How is cash laundered in the modern day?  What steps do the authorities take, and what further steps could they take, in order to prevent the laundering of illegal cash?  The following article provides a modern day perspective on this topic.

1.     HOW DOES CASH FIT INTO THE (ANTI)-MONEY LAUNDERING FRAMEWORK?  AN INTRODUCTION.

The following are examples of activities that generally result in an individual receiving cash (i.e. coins and notes) representing the proceeds of crime:

1.     Lawful activities consisting in the sale of goods (e.g. in a shop) or the provision of services (e.g. construction or healthcare services) in consideration for a cash payment where the transaction is not declared, in whole or in part, to the tax authorities.

2.     Unlawful activities consisting in the sale of prohibited or restricted goods (e.g. drugs or pharmaceutical products) or the provision of prohibited or restricted services (e.g. running an unlicensed casino) in consideration for a cash payment.

3.     Stealing cash as part of a robbery or burglary.

In case 1 above, the cash representing the proceeds of crime is arguably equal only to the amount of tax (e.g. income tax or VAT) evaded rather than the full amount of cash received by the individual in consideration for the transaction.  Cash-based tax evasion is apparently the largest source of tax evasion in most countries.

As a result of the above activities, an individual, or group of associated individuals, might accumulate a significant amount of cash.  It is reported that, at the peak of his power, Medellín cartel boss Pablo Escobar generated an estimated USD 420 million a week in cash.

What follows is what is known as the “placement” stage of money-laundering, which consists in the introduction into the financial system of cash representing the proceeds of crime.

2.     CASH SMUGGLING, GAMBLING AND OTHER WAYS CASH IS LAUNDERED IN THE MODERN DAY.

In the 70s, 80s and 90s, it was apparently possible to deposit a large amount of cash with a commercial bank, private bank, stock broker or other financial institution without the recipient of the cash asking too many questions, seeking to independently verify the origin of the cash or reporting the transaction to tax authorities or financial intelligence units (“FIUs”).

In the modern day, any deposit of cash exceeding EUR or USD 10,000 in most developed countries is likely to result in the recipient of the cash reporting the transaction to the FIUs of the country where it is located.

There are however many different ways (including the following) in which individuals might still be able to place large amounts of cash in the financial system without being detected:

1.     Cash Businesses.  It is suggested that this is by far the most common way to launder illegal cash in the modern day.  It involves the establishment of a cash-based business such as a restaurant, cafe, hotel, casino, nightclub, shop, amusement park, camping site, tourist attraction and waste recycling facility.  Charities, religious organisations and weddings could also be used for these purposes.  The monthly cash receipts of the business are inflated by a small margin and a mixture of legal and illegal cash (so called “blending of funds”) is deposited with a bank.  The cash is then paid by bank transfer to the owners of the business as an after-tax dividend or to third parties in payment of a tax-deductible false invoice (e.g. for non-existing consulting services provided by an overseas company which may not exist or, having been incorporated in an offshore jurisdiction, exists only on paper and is not liable to pay corporation tax in its country of incorporation).  It is reported that Al Capone laundered his cash through cash-only laundromats, hence the term money-laundering, and that ATM machines might have also been used in the past to launder illegal cash.  The machines were apparently filled with illegal cash which was dispensed to card holders and then refunded by the banks to the operator of the machine by way of a bank transfer.

2.     Money service businesses (MSBs).  These are businesses that specialise in receiving cash amounts in one country and paying out an equivalent amount in a different country, either in cash or by bank transfer.  These businesses can also provide currency exchange services.  Since MSBs are subject to AML regulations in most countries, the expectation is that it might be difficult to use them to launder illegal cash in the modern day unless the laundering takes place through a “smurfing” campaign or if their employees have a relaxed attitude to compliance or are complicit in the money-laundering scheme.

 3.     Smurfing.  Smurfing (also known as “structuring”) is the practice where a person breaks up a large amount of cash into a number of small deposits that are below the threshold requiring customer identification or reporting.  These are then paid into many different banks in one or more countries by one or more individuals.  In the old days, criminal organisations were apparently even able to set up their own banks in offshore or non-compliant jurisdictions.

