The dark secret of global finance

An attractive destination for crooks

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The dark secret of global finance

Money laundering is no longer the preserve of criminal gangs – it's a trillion-dollar business run through global financial centres, such as London. Simon Wilson reports.

What is money laundering?

It's the generic term used to describe any process by which criminals disguise their ill-gotten gains by hiding the source of their loot, and/or transforming "dirty" money into legitimate assets. The money is "laundered" in the sense that the "dirty" money has become "clean" – and thus the criminals are free to spend it as they choose, without having its provenance questioned, and with no risk that the original criminal activity will be exposed.

The most high-profile money laundering case in the world today is probably the trial in Singapore of a Swiss private bank employee charged in relation to Malaysia's massive 1MDB scandal – a case that highlights the complex, international nature of the issue. However, money laundering is necessary even for a small-scale organised criminal enterprise because such enterprises, if successful, will be generating large amounts of physical cash, a form of money that is both inconvenient as a store of value and likely to attract attention.

What's the scale of the issue?

For obvious reasons, it's impossible to say with any confidence. A recent joint Treasury/Home Office "risk assessment" on money laundering says that the "best available international estimate" dates back to 2009, when a UN analysis concluded that the amount of money laundered globally was in the region of 2.7% of global GDP – a proportion equivalent in 2009 to $1.6trn. This is in the same neighbourhood as a widely cited International Monetary Fund estimate from 1996: it reckoned laundered money accounted for between 2% and 5% of the world economy.

The UK's National Crime Agency (NCA) says that "billions of pounds" of corruptly acquired money is laundered through the UK each year. And the Home Office says that money laundering enables serious organised crime with social and economic costs of £24bn in 2013.

How is money laundered?

Techniques vary from the straightforward to the mind-numbingly complex. A basic form of laundering money is the bulk smuggling of cash: simply taking a large quantity of physical cash to another jurisdiction – a less rigorous or more secret one – and depositing the cash in a bank. Another form of money-laundering, famously favoured by the US mafia and similar criminal rackets, is to open a highly cash-intensive service business as a front, in order to channel dirty money through it.

In this scenario a business simply passes off all "dirty" money received as legitimate revenues, and the cash-intensive nature of the business makes it hard to detect. Typical outlets might be parking lots, pizza parlours, strip clubs, car-wash businesses or casinos. Another common practice is trade-based laundering, which means issuing false or under/overvalued invoices to disguise the movement of money. But these days such simple strategies look old-fashioned in the extreme.

Why are they outdated?

Financial globalisation and new technologies mean that money laundering has become far more complex and more international – and more associated with oligarchs, kleptocrats and the financing of global terrorism than with New York hoodlums running drug distribution or prostitution rings. Typically, money laundering today involves three stages, known to financial authorities as "placement, layering and integration".

First, the launderer "places" large sums into the legitimate financial system by furtive means, such as breaking up large sums of cash into inconspicuous units. Second, they "layer" the funds, which means moving them around to sow confusion, perhaps by wiring or transferring them through numerous accounts or jurisdictions, or by channelling them through the purchase and sale of different investment vehicles.

Then the third stage, "integration" into the legitimate economy, is achieved through the purchase of assets such as real estate, stakes in businesses, or buying luxury assets. It's a complex business that requires professional help.

Who provides that help?

The sort of people who work in Switzerland, Panama, or, indeed, the City of London, appear respectable – and may even be unaware of what they're doing. "The ability of criminals to launder large sums of money themselves without attracting attention is limited [and] it is often the 'professional enabler' who holds the key to the kind of complex processes that can provide the necessary anonymity for the criminal," says the NCA in its literature on its anti-laundering strategies.

"While our assessment is that the vast majority of professionals working in these fields have a high standard of integrity, lawyers, trust and company formation agents, investment bankers and accountants are among those at greatest risk of becoming involved, either wittingly or unwittingly, in high-end money laundering."

Global finance: dirty money and UK property

The very things that make London so attractive to very wealthy foreigners – the secure legal and political framework, world-class legal and accountancy services, the perceived security of its property market – also make it one of the world's most attractive destinations for the proceeds of crime and corruption. Almost one in ten properties in Kensington and Chelsea is owned through a "secrecy jurisdiction" (tax haven), such as the British Virgin Islands, Jersey or the Isle of Man, according to anticorruption group Transparency International.

While that doesn't mean that their owners are all criminals, it's still a worrying sign. Anyone who suspects something fishy in a property transaction and fears they risk becoming an unwitting participant can file a "suspicious activity report" (SAR) to the NCA. But it's doubtful that this has much impact. Last year there were more than a million properties sold in the UK. The number of SARs was just 355.

Top 5 Money Laundering Facts