The history of money laundering

The term money laundering first appeared about 100 years ago. But that does not mean that people did not engage in this activity in the past? So, what term should we be looking at?

The answer is related to the issue of tax avoidance/evasion or non-compliance, which refers to activities that are unfavourable to a government’s tax system.

People have considered refusing to pay taxes unfair since the first rulers began imposing them. Stories dating back to 2000 BC in ancient China describe merchants hiding their wealth to pay lower taxes. Throughout history, resentment of taxation has also prompted many rebellions and revolutions, such as the American Revolution, where tax evasion played a significant role. In short, we humans do not like to pay taxes, especially when we have to pay more than we already do. These episodes can be qualified as the beginning of the history of money laundering.

But let’s take a look at some of the notable events in the last 100 years of money laundering history and the key figures behind them.

1930s: The Prohibition Era

It is worth talking about the Prohibition era when we begin to analyse the history of money laundering. This term refers to the period from 1920 to 1933 when the United States banned the production, importation, transportation and sale of alcoholic beverages. Americans who wanted to continue drinking found loopholes in the prohibition laws or used illegal methods to obtain alcohol.

This moment in history shows that black markets emerged after such prohibitions. As well as crime syndicates dedicated to the distribution of alcohol. One of the key figures of this era was the notorious gangster Al Capone.

Authorities eventually charged him with tax evasion. Some sources suggest that Al Capone invented the term money laundering. He did this when he used laundry machines in Chicago as a front for his rum-running operations. But there is no evidence to support this. It seems that the term money laundering was first used during the Watergate scandal in 1972.

The 1970s and 1980s: The War on Drugs 

This is the most important era in the history of money laundering. The US Congress originally passed the US Bank Secrecy Act (BSA) in 1970. It required vendors to report cash transactions over a certain amount. But why did authorities require these reports in the first place? Enter another historical figure – Pablo Emilio Escobar Gaviria. People also call him the “King of Cocaine.”

Escobar was a Colombian drug lord and narco-terrorist who founded the Medellín Cartel in 1976. How did he do it? He established the first smuggling routes from Peru, Bolivia and Ecuador. It went through Colombia and eventually into the United States. Corrupt and bribed politicians and officers protected him. Escobar’s infiltration of the US created an exponential demand for cocaine. By the 1980s, estimates suggested that Escobar was leading monthly shipments of 70 to 80 tonnes of cocaine from Colombia into the US. This made him one of the richest people in the world at the time.

As a result, Congress passed the Money Laundering Control Act of 1986 (MCLA), and Reagan began his War on Drugs campaign. It focused specifically on seizing the assets and funds of drug lords. You can watch the Netflix series ‘Narcos’ to see how powerful these drug lords (not just Escobar) have become.

Introduction of the Vienna Convention in 1988

However, a few years later the United States realised that this was not enough. Because drug trafficking had become an international problem and they needed the support of other countries. In 1988, 171 countries signed the Vienna Convention. It recognised money laundering as an illegal practice linked to drug trafficking and pledged cooperation against illicit trafficking in narcotic drugs and other psychotropic substances. 

A year later, the G7 Summit established the Financial Action Task Force on Money Laundering (FATF). The aim was to study, analyse and implement measures to prevent and combat this financial crime. In 1990, the FATF issued a report containing a first set of 40 Recommendations aimed at providing a comprehensive action plan to combat money laundering, which inspired the first EU Anti-Money Laundering Directive, adopted in 1991.

2000s: The Addition of Terrorism Financing

After the terrorist attacks of 11 September 2001, lawmakers realized the need to broaden the focus of existing legislation. Shortly after, Congress introduced the USA Patriot Act of 2001. It focused on combating terrorism, its financiers, and improving inter-agency cooperation. In the same year, the EU introduced its second AML Directive. This followed the FATF’s expansion of its 40 Recommendations to include terrorist financing. The FATF also created the 8 Special Recommendations on Terrorist Financing, which outlined measures to combat the funding of terrorist acts and organizations.

‍2010s: The Globalization and Technology Advancement Era

The decade of the 2010s has seen significant technological advances and societal changes that have benefited everyone. It left a huge mark in the history of money laundering..However, the same era also brought one of the biggest money laundering scandals, such as the HSBC scandal in the US in 2012 and the Danske Bank scandal in 2017, as well as the global fight against terrorism with the so-called Islamic State (also known as ISIS, ISIL or Daesh), which at one point held about a third of Syria and 40% of Iraq.

‍The Current Decade

The global COVID-19 pandemic led to global lockdowns and other restrictions that even slowed down the money launderers for a while. However, it did not take long for there to be a huge increase in cryptocurrency-related fraud cases, as well as online child sexual exploitation and abuse cases. Also, after the invasion of Ukraine, the topic of international sanctions and their evasion became one of the most popular topics today, and this topic is an important part of shaping the history of money laundering today.

Different profiles of the money launderers

Having outlined the history of money laundering, it is now worth explaining the different profiles of money launderers.

