How Does Money Laundering Work: Tax, Al Capone, & Top 3


So, how does money laundering work?

There are several different ways to launder money. A common way to launder money and avoid rules for taxation is to deposit small sums in a large number of bank accounts and from there transfer them to accounts at various foreign banks before they are used for purchases.

This is very difficult for the authorities to detect and it is not common for those who engage in this type of money laundering to be convicted.

Another way to launder money is to turn it over through casinos and other betting activities such as trotting and galloping as the black money is replaced with winnings for which there is a receipt.

It also happens that black money is transferred to various tax havens where the authorities are less careful. There, they can then be used for, for example, property purchases and the like.

The person or persons performing this type of money laundering then use bank cards from the foreign banks to use the laundered money.

If this is used often, however, the authorities will soon begin to suspect.

Let’s demystify this with money laundering…

You probably know the name Al Capone, a name that is highly relevant when talking about money laundering.

In the 1920s, a rather odd story took place, the one about how Al Capone could finally be imprisoned. But not for murder, extortion and smuggling, but for tax evasion and money laundering.

He was guaranteed guilty of extremely serious crimes, but since the prosecutor lacked evidence and witnesses, the only thing they could really link him to was tax crimes and money laundering. Pretty funny huh?

In 1929, Al Capone was arrested and after lengthy trials, he was eventually sentenced to 11 years in prison for tax offenses.

Even though he deserved hundreds of life sentences for everything he did but could not be connected.

In this guide, we will take a closer look at this with money laundering (or money laundering, both work). How does it work? What are the classic ways to launder money? and why does it work?

But first, perhaps the most basic question, what is money laundering and where does the name come from?

What is money laundering?

Money laundering is an activity in which black money, ie money earned illegally, is transferred in such a way that the money appears to be legally earned, or can be used for private consumption without arousing suspicion. Money laundering is often a kind of transnational crime.

Let’s say that someone commits a bank robbery and gets away with $10 million.

Then they can not just start spending them the next day, this because the Tax Agency knows exactly how much money all people in the country earn and what assets they have.

So if someone who withdraws $2000 / month and lives in a tenancy suddenly buys a mansion and a Porsche, it would be very obvious that the person in question has gotten hold of a lot of money very quickly.

This would lead to them having to look more closely at the person’s finances and if there is then no legal evidence of where the money comes from, it becomes obvious that they received it in some illegal way.

So money laundering is about making these 10 million look legal so they can be used.

But what could a legal proof be?

If you have won 10 million on the lottery, you will receive an official receipt confirming that you have won the money.

If you have received a bonus via the job, the payroll department posts everything and tax is deducted correctly. If you have sold a house that you inherited, there is a buyer and a lot of paperwork and receipts.

You see the point, there are a lot of different examples of legal activities that can generate big money fast.

Why is it called money laundering?

The word money laundering actually comes from the washing machines that you so often see people use in American movies – you know those places that are lit with cheap fluorescent lamps and have walls full of washing machines and dryers where people put in a few coins and then sit and wait for their laundry.

This type of washing machine was a type of business in which Al Capone and his gang invested their illegal money to wash them.

So it’s called money laundering just because the gangsters of the 1920s did just that with the help of washing machines.

But now you may be thinking, “what did you invest in? what are you talking about?” Calm just calm down, if you scroll down to the next paragraph, we will talk more about this with investing in businesses.

The 3 common steps in money laundering

There are many different ways to launder money, but if you look at them more closely, you will see that most people share the following 3 steps:

1. Place

Step 1 is about turning the illegal money into some form of investment, often some form of everyday activity, such as a pizzeria, a dry cleaner or a café.

This is usually done by depositing the money in a bank account belonging to an anonymous person or a company.

It is at this stage that the criminals run the greatest risk of getting caught, as they are trying to deposit large amounts of money from nowhere.

If it is not done in a smooth way, it becomes quite obvious that something is not right.

Once the money is in a bank account, the most difficult step is completed.

If you have ever deposited a large amount of cash in a bank, you probably remember that they asked a lot of control questions, precisely because they do not want to get a lot of black money in their system.

2. Add stock

Adding inventory is about getting as far away from the money as possible to make it harder to trace it back to you as an individual or organization.

Let’s take an example: You take your $10 million from the bank robbery and manage to get it into a bank. Now you invest your money in a business, a pizzeria.

The money has now come a small step away from you, especially if someone else is the owner of the pizzeria.

Shortly after you have invested in your new pizzeria, you sell it again, this to bring about a completely legal transaction between you and the person or organization that wants to take over your business.

If the deal goes through, you will then have a receipt and various documents proving that the money you now have comes from a fully legal deal where you sold your pizzeria.

Succeeding in this is of course much more difficult in reality, especially if you are trying to erase all traces. But the example above at least explains the principle.

3. Integrate

Now it’s about taking your “legal money” (note the quotes) and reintroducing them into the legal economy.

This by investing in a new business, or starting a charity where you sit as chairman of the board and have a gigantic salary that is paid out through the assets you brought into the organization – the assets you received when you sold your pizzeria.

Then it’s done

You have now managed to get all your black money into the legal economy.

Where does black money come from?

Black money comes from illegal activities and is untaxed. There is black money when performing so-called undeclared work.

However, this money is extremely rarely spent on money laundering, as it is usually a question of small sums paid for services such as repairs, cleaning or other assistance.

However, money laundering occurs, and is relatively common, for large sums of money earned through activities carried out by criminal organizations.

Conclusion

Money laundering is about making illegal money disappear into the legal system as unnoticed as possible.

One way that has been popular since Al Capone’s time is that investments in smaller businesses, e.g. pizzeria.

As we in today’s society have almost all money digitally, it has become enormously much more difficult to launder money.

But the road to successful money laundering is the same as it always has been.

Sources

https://www.bahamasb2b.com/b2b/big_picture/download/FATF_Laundering.pdf

https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1467-6478.2008.00446.x

https://www.journals.uchicago.edu/doi/abs/10.1086/501508

https://www.emerald.com/insight/content/doi/10.1108/13685200710721881/full/html

http://www.jcomputers.us/vol6/jcp0601-19.pdf

https://link.springer.com/article/10.1023/A:1008776629651

https://en.cnki.com.cn/Article_en/CJFDTotal-HNGA200606013.htm

https://books.google.se/books?hl=en&lr=&id=_fEBAQAAQBAJ&oi=fnd&pg=PR1&dq=How+Does+Money+Laundering+Work&ots=eqsF3xtOkF&sig=vK0PUVSIcskWDlLjgvIfoBBWs74&redir_esc=y#v=onepage&q=How%20Does%20Money%20Laundering%20Work&f=false

https://books.google.se/books?hl=en&lr=&id=5i9mAwAAQBAJ&oi=fnd&pg=PR1&dq=How+Does+Money+Laundering+Work&ots=gkDWbKbz41&sig=dsdNoVOwRLkM201tOnWyEaneYfg&redir_esc=y

Kevin

This article has been reviewed by our editorial board and has been approved for publication in accordance with our editorial policies.

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