It is necessary to draw a distinction between the proceeds of financial crime and the proceeds of other crime.

There is no generally agreed definition of financial crime: the simplest way of looking at it is that financial crime generates money as its primary activity.

Other types of crime generate something which has to be turned into money or a money equivalent. So, for example, a criminal who steals a car needs to find a buyer before he can enjoy the profits of the offence. Similarly, a drugs dealer has to convert the drugs into money before he can spend it.

In many countries, there was an attempt to control the trade in stolen goods by making the person who handles the stolen goods, “the fence”, liable to heavy penalties, often more severe than those to be suffered by the original criminal. The reason for this was that the criminal would be less likely to commit crime if he could not turn the stolen goods into cash.

However, the incidence of economic crime - fraud, extortion, theft of money has led to this method of crime prevention proving useless. There was no-one handling stolen goods. Yet, there was someone handling the proceeds of crime, every time the criminal wanted to spend the proceeds or invest it.

Someone within the financial system was holding or moving the money which had been generated. Someone was hiding it from the authorities, the modern equivalent of burying bundles of cash in a sack under a tree.

In most countries, money laundering was not regarded as a priority: the only reason money was tracked was to try to identify the criminal and there was no sanction in criminal law applicable to the person who took in the money and helped the criminal to hide it.

If a person wanted to recover money stolen from him - or the proceeds of the disposal of goods - he had to mount a civil action called a tracing action. Such actions are extremely expensive and, because criminals often have no significant assets other than those which are the proceeds of crime, the costs of recovering the money had to be met from out of what was recovered. Often, this was not economic and so the person who the police term “the loser” would often not bother unless large sums were at stake.

So it was that the proceeds of the UK's Great Train Robbery, thirty years ago, could be spent largely without fear by associates of the criminals, as could the proceeds of the Brinks Mat robbery at Heathrow. At the time of both offences, the UK had no laws to control money laundering. However, in the latter case, there were prosecutions for associated offences.

The spending of money was itself a cause for suspicion. If someone with no visible means of support, or who claimed to have only a poorly paid job, was seen driving an expensive car, it could be a reason for the police to ask how he could afford it. To overcome this, criminals needed to find a way of being able to prove that they had come by the money to buy the car in an honest way.

So they began to “launder” money.

The term “money laundering” is said to originate in the days of American gangsters when extortion, gambling and prohibition breaking generated huge sums in cash. The gangsters opened outwardly legitimate businesses and banked the takings from those businesses along with the proceeds of crime. But not any sort of business would do.

A favourite sort of business was, apparently, a laundry - washing clothes - because all the customers paid in cash and there was little, if any, way of the takings being calculated other than by the authorities undertaking a full time watch.

The terminology of money laundering still reflects those beginnings. Although there are proper terms, the stages of money laundering are often referred to as “wash, spin, dry” or “washes, sinks, rinses”. The proper terms are “Placement, Layering, Integration.” At Silkscreen Consulting, we prefer our own terms: "hide, move and invest."

Perhaps of as much interest is that one of the new crop of businesses which launderers favour is the modern laundry – the car wash.

Increasingly, money laundering is being regarded as one of the evils of the modern world. Governments are being encouraged or even coerced into enacting measures to combat the use, by criminals, of their economic systems to pass the proceeds of crime into the legitimate economy. It is a logical assumption that people laundering large amounts of money via, for example, Burma want to expatriate it to a place where they can enjoy it.

In the mid 1990s, there was criticism of Burma’s refusal to enact any anti-money laundering laws. In fact, the Burmese government has said, in effect, that it will not enact money laundering laws because the domestic economy would suffer a crisis if it were to do so. Nevertheless, the Burmese government is sensitive to the reporting of such matters and in 1995 they jammed the BBC World Service which had carried such a report.

Counterfeit Currency

There is often a misunderstanding that money laundering is the passing into the economy of counterfeit notes and coin. This is, in fact, not so.

Although there are similarities in the ways in which fake money is entered into the economic system the counterfeiter needs to get his value as soon as possible and to distance himself from the "money" which is the evidence of his crime.

This is the exact opposite of the objective of money laundering where the criminal has the objective of getting back as much as possible of the money he entered into the economy. A counterfeiter will usually sell his fake money at a substantial discount against face value. However, it is important to remember that he becomes a money launderer not when he sells his “product” but when he tries to spend the money he received when he sold it.

