According to the National Institute of Justice (1992), money generated by organized crime and other profit-motivated crime in the United States is estimated at $300 billion annually. Syndicates earn huge profits on the illegal goods and services they sell to the public, as well as through their relations with the business world. Much of these profits are in the form of cash, and virtually all of it must be converted to legitimate forms before it can be invested or spent. The process of turning illicit profit into legitimate investment capital is called money laundering. Drug traffickers and other racketeers who accumulate large cash inventories face serious risks of confiscation and punishment if considerable, unexplained hoards of cash are discovered. In order for these criminals to enjoy the fruits of their illegal enterprises, they must first convert those cash proceeds to a medium that is both easier than cash to use in everyday commerce and that avoids pointing, even indirectly, to the illegal activity that produced it.
Money laundering conceals the source of the illegal money and gives that money a legitimate history and paper trail. The President's Commission on Organized Crime (1984: 13) estimated that about $50 to $75 billion in illegal drug profits are laundered in the United States each year. The commission further asserted that between $5 and $15 billion of those drug profits are laundered through international financial channels.
Concealment is the foremost objective of the money launderer - hiding the criminal source, true ownership, and future destination of the illegal funds. A second objective of the launderer is anonymity.
Several of the largest and most respected financial and investment institutions in the United States have been implicated in money laundering schemes involving organized crime. For example, in the Pizza Connection heroin smuggling investigation, it was revealed that both Merill Lynch and E. F. Hutton, two of the largest brokerage houses in the United States, had laundered almost $20 million for the heroin traffickers. William Chambliss comments:
In the 1980s, many of the major banks of the United States were found guilty of criminally transferring funds to overseas banks. Many of these funds were the profits of organized crime. The banks indicted included leading banks in New York, Chicago, Boston, and Philadelphia. In June of 1986, to cite just one example, the brokerage house of Shearson and Lehman Brothers, Inc., the former manager of its Philadelphia office, and six other men - including the son-in-law of former chief of police and Mayor Frank Rizzo - were charged with conspiracy in the operation of an illegal sports-gambling enterprise and the laundering of $1.2 million for an organized-crime gambling syndicate. Other banks and brokerage houses were indicted in 1986 for laundering money from organized crime syndicates (Chambliss, 1988: 315).
The steps in a money laundering scheme are directly related to the distance that criminals wish to place between the illegally earned cash and the laundered assets into which that cash is converted. As a rule, the most basic factor in a laundering scheme is the conversion of cash into another asset - typically another payment medium, so the cash can be more easily concealed and be spent more freely.
The many different techniques for laundering illicit proceeds are limited only by imagination and cunning. An entire "wash" cycle may take as little as 48 hours to transform small denominations of currency to legitimate businesses, money market deposits, or real estate. The method used by any given launderer will no doubt reflect his or her unique situation and circumstances, but most often it is dependent on three factors:
1. the particular laundering situation, e.g., the source and amount of cash to be laundered, time pressures of the launderer, and plans for future use of the laundered money.
2. the sophistication of a launderer's techniques.
3. a launderer's access to the types of resources or mechanisms (or both) required for each money laundering method.
The following six money laundering techniques illustrate the ingenuity of organized crime operators in hiding millions (and even billions) of dollars of illicitly gained revenues:
Conversion techniques. The most common method for laundering money is one called "conversion techniques." In this basic technique, the launderer takes cash to a bank and conducts a number of transactions which usually involve trading currency of small denominations for larger ones. This is done for obvious portability purposes. It is also common for cash to be exchanged for treasury bills, bank drafts, letters of credit, travelers checks, or other monetary instruments.
Smurfing. In this technique, several individuals or "smurfs" are provided with cash from illegal rackets. Each smurf goes to different banks and purchases cashiers checks in denominations of less than $10,000, thus bypassing the reporting requirement. The smurfs then turn the checks over to a second individual, who facilitates their subsequent deposit into domestic banks or physically transports them to banks in Panama, Colombia, or the Bahamas. In some instances, the monetary instruments are pre-marked "for deposit only," making them nonnegotiable to the courier. In transporting monetary instruments such as described above, the trafficker also circumvents yet another requirement of the Bank Secrecy Act: reporting the international transportation of currency in amounts of $10,000 or more.
Currency Exchanges. Members of organized crime organizations may also use money exchanges or brokerage houses for facilitating the movement of their money. Foreign currency exchanges are frequently set up as store fronts that regularly deal in large cash transactions. In using the exchange, the launderer can avoid using traditional banking institutions and, therefore, avoid risky reporting requirements. Banks typically deal with exchange companies and customarily won't question large transactions from these businesses. The currency exchange business can also move money in other ways for the crime syndicate member. In particular, money sent to other jurisdictions in payment for foreign drug shipments is common. Using a "dummy" corporation, a organized crime player will sometimes contact his lawyer and request that he accept a huge deposit into the lawyer's foreign account. The lawyer will then wire the money directly into the dummy account where it remains undetected.The currency exchange specialist operates both formal and informal businesses which may be tailored to service a specific clientele. The most formalized exchanges, casas de cambino, exchange dollars for pesos. Typically exchanges are legitimate foreign currency exchange houses that are used by criminals who seek quasi-banking services.
Double Invoicing is yet another popular method of hiding illicit financial gains. In this technique, a company orders merchandise from a foreign subsidiary at an inflated price. The difference between the inflated price and the actual price is deposited by the subsidiary in a special off-shore account. Occasionally, the same technique in reverse is also employed. The company sells merchandise at an artificially low price, and the difference between the two prices is deposited in a secret foreign bank account maintained by the company.
Acquiring Legitimate Business Assets. Criminals who acquire assets which are legitimate businesses (such as real estate investments) realize that they can make their illicit money appear to have been made legally. This is one of the oldest forms of money laundering. Doing so has several distinct advantages: 1) It offers criminals a legitimate source of employment in the community and helps cultivate a respectable public image; 2) acquired legitimate businesses also provide the criminal with a reportable income for tax purposes - especially those businesses dealing with considerable cash sales and transactions which makes business audits difficult; 3) they also offer a base of operation and a planning site for a number of ancillary criminal activities such as fencing stolen goods.
Acquiring Financial Institutions. This sixth money laundering method is possibly the most difficult of all to detect and simply involves acquiring a domestic or international financial institution. By controlling an entire institution, organized crime operators can go far beyond the immediate aim of concealing illicit earnings. They effectively take over part of the local banking system and divert it to their own needs. Such operations, which are apparent in South Florida and Southern California, enable criminals to manipulate correspondent banking relations, make overnight deposits, arrange Eurodollar loans, and manipulate the so-called abuse list (those customers exempted from cash reporting requirements).