How dirty money gets clean

Money laundering is a multi-billion dollar problem in Canada, according to the RCMP. It's a system by which criminal organizations try to "clean" the money they derive from illicit endeavours.
The ways to launder money are varied and complex and usually employ a series of transactions involving multiple organizations and countries, experts say.
Money laundering is the process by which a person or organization converts cash and assets gained through illicit activity into a form that can be used legitimately and openly without drawing the attention of the authorities. The name refers to the attempt to "clean" what would otherwise be considered "dirty" money.

The broad aims of laundering systems are threefold:

  • To convert proceeds of crime to a less suspicious form.
  • To conceal the illegal ownership or origin of the criminal earnings.
  • To create a legitimate explanation for the source of assets.

Money laundering is an essential element of organized crime, said Margaret Beare, professor at Osgoode Hall Law School and co-author of Money Laundering in Canada.

"It's important because criminals want to be able to use their money and in some cases to use it visibly," she said.

The money can be used in any number of ways: from buying houses to the purchase of more basic consumer or luxury goods.

The degree of success depends on how difficult it is to for authorities to establish a connection between the seemingly legal assets and the crime from which they were derived.

The RCMP say it is difficult to determine the exact size and scope of money laundering in Canada but that it is a multi-billion-dollar industry.

Drug money accounts for bulk of laundering

Drug trafficking is the source of the vast majority of money laundering, according to a 2004 report prepared by York University's Nathanson Centre for the Study of Organized Crime and Corruption in Toronto. The report looked at 149 RCMP cases involving money laundering. It found that 72 per cent of the cases involved narcotics offences. The next largest source of money was custom and excise offences, including the smuggling and distribution of contraband cigarettes and liquor. Those accounted for 15 per cent of the RCMP cases.

There are several industries or sectors of the economy that are vulnerable to money laundering, and many of these involve cash transactions, said Rudy Duschek, senior consultant with Chris Mathers Inc., a Toronto-based firm that consults companies on how to detect and avoid fraud and money laundering.

Detecting 'dirty' money

The Proceeds of Crime (Money Laundering) Act was passed in 2000, making it mandatory for a large number of companies, including deposit institutions like banks, casinos and brokerage houses to report all suspicious transactions.

The legislation established the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) as the government agency tasked with facilitating the detection, prevention and deterrence of money laundering.

All cash transactions, electronic transfers or casino disbursements of $10,000 or more need to be reported to FINTRAC, which has a mandate to disclose any relevant information to police.

These include deposit institutions such as banks and credit unions, currency exchanges, securities firms, real estate brokerages and insurance companies.

The actual process involves three steps. The first is called placement, in which the "dirty" money is deposited into a legitimate financial institution. This is the most dangerous aspect of the operation as large amounts of cash attract attention.

One common technique during this stage is called "smurfing," in which a number of people are paid to make smaller deposits — of less than $10,000 each — that are actually pieces of a larger whole. (Any transaction of $10,000 or more needs to be recorded and reported to the Financial Transactions and Reports Analysis Centre of Canada). The money is deposited into bank accounts set up for the purpose of laundering.

"So, they'll send in a bunch of people who will be innocuous, who otherwise would not attract attention … and they're effectively working for criminals to launder their money," Duschek said.

The next step is called layering, in which the money is involved in a series of transactions to obscure its origin and effectively put it as far away from its true source as possible. This can involve any number of wire transfers, deposits or withdrawals, exchanges into different currencies or the purchase of high-value goods such as cars, boats or jewelry.

The last step is called integration, in which money is reintroduced in a more legitimate-looking form, including investments into legal businesses.

Those shell companies engage in a small amount of legitimate business but are largely used to put the illicit money into circulation under the auspices of legal transactions.

Many ways to launder a buck

The schemes are usually quite varied and complex, employing a series of transactions in multiple organizations and countries, said Duschek.

"If I was going to choose one way to describe it, it would be next to impossible," he said. "You have to remember, criminals don't play by the same rules that we do, and they're always trying to stay one step ahead."

RCMP suspect that a series of unusual cash transactions at the River Rock casino in Richmond, B.C., were part of a money laundering scheme. ((CBC))
The emergence of precious metal dealers who operate cash-for-gold services represents a growing source of laundering opportunities, Duschek said.

"You know someone can get just walk off the street with a bundle of cash and basically buy an ingot of gold," he said. Once in this more legitimate form, it is easier to transfer wealth with less suspicion.

Casinos are also becoming popular for money laundering, in part because the large-scale exchange between cash and chips.

Between May and August 2010, suspicious transactions totaling $8 million were reported to gaming officials in the Lower Mainland of B.C. The RCMP said they were likely the result of money laundering by organized crime.

In one case, a customer purchased $100,000 worth of chips with $20 and $50 bills. He gambled for an hour, winning a small sum and then cashed out before leaving the premises.

The more jurisdictions, the better

There is a common misconception that a majority of money laundering is being perpetrated by a small number of large criminal operations when it is actually employed by a number of organizations of various size, Beare said.

"In fact, we're talking about petty criminals, middle-range criminals and yes, we're talking about some high-powered, large-scale, sophisticated laundering operations, but, you know, it's everything," she said.

There is also a "huge" international dimension to money laundering, where assets are channeled through a variety of organizations around the world, which makes it more difficult to track, said Duschek.

"Criminals aren't stupid, and they realize that the more jurisdictions they involve in their money laundering schemes, the less likely the authorities are to pursue it," he said.

However, although dirty money is often routed through so-called offshore destinations, it ends up in major financial centres and back in the hands of criminals, Beare said.

"It's probably just marching through to get somewhere else," she said.

For Duschek, money laundering is a given for any criminal organization whose activities involve large sums of money. Criminals need to find a way to convert their ill-gotten goods into a safer, useable form.

"They want to use it," he said. "They just can't keep it under a bed for all of eternity," he said.