to conspiring individuals or subsidiaries for services that were never done, or services that are vastly overbilled.

If I want to give a $10k bribe to a foreign official, I might hire the services of a local attorney, accountant, or “consultant”, and pay him $11k. He gives $10k to the official and keeps $1k for himself as a fee. Meanwhile, according to my books, I’ve paid $11k for his consulting/legal/professional fees, which certainly looks reasonable on paper. The $11k was supposed to be for 50 billable hours and I only met him for 30 minutes to set up the scheme. Unless the consultant gets caught giving the bribe and blows the whistle on me, or investigators can prove that he never provided any actual service (more likely with huge amounts of money), I’m in the clear. Overpayment for services is a very popular method of money laundering for good reason- it takes a very keen eye to notice, and is even more difficult to prove.

Laundering money is an integral part of many illicit financial activities, especially bribery. The Foreign Corrupt Practices Act (FCPA), passed by Congress in 1977, prohibits US companies or foreign companies doing business in the US from bribing foreign officials. Because writing “BRIBE” on your expense reports is rather obvious, the bribe money usually must be laundered in some form. Usually this means turning clean money into dirty money with creative accounting, often in a foreign country where large cash withdrawals can be done no-questions-asked. Because corporate money laundering is usually an exercise in hiding in plain sight, discovering laundering schemes usually occurs when investigators know a bribe has been paid and are now scouring a company’s books for irregularities, or when trained auditors and compliance officials carefully review the accounting for foreign transactions, OR when an insider takes the initiative to become a whistleblower and comes forward to explain the scheme.

Oftentimes, whistleblowers know the bribery is happening, but not how the money is being laundered- some corporations are quite open and brazen about their bribery practices, judging from some of the more damning documents to come out of FCPA settlements. Or the whistleblower might know nothing about the bribes, but notice irregularities that are telltale signs of money laundering. In recent years, more FCPA cases are being brought forward by whistleblowers, in part because the 2010 Dodd-Frank Act strengthened the FCPA, giving stronger protections to whistleblowers as well as a powerful financial incentive- whistleblowers who bring information to the authorities that results in a settlement are eligible to receive 10-30% of the settlement amount. With settlements running into the tens or hundreds of millions of dollars, whistleblowers can reap large financial rewards while also taking a stand against corrupt practices by multinational corporations across the globe.

Whistleblower Justice Network Can Help You

Whistleblower Justice Network partners with whistleblowers in countries across the globe. Utilizing whistleblower programs, including the IRS Whistleblower Program, the SEC Whistleblower Program, and the False Claims Act, Whistleblower Justice Network is expert in all aspects of the Foreign Corrupt Practices Act and the many ways it is violated by multinational companies.

If you have meaningful information regarding money laundering or international bribery, Whistleblower Justice Network can help. Working alongside world-class legal counsel, we will ensure you are protected to the fullest extent of the law and that you receive credit for the information you bring to the U.S. government. Partnering with whistleblowers is all we do. Visit us at www.whistleblowerjustice.net, or call us at 844-WJN-4ALL, to learn if we can help you.