The whole concept of counterfeit currency has been a major embarrassment for the US Government:

Several years ago, the Secret Service station at the US Embassy in Athens worked with the Drugs Enforcement Agency or DEA in Nicosia and huge sums of counterfeit US currency - in USD100 bills - were used to make drug buys in Europe, the US and Mexico (1). The Defense Intelligence Agency or DIA was informed that much of the counterfeit was printed in Lebanon. Large quantities of genuine USD1 bills were bleached and reprinted, therefore giving the fake notes a greater degree of genuiness. But even better forgeries were coming from Iran where the US mint had sold printing presses.

Most of the counterfeit currency used by the DEA was provided by Monzar al-Kassar: he had two bank accounts into which the US government paid a regular CIA retainer. His accounts were numbered 50 30 74 95 (in Vienna) and 51 02 30 C-86 (in Geneva). Bankers reading this might like to check your records.

The counterfeit currency problem was explained in The Times(2).

US Customs had found that there was a supply of near perfect USD100 notes originating, it was believed, in Lebanon. The supply was said to be so large that it was said to be capable of destabilising economies. A senior Russian central banker was quoted in The New Yorker as saying that his country was being swamped with the notes which are so near perfect that the Federal Reserve’s machines, previously praised for their sensitivity, cannot spot the fakes. The notes had, it seemed, Syrian sanction. Syria controls Lebanon. The problem was so great that Syria was told to cease production or face a breakdown in talks to improve relations between Washington and Damascus. Of course, it is possible, given the facts presented earlier, that the USA is simply reaping what it has sown.

There is a fear of economic terrorism behind the Lebanon notes. But it goes deeper than that. Lebanon is a source for many drugs. Payment for those drugs is fed back to Lebanon. The comment from the Russian banker gives some special cause for concern today. If Russia is being swamped with Lebanese forgeries, as he says, then it is sensible to assume that there is also a considerable quantity of genuine money passing from Lebanon to Russia.

Lebanon is a major centre for drugs. Russia is known to be a major centre for laundering money from a range of sources. In this way, counterfeit currency is mingling with genuine currency. But the problem in Russia is even more complex.

Russia is a country with a closed economy. Even after the break-up of the former Soviet Union, the Ruble remains a currency with little international exchange and even less international credibility. Indeed, in November 1998, the Russian Government is reported as entering into a rescue of its banking system. Many ailing banks need support and the estimated bill is 141 Milliard Rubles. But, according to the Central Bank, only 54 Milliard Rubles is available.

Because of the instability of the domestic currency, a very significant amount of Russian international trade is done in US Dollars. However, because of economic uncertainties, much of the business done within Russia is also done in US Dollars. This is perhaps surprising because under Russian law, it is illegal to conduct business in any currency other than the Ruble. Even so, the effect has been to create a parallel economy which operates openly alongside the Ruble economy.

In Russia, staff are often paid in a mix of US dollars (which are regarded as a safe currency) and Rubles to pay their rent and buy food. One of the difficulties is that Russia has high inflation and so people don't want to hold onto Rubles which will buy less tomorrow than they will today.

In 1996, in a report to BBC Radio 4, the BBC’s Moscow Correspondent Diana Goodman revealed how Russians used to go to the frozen wastelands of the North to work for higher salaries in order to save for a flat when they returned home. They would holiday in the South to get some daylight yet still build savings of perhaps 10 000 Rubles which would be sufficient to move back to their home towns and buy a flat. However, only five years after the break-up of the Soviet Union, that sum would buy only a bottle of vodka. People who thought they would spend a few years in an environment so hostile that life expectancy is considerably shortened now face a future where their savings will not even pay their fares to leave.

As a result, dollars are seen as an investment or at least a relatively inflation proof medium of exchange.

In the commercial world, the dollar is king because it is readily moveable internationally (a subject we will come back to later): in 1995, anecdotal evidence suggested that the average bag of money found by Russian customs being taken into Russia was USD90 000.

But, now, there is a problem: the parallel cash economy is flooded, the Russians say, with fake dollars so good that they are, in effect, additional money in the unofficial economy of Russia’s post Soviet regeneration. It is possible that it is not overstating the case to say that Russia’s economic development has been funded - in significant measure - by fake money.

This is not, of course, anything too far removed from the old Communist system of printing more notes and issuing them as real money: with nothing to back its currency, the old Soviet Union was, basically, forging its own money. Now, its economy appears to be, in substantial part dependant, on forgeries of someone else’s. A very valuable potted history of Russian banking is to be found in Understanding Russian Banking by Lapidus and van de Wall-Palms(4)