What this misses, of course, is the fourth dimension of the crime - the jurisdiction where the money is laundered. Laundering the proceeds of transnational criminal activity is critical for two reasons. Money can be used as evidence against the perpetrators and can itself be the target of investigation and seizure.
Secrecy is crucial to successful money-laundering. Hence, the role of secrecy jurisdictions such as Panama. There are the locations where money can be removed from direct association with the underlying crime, the trail disguised and the money made available again to the criminal with its origins hidden.
The Panama Papers revealed to the general public what had been known for decades about Panama. Here’s what a wikileaked 2006 memorandum from the U.S. embassy in Panama had to say: The Panamanian “incorporation regime ensures secrecy, avoids taxes, and shields assets from the enforcement of legal judgments. Along with its sophisticated banking services, Panama remains an environment conducive to laundering the proceeds from criminal activity and creates a vulnerability to terrorist financing.”
Of course, Panama is not alone. The UN Office on Drugs and Crime estimates that more than $600 billion of the proceeds from transnational organized crime may have been laundered through the global financial system using multiple bank secrecy jurisdictions.
But altering bank secrecy rules alone will not solve the problem. Secrecy jurisdictions have professionals who have developed sophisticated means to hide the source and use of money: special purpose vehicles, instruments such as bearer shares, foundations, trusts, trust companies, banks and bank accounts. And these jurisdictions have made a point of lax cooperation with the rest of the international community in criminal and tax investigations.
In other words, what started as a business to help a wealthy few protect their privacy and perhaps legally minimize their taxes has grown to be an enormous loophole in the international legal system designed to protect against the plagues of human, arms and drug trafficking.
Experts know that money-laundering often depends for its success on approximating as closely as possible legal transactions. For example, inter-company transfer pricing becomes under- or over-invoicing or back-to-back loans becomes a loan-back scheme. And better yet if the money-launderer can use an unwitting legitimate business to cleanse the money.
My next blog will look at ways that legitimate international businesses try to avoid becoming tools of the money-laundering trade.