 4.     Cuckoo Smurfing.  This involves the use of a MSB owned by a complicit individual.  Criminal money that is wired through the MSB substitutes legitimate money that is wired though the same MSB so that the intended recipient of the legitimate money receives the criminal money and the intended recipient of the criminal money receives the legitimate money.  In this way, the connection between the criminal sender and their intended recipient is lost.

5.     Money Mules/Cash Smugglers.  As part of a smurfing campaign, these individuals transport the criminal cash to another country where it is then deposited into one or more banks.  The amount being transported can be higher or lower than the threshold requiring a customs declaration at the border.  If the criminal money is already in the banking system, money mules are recruited to receive and then transfer (or withdraw in cash) large sums of money through their own bank accounts in consideration for a small fee.  Apparently almost 10,000 money mule bank accounts are detected by banks in the UK every year.  The majority of these accounts are held by individuals who are less than 21 years old.  Cash is sometimes also smuggled across countries through the post and it is reported that the Financial Action Task Force (“FATF”) estimates that the amount of money laundered annually through the smuggling of cash across international borders is “between hundreds of billions and a trillion US dollars per year”.  To put this figure in perspective, the total value of cash outstanding in the world amounts apparently to about USD 4 trillion.

6.     Gambling, Casinos and Lotteries.  In certain countries (e.g. the UK), casino winnings are tax free and therefore a person could attend a casino and subsequently deposit in their bank a (relatively) large amount of cash claiming that it was the result of gambling.  Larger sums could be deposited if more than one individual participate in this exercise (e.g. a group of complicit individuals attend a casino together).  Horse-races and lotteries could also be used to launder illegal cash.  The cash could be used to buy winning tickets or chips which are then redeemed by means of a transfer of money into a bank account.

7.     Valuables.  Paintings, watches, precious metals, precious stones, jewellery, artwork and other luxury items could be bought in cash and kept for the long term, resold in the short term or transported to other jurisdictions.  Certain countries have adopted restrictions on the use of cash to pay for high value items or require the seller of those items to identify their customer (see section 3 below).  There is a perception however that there is a relatively low level of compliance with these requirements among retailers at least in certain countries because retailers generally do not wish to disincentive a customer from making a large purchase by requiring them to produce an ID.

 8.     Wholesale Trading.  High-end fashion, electronics and retailers of other items might be prepared to accept a large amount of cash from an import/export broker in payment of a large order of merchandise that is shipped to an overseas buyer which then pays the broker in foreign currency by bank transfer.  This is apparently the way the Sinaloa Cartel headed by El Chapo Guzmán used to launder the millions of US dollars it was reportedly generating annually in cash from the sale of drugs in the US.  The dollars were apparently used to buy merchandise in the US which was then shipped to legitimate importers in Colombia which would then pay Colombian pesos to the cartel’s import/export organisation.

 9.     Other. Other ways to launder illegal cash might include refurbishing a property (or fitting a restaurant) which is then sold at a profit or using the illegal cash to access a crypto-currency account which is then converted into fiat currency.  In a way, a Bitcoin account could be seen as the modern day equivalent of a bearer passbook.  Until very recently, cash could also be used to top-up anonymous pre-paid cards but the ability to do so is now subject to significant restrictions, at least in the EU.

3.     WHAT SPECIFIC MEASURES HAVE COUNTRIES ADOPTED TO PREVENT THE LAUNDERING OF CASH?  THE NATIONAL PERSPECTIVE OF ITALY, THE UK AND OTHER COUNTRIES.

The main restrictions that countries have put in place to prevent the laundering of cash are as follows:

1.     Prohibiting businesses from accepting more than a certain amount of cash as part of a transaction (so called “cash thresholds”).

2.     Requiring retailers to report to the authorities any transaction involving the payment by an individual of cash exceeding a certain amount or which is suspected to involve money laundering.

3.     Requiring banks to report to the authorities the deposit by an individual of a large amount of cash.

4.     Requiring individuals to complete a customs declaration if transporting more than a certain amount of cash in or out of a country.

The approach taken by countries within and outside the EU in respect of the above matters varies.  A summary of the position in the UK, Italy, the US and other countries is set out below.

