In 2014, Russia took the chair of the Group of Eight (G8), whose next summit is to take place at the beginning of June in Sochi. According to the preliminary agenda, the main topics under discussion will be the fight against drug trafficking and terrorism, and offshore companies. These global problems are, either directly or indirectly, linked to the banking sector, which is systematically providing the criminal world with a wide range of services. I first began talking about this in my article «The International Drug Trade and Money Laundering». In this article, however, the ways that banks provide these services to the drug trade, international terrorism and other forces of organised crime are discussed in more detail.
1. The organisational principles of bank laundering
A key feature of dirty money is that it is cash in the form of paper money, and money laundering is carried out both with and without the banks’ participation. The latter, for example, involves the purchase of homes and other types of property for cash. The law does not permit transactions like these in every country, however.
The gold market is used fairly extensively to launder money, and a significant amount of trade in this metal remains in the shadows. Through Mafia-controlled gold mining and refining companies, the gold purchased on these shadow markets then materialises on the white precious metals market.
In a number of countries, anonymous financial instruments like bearer shares and bonds have become widespread. Dirty money can be used to purchase securities like these, with their subsequent sale and the accumulation of money received placed into bank accounts.
The version of laundering that takes place with the participation of banks is mostly where amounts in the region of tens of millions of dollars are concerned. It is primarily wholesale drug dealers that turn to banks and other financial institutions for their laundering services. According to a report by the United Nations Office on Drugs and Crime (UNODC), of the total amount of dirty money obtained from all forms of cross-border organised crime, no less than 70 percent is laundered through financial institutions. Besides banks, this function can also be performed by insurance companies as well as a variety of investment funds, including «charitable» funds, which have gained considerable ground in the US.
Let us look at certain features of this process.
Firstly, laundering is often a multi-stage process; the money passes through a chain made up of several banks and other financial institutions. This multi-stage process ensures that the money is completely clean when it comes out, although the scheme involves additional costs.
Secondly, before finding its way into the washing machine of the banking and finance sector, money usual undergoes a preliminary clean in various small commercial enterprises. These include restaurants, casinos, entertainment centres, hotels, cinemas, and other establishments whose business is associated with cash. On the whole, they are companies that provide a service; imitating the sale of services is considerably easier than imitating the sale of goods. The cash is then credited to the bank accounts of commercial laundering organisations. In some cases, a bank will turn out to be at the end of a laundering chain involving several shell companies. Each of these companies is created purely to receive money and pass it on to the next link in the chain.
Thirdly, the practice of dirty money in the banking system is predominantly carried out in countries that are still undeveloped economically. The money only ends up in the Western banking system in the final stages so that it can then be invested in the white economy. Banks and companies located in offshore zones, where not only tax avoidance is guaranteed, but also complete confidentiality of operations, play an import role in many laundering schemes. Offshore structures often act as an intermediary link between Western banks and banks on the periphery of the global financial system.
Leading Western banks create a wide transnational network with their branches, daughter and granddaughter subsidiaries in Central and Southern America, Western Africa, Southeast Asia and Russia. It would be fair to assume that these transnational giants are expanding in order to conquer new credit and money markets, but at the same time, a motive like laundering dirty money is almost never mentioned with regard to their activities. However, this is why countries on the periphery of global capitalism are unable to establish effective financial and banking control, since such control directly contradicts the interests of major banks and the drug mafia...
In his book McMafia: Seriously Organised Crime, Misha Glenny gives examples of how the movement of dirty money is organised in the Dubai branch of the American company Citibank. In practice, there is only the appearance of control. The bank never turns down big money. Glenny cites the story of successful businessman Ranko Lukic, who mostly operates in the grey sector of the economy. When Lukic first arrived in Dubai and transferred 3,000 dollars to his Dubai lawyer from the local Citibank branch, he was soon astounded. In Lukic’s words: «Some aggressive guy calls me and says: ‘What is the purpose of this transfer?’ So I tell him it’s none of his business; it’s between me and my lawyer. But I was absolutely astonished and I had to fill out some form before they would transfer this lousy three grand! But of course, Citibank is an American firm.
