Buzz
However, money laundering is not just a shady activity for mobsters and corporate criminals. It's far more widespread than that.
In theory, almost anyone can be involved in money laundering, and many people are. Every year, it is estimated that between $800 billion and $2 trillion—roughly two to five percent of global GDP—is funneled through the laundering process. According to the United Nations Office on Drugs and Crime, while large entities like drug cartels, terrorist organizations, and the wealthy are major players in this illicit activity, everyday middle-class investors and enterprising businesswomen contribute as well.
Money laundering is a global issue that spans across various sectors, involving a wide range of people and organizations. The scale is massive, with billions of dollars moving illicitly across borders every year.
In simple terms, money laundering is the process of making money gained through illegal means appear to come from legitimate sources; essentially, transforming dirty money into clean, lawfully earned funds. (This Youtube compilation does an excellent job of explaining it.) It’s like taking tainted money and making it appear pristine.
While the laundering process is typically broken down into three phases, it is often more intricate and complex than it seems. The goal is to make the illicit funds untraceable, and launderers use a variety of methods with varying levels of success to do so.
Placement: This phase involves introducing the illicit money into the legitimate financial system. It’s the most perilous step, as it often involves large amounts of cash (since, for example, cocaine purchases aren't likely to be made via Visa). Criminals have a variety of ways to accomplish this: they may use the funds to pay off loans, gamble, combine illicit and clean money via cash-based businesses (such as car washes or strip clubs), exchange it for foreign currency, have 'smurfs' trade small amounts of the dirty money for financial products, or even invest in real estate.
Layering: The next step involves moving the money around to hide its origin. More advanced launderers might shift the funds into foreign financial products, businesses, investments, etc. This typically occurs multiple times and across various products, giving rise to the term “layering.” For example, a launderer could move money into an offshore account, then to a shell company, then another shell company, and so on, constructing a complex network that's difficult to dismantle.
Integration: At this point, the launderer draws the money back out from legitimate sources. This can be achieved through methods such as purchasing art or selling property, among others.
In the U.S., there are hundreds of federal offenses, known as “specified unlawful activities,” that must be involved for the act to qualify as money laundering. These activities include various drug-related crimes, Medicare/Medicaid fraud, and more. Additionally, the person engaging in these activities must do so with the intent to conceal the true origin of the funds.
To gain a clearer picture of how money laundering works, let’s explore some real-world case studies.
Paul Manafort
A prominent example in recent history involves President Trump’s former campaign chairman, who was indicted for money laundering as well as tax and bank fraud. Here’s a breakdown of how he allegedly laundered money, according to How Stuff Works:
Manafort is accused of receiving millions from the former Ukrainian President Viktor Yanukovych. Instead of reporting this income to the IRS and paying the appropriate taxes, Manafort is believed to have moved the funds to offshore accounts and used them to purchase costly properties in the U.S.
Once in possession of these properties, prosecutors claim he leveraged them as collateral to secure millions in loans from U.S. banks. Since the funds came in the form of loans rather than earnings, he was not required to pay taxes on them.
Experts in financial crimes, like Tom Cardamone, managing director of Global Financial Integrity, explain that investing in luxury real estate is a common method for laundering money. “A classic method of laundering money is purchasing real estate in high-value markets like New York or Miami,” he states.
The process works like this: “The assumption is that the money you’re using to purchase the property is illicit, and you must clean it, get it into the legitimate financial system,” he explains. “You’ll buy a property with cash and hold onto it, and when you sell it, the proceeds from the sale are clean, laundered money.”
Even if the property is sold at a loss, it can still be worthwhile to convert potentially tens of millions of dollars into clean funds. In fact, anonymous buyers will often offer more than the asking price to facilitate a smoother transaction.
This is because, until the New York Times published a series of articles in 2015 about the practice of anonymous LLCs (likely owned by affluent foreigners) purchasing high-end properties in the U.S., there were no federal reporting regulations. In 2016, the Treasury Department announced that real estate companies would be required to disclose the identities behind cash transactions. Prior to that, there was no way to trace the true owners of properties like an Upper West Side Co-op or a Miami Beach mansion if a shell company was used to make the purchase.
But Manafort didn’t limit himself to just real estate. Over six years (and this is only what was included in his indictment—there could be more undiscovered illicit activity), he allegedly used offshore bank accounts to facilitate “transfers amounting to $6.4 million for real estate and over $12 million for personal goods and services like clothing, cars, and home renovations,” as reported by the New York Times, including more than $1 million for an antique rug and its maintenance, as well as $15,000 for the infamous ostrich coat.
The fact that Manafort was caught suggests he was either “stupid or unlucky,” as Politico puts it, since 99.9 percent of money launderers typically evade justice.
