NEW YORK — Operating a laundry is a federal crime if money is what is being washed. "Laundering" money means intentionally creating a string of transactions that make it difficult for law-enforcement agencies to trace the original source of funds.
In the days when wealth traveled in the form of coin, the equivalent of today's money laundering was a messier, if simpler, affair. English pirates just melted their plundered gold and silver coins and transformed them into untraceable ingots. But money now travels primarily via computerized transactions between bank accounts. The laws in most Western countries require banks to maintain minimum information on their depositors and borrowers and cooperate with law-enforcement authorities attempting to trace illegal transactions.
Nine current and former officials of Bank of Credit and Commerce International (BCCI) were recently arrested and indicted for laundering Colombian drug money, after a long undercover investigation involving authorities in at least two other countries. BCCI is a Luxembourg bank with branches around the world, owned mostly by Arabs and operated mostly by Pakistanis. Up to 80 additional indictments have been issued by a Florida federal grand jury in the case.
The incident is a fascinating one, including the manner of the initial arrests. Eleven suspects received engraved wedding announcements from U.S. Customs officials, inviting them to share in "beginning a new life together," and were arrested as they showed up for what they thought was a prenuptial bachelor party.
This is also the first time an institution was indicted in a money-laundering case. Most such schemes are carried out by buying the cooperation of lower-level employees. The implication of the BCCI indictments is that senior management actively cooperated in developing convenient and untraceable conduits for the profits of the cocaine trade--not in exchange for bribes, but to build up the deposit base of the bank. If convicted, the bank faces more than $100 million in fines.
There is nothing complicated about money laundering. The trick is merely to create enough transactions, under enough different names, to obscure the trail back to the original source. Not very many transactions are required, because tracing a single flow of cash to the international bank payment system is like chasing a single sardine through a huge school of fish in the open ocean.
Most banks transfer funds to one another through their international correspondence banks, the small number of large international money-center banks like Citibank and Bank of America. If Bank Y wants to send $100 to Bank Z in another country, it will deposit the $100 in its checking account with the international megabank, where Bank Z will also maintain an account. Megabank will simply move the $100 from one account to the other, as instructed, and the transaction is complete. Megabank doesn't make a separate transfer for each transaction, of course, but simply adds up all the debits and credits for all of its correspondence at the end of each day and transfers the net balances. Hundreds of billions of dollars flow through the big money center banks every day. To complicate matters, most transactions will flow through one or more intermediate banks, each with its own netting and settlement procedure, before reaching the ultimate recipient. Some sketchy information on individual transactions is retained in bank computer systems but not much. The details are stored on microfilm or in paper files. The Federal Reserve has recently required banks to report all international transactions in excess of $10,000, but that narrows the search only slightly.
In the BCCI case, the money trail was made even more tortuous by using the system of interlocking deposits and loans. In its simplest form, a front company would buy a certificate of deposit with $100 of drug money at a BCCI branch in, say, Panama. At the same time, a BCCI branch in France would make a $100 loan to another front company. At a stroke, the drug lords had managed to transfer their $100 from Panama to France and convert it back into cash. All that was required to square everyone's books was to pay off the front company's French loan by shipping the funds in the Panama CD to the branch in France--through a whole series of intermediary banks, of course. It is hardly surprising that, to break the case, investigators had to pose as drug dealers with millions in cash so that they could watch the bank's operations firsthand.