1.     UK

MeasureDescription
1Cash ThresholdNo cash threshold applies in the UK.  It is suggested that Luxury retailers in certain UK cities accept cash payments well in excess of GBP 10,000.

There are other EU countries that have not adopted any cash thresholds.  These include Germany, Austria, Malta and Cyprus.  Germans and Austrians have apparently a strong cultural attachment to the use of cash and have resisted attempts to introduce cash thresholds in their countries.

2Reporting by RetailersIn the UK, only high-value dealers (“HVDs”) are generally required to submit reports to FIUs.

In particular, HVDs are required to: (i) register with HM Revenue & Customs (“HMRC”) under the UK anti-money laundering regulations, (ii) carry on customer due diligence in relation to any customer that carries on a transaction in cash that amounts to EUR 10,000 or more, and (iii) send a suspicious activity report (“SAR”) to the National Crime Agency (“NCA”) if it suspects that a transaction involves money laundering.

A HVD is defined as any business that accepts high value cash payments of EUR 10,000 or more (or equivalent in any currency) in exchange for goods.

There is no minimum amount of cash the acceptance of which results in a HVD being automatically required to submit a SAR.

3 

Reporting by Banks

 

As far as depositing cash into a bank account is concerned, there are no fixed minimum amounts which trigger an automatic mandatory report in the UK.

A UK bank is required to submit a SAR only it suspects that the transaction involves money laundering.

4Customs DeclarationIf a person brings cash to the UK from another EU country, or vice versa, there is no need to make a customs declaration to the UK authorities (but the cash may have to be declared to the authorities of the other EU country).

A person must declare cash of EUR 10,000 or more (or the equivalent in another currency) if they take it between the UK and any non-EU country.  Cash includes: (i) notes and coins, (ii) bankers’ drafts, (iii) cheques of any kind (including travellers’ cheques).

A person could face a penalty of up to GBP 5,000 if they don’t declare their cash or give incorrect information.  The declared cash can be seized by customs officers if they have reasonable grounds to suspect a crime. They can keep the cash for 48 hours – after that they need a court order.

2.     Italy

MeasureDescription
1Cash ThresholdIt is prohibited to transfer cash exceeding EUR 3,000 from a person (both natural and legal) to another person (both natural and legal).  Such prohibition concerns payments made for any reason but does not apply to the deposit of cash into a bank account in the name of the depositor.

The limit that applies to MSBs is lower and amounts to EUR 1,000.  In addition, foreign tourists are allowed to purchase goods in Italy by paying by cash up to the higher limit of EUR 10,000.

Similar cash thresholds apply in France: EUR 3,000 for fiscal residents of France and EUR 15,000 for non-resident individuals who act as consumers.  In Spain, the cash threshold is EUR 2,500 for Spanish residents and EUR 15,000 for non-residents.  Switzerland has also introduced a cash threshold but it is at CHF 100,000 (about GBP 81,000), arguably too high to have any impact on combating financial crime.

2Reporting by RetailersIn Italy, precious goods dealers (including gold dealers) have to register in a special register and are subject to specific conduct of business obligations.

These include a duty to: (i) identify their customers; (ii) refrain from making cash transactions of an amount exceeding 500 Euro; (iii) use a specific bank account exclusively for precious goods transactions; and (iv) make a record of any transaction that includes the identity of the customer, a description of the item that is the subject of the transaction, the price paid, the means of payment, and a picture of the object.

3Reporting by BanksIn Italy, banks are required to notify the Bank of Italy if an individual deposits or withdraws more than EUR 3,000 per month.
4Customs DeclarationAny person entering or leaving Italy and carrying banknotes, coins, traveller’s cheques, bearer negotiable instruments, etc. of an amount equal to or greater than EUR 10,000 must complete a customs declaration.  This applies whether the person is travelling to or from an EU or a non-EU country.

3.     US

 MeasureDescription
1Cash ThresholdThere is no cash threshold in the US.
2 

Reporting by Retailers

 

Any person in a trade or business who receives more than USD 10,000 in cash in a single transaction or related transactions must report the transaction to the Internal Revenue Service (“IRS”) and the Financial Crimes Enforcement