The Panama/Paradise Papers
The Panama Papers and the later Paradise Papers revelations brought to light the ways in which the world’s wealthiest individuals—including politicians and other public officials—avoid paying taxes and allegedly launder money. As detailed in the papers, one of the key methods used by the rich and powerful for concealing their wealth, similar to Manafort’s tactics, is the purchase of luxury real estate through shell companies.
To provide some context, shell companies are entities created purely for the purpose of carrying out transactions, without any legitimate business operations—they don’t produce or sell anything, for example. These companies are typically set up as limited liability entities and are incorporated in jurisdictions like Bermuda or Panama, where there is minimal oversight. These offshore havens don’t impose taxes on the funds—they only charge a fee for establishing the LLC (usually an annual fee), providing a way for their owners to avoid taxes while the countries reap the financial rewards.
However, Cardamone notes that more anonymous LLCs are formed each year in the U.S. than anywhere else in the world.
“You can create them in New York, New Jersey, Delaware, virtually any state,” he explains. “Most states don’t require the beneficial owner’s name to appear on the registration,” meaning that all you need is an attorney to open the LLC in their name. That being said, Delaware’s relaxed business laws make it a particularly appealing state not just for anonymous LLCs, but for all kinds of companies looking for favorable regulations.
LLCs are used to launder money because they obscure their owners and the origins of their funds. Essentially, one can establish a company, funnel money into it, and then distribute the money across various channels. Once you become the anonymous owner of a company, it can open bank accounts around the world. In money laundering schemes, a network of shell companies is often created, forming a tangled web of transactions that are hard to decipher or trace back to a specific individual.
“You can make these structures incredibly intricate, with one LLC in Delaware owning another in the Cayman Islands, which in turn owns a bank account in Hong Kong,” explains Cardamone. “Given the opacity of such setups, law enforcement often faces significant challenges in peeling back the layers to identify who is behind each company.”
Establishing these LLCs is entirely legal (the illegal activity is the money laundering and tax evasion), but if the IRS or another federal agency suspects wrongdoing and traces the LLC back to your attorney, they can invoke attorney-client privilege to keep your identity concealed.
Drugs and Guns
Money laundering isn’t just a tool for the wealthy to evade taxes—it’s a far more serious issue. “It’s a crime that fuels catastrophic drug epidemics—opioids, methamphetamines, cocaine,” writes John Cassara, a former Treasury special agent, for Politico. “Gang violence, government program fraud, corruption, online scams, identity theft, and many other crimes impact our daily lives. Terrorism—partially financed by money laundering—poses a significant threat to our national security.”
Criminals employ many of the same tactics as the world’s wealthiest to launder their money. “There’s this legal system of anonymous shell companies that anyone can manipulate,” says Cardamone. “Whether you're a legitimate businessperson or a drug trafficker, you can use these anonymous entities. They exploit the legal system to further their illegal activities.”
It goes further than just shell companies—legitimate businesses are often involved too. A clear (if somewhat exaggerated) example of this is seen in the first season of Ozarks on Netflix. Marty Byrde, played by Jason Bateman, a mild-mannered accountant turned cartel money launderer, buys a motel, renovates it, and then engages in some creative accounting. He purchases 16,000 square feet of carpeting at $0.69 per square foot, but records in the motel’s ledger that he bought 32,000 square feet at $8.75 per square foot—a nearly $270,000 discrepancy. With a little manipulation of the books, the laundering begins. He eventually expands his operation to a strip club, another common all-cash business used for laundering illicit funds.
By the way, the strip club in question is owned by a shell company based in Panama, with Marty’s name completely absent from any of the documentation—an entirely legal component of his larger money laundering scheme.
Your Everyday Money Launderer
That said, almost anyone can open an anonymous LLC and attempt to launder money, according to Cardamone (though we’re not encouraging you to try it).
As mentioned earlier, laundering money doesn’t necessarily require a complicated network of shell companies. There are numerous methods, including investment schemes, and this example reported by the IRS in 2015 is a good illustration:
On March 19, 2015, Erika Rae Brown pled guilty to money laundering in connection with a bank fraud scheme. According to court documents, Brown obtained a $4 million loan based on false claims regarding a data storage facility project she allegedly worked on. In January 2009, the bank forwarded the loan application to the USDA, which then guaranteed the loan after one of Brown's associates made misrepresentations about the project. As part of the loan terms, the bank requested proof that companies were interested in using the storage facility.
Brown submitted fake letters to the bank from several well-known national companies supposedly interested in using the storage facility, along with altered cashier’s checks and invoices to make it appear as though the company was spending capital. In reality, no national companies were interested, and the checks were simply altered versions of ones Brown had written for other personal expenses. A financial review revealed that she used the loan money for personal expenditures, including $128,135 for rent on a Laguna Beach house and $5,825 for two Rolex watches. The bank eventually foreclosed on the property in August 2013.
While not a particularly successful example, it still serves as one. “Anyone could do this,” says Cardamone. “You don’t have to be a legal genius. Just a little bit smarter than Paul Manafort and Erika Rae Brown.”