In 2018, the FATF published the Professional Money Laundering document, which focuses on professional money launderers (PMLs), who specialise in enabling criminals to evade anti-money laundering and counter-terrorist financing safeguards and sanctions in order to enjoy the profits from illegal activities.

PMLs provide services to criminals and organised crime groups for a commission or fee by laundering the proceeds of their illegal activities. They rarely participate in the illegal activities that generate the proceeds. Instead, they provide expertise in disguising the nature, source, location, ownership, control, origin and/or destination of funds in order to avoid detection. PMLs generally make no distinction between drug dealers, fraudsters, terrorist organisations, human traffickers or other criminals, as all are potential clients. Also, PMLs operate under a variety of business models and may be individuals, criminal organisations with a clear structure and hierarchy, or networks of loosely associated members.

PMLs may provide the entire infrastructure for complex money laundering schemes (e.g. a ‘full service’) or, if the organised crime group prefers to self-launder, PMLs may advise criminals on how to construct a unique scheme tailored to the specific needs of a client seeking to launder the proceeds of crime.

Most common money laundering techniques

According to Europol, almost 70 % of criminal networks operating in the EU make use of basic money laundering techniques.

They use a variety of methods and techniques to obscure the source of illicit profits. And also mask the identity of the final beneficiaries of the funds reintroduced into the legal economy.

The tricky part is that people can apply money laundering techniques in multiple stages and combine them with others. In this blog, we will review the most common money laundering techniques based on the following breakdown.

1. Cash-based money laundering techniques

Smurfing/structuring.  This occurs when individuals break down a large sum of money into smaller deposits and input them into the financial system through one or multiple companies.

Cash smuggling. It occurs when illicit proceeds are moved physically around the globe. Cash is sent in consignments or packages or transferred by cash couriers.

Informal Value Transfer Systems (IVTS) / underground banking. It is a system, mechanism, or network of people that receives money to make the funds or an equivalent value payable to a third party in another geographic location, operating outside the regulatory oversight of the legitimate banking sector.

Physical casinos. Criminals can use their cash to buy chips from the casino, which they then claim as winnings and deposit into their bank account.

Charities. Criminals may use charities or non-profit organizations as fronts, making large ‘donations’ of illicit cash to them.

Gift cards. Illicit cash can be used to purchase gift cards, which are then used for various purchases or resold. These cards can be moved internationally or cashed in, making it difficult to trace the original funds.

Match fixing. Criminals can place large bets on fixed matches through legitimate betting platforms using illicit funds. If the fix is successful, the winnings are collected and appear as legitimate gambling proceeds, effectively ‘cleansing’ the dirty money.

Bribery. Illegal funds can be used for bribery to influence public officials, politicians or people in positions of power. The aim is to secure favourable conditions for future criminal activities.

2. Digital/non-cash money laundering techniques

Digital assets. Digital assets are becoming increasingly popular as a means of payment for illicit activities, as some allow anonymity that can be used to trade illicit goods and services online. They can also be used for layering and integration purposes (e.g. using bitcoin to store and diversify illicit funds).

Brokers and securities companies. Criminals can invest large amounts of illicit money in securities and then sell them to create a legitimate source of income. Churning can create layers of transactions that make it difficult to trace the original dirty money.

Shell or shelf companies and trusts. Provide a front for criminals and exist only on paper, with no real operations, making them ideal for hiding ownership (e.g., of real estate or artwork & antiques) and financial activities. Such companies are often registered in tax havens with lax transparency laws.

Online casinos. Can be misused in layering (e.g., if the digital assets can be used as deposits) and cashed out as a fiat currency.

3. Hybrid money laundering techniques

Money mules. Individuals who, often unknowingly, have been recruited as money laundering intermediaries for criminals. They deposit cash and/or transfer illicit funds between accounts, often in different countries, on behalf of others, using personal and/or corporate bank accounts.

Cross-border transactions. Transactions that are sent to other countries can be used to create additional layers. The transaction can be funded by cash and sent via Money Service Businesses. Also, it can be sent directly from a bank account.

Real estate purchase. Many countries have limits on cash transactions. It prevent large amounts of cash from being misused. But the risk remains for cash transactions below these limits (e.g. to buy small plots of land).

Trade-based money laundering (TBML). Legal entities can be used to over/under charge on the invoice for goods or services they buy/sell. As well as over/under deliver the number of goods.

Fake loans. Create a paper trail that makes it look like the money came from legitimate loan proceeds.

Precious stones and jewels. Criminals can use illicit funds to buy expensive gems or jewellery and then resell them, making the proceeds appear legitimate. Because the value of precious stones is difficult to trace and easy to transport across borders. They also offer a discreet way to move and store wealth.

Cash intensive businesses. Such businesses are easily abused for money laundering as they provide ample opportunities for mixing legal and illegal proceeds. The most common examples in the EU are bars, restaurants, pizzerias, grocery stores, construction companies, car dealers, car washes, art and antique dealers, auction houses, pawn shops, jewellers, textile retailers, liquor and tobacco stores, retail/nightclubs, gambling services, strip clubs and massage parlours.