«When I had two lots of two million euros transferred to the Emirates bank here so I could purchase property along Sheikh Zayeed Road, the bank called me and said: ‘Tell us, please, the origin of this money?’ So I tell them that it comes from my tobacco farms in Zimbabwe! And they say ‘okay’ and no more questions asked. Job done! Why would they want to know where my money comes from? If they ask too many questions, they won’t get sales!»
2. Private banking – a service for criminals
In order to launder dirty money in the 1990s, major Western banks created special divisions providing private banking services. These private banking services were intended for very wealthy clients who were willing to put millions of dollars in the bank. And such services are primarily attractive to clients with dirty money. Private banking divisions receive money from clients for managing their accounts and providing services beyond the norm. These services include advice on investments, property, taxes, offshore accounts, and the development of complicated schemes to cover the tracks of money movements. Private banking divisions usually offer clients code names for their accounts, concentration accounts that merge the bank’s money with its client’s money and conceal the movement of their client’s money, and recommend offshore private investment companies located in countries with strict laws on banking secrecy. In recent years, banking and other regulatory authorities in Western countries have managed to bring a certain amount of order to private banking oeprations in the US, Western Europe, and other economically developed countries. But on the periphery of global capitalism, however, private banking divisions are still a hole though which billions in dirty money pours into the global banking system.
Besides the private banking conducted in the branches and subsidiaries of transnational banks, money is also laundered through the correspondent account system. These accounts allow foreign banks to serve their clients (including drug dealers and other criminals) in locations, for example in the US, where they do not have branches or subsidiaries. A bank that is registered abroad and not located in the US attracts wealthy criminals wishing to launder money in the US. Without being subject to US control and avoiding high outlays on subsidiaries, the bank opens a correspondent account in one of the US banks. This way, foreign banks (called respondent banks) and their criminal client receive many or all of the services provided by large American banks (called correspondent banks). In 2001, the scandalous story about the mass transfer of dirty money through the correspondent accounts of leading American banks became a subject of discussion in the upper house of US Congress. The press wrote: «According to senators, 12 offshore banks have moved billions of dollars though US correspondent accounts in the past several years. Among the banks that the senators believed did not «have adequate anti money-laundering safeguards in place» were named four of the country’s six largest banks: Citibank, JP Morgan Chase, Bank of America and First Union. These hearings will be devoted to the practice of operating correspondent accounts, and the combating of money laundering through US banks. The hearings have a particular significance for Citibank in view of the suspicious incidents that have come to light in this bank recently. No other bank in the world has such a wide network of offices. The heads of Citibank, along with certain analysts, say that the bank’s large-scale international activities create additional problems for the bank in its fight against shady clients».
3. Money laundering through correspondent accounts
Commenting on the involvement of US banks in money laundering through correspondent accounts, James Petras wrote: «The largest US and European banks, located in financial centres, serve as correspondents for thousands of other banks. Most of the offshore banks laundering billions for criminal clients have accounts in the United States. The biggest banks specialising in international fund transfers (called «money centre banks») can process up to USD $1 trillion in wire transfers a day. Through June 1999, the top five correspondent bank holding companies in the United States held correspondent account balances exceeding USD $17 billion; the total correspondent balances of the 75 largest US correspondent banks was USD $34.9 billion. For billionaire criminals an important feature of correspondent relationships is that they provide access to international transfer systems – that facilitate the rapid transfer of funds across international boundaries and within countries. The most recent estimates (1998) are that 60 offshore jurisdictions around the world licensed about 4,000 offshore banks which control approximately USD $5 trillion in assets».
Several years later, the same James Petras (in 2011) admitted that the situation surrounding the laundering of drug money by Wall Street banks had become even more catastrophic: «Virtually every major US bank has been deeply involved in laundering hundreds of billions of dollars in drug profits, for the better part of the past decade... Drug profits... are secured through the ability of the cartels to launder and transfer billions of dollars through the US banking system. The scale and scope of the US banking-drug cartel alliance surpasses any other economic activity of the US private banking system... Every major bank in the US has served as an active financial partner of the murderous drug cartels – including Bank of America, Citibank, and JP Morgan, as well as overseas banks operating out of New York, Miami and Los Angeles, as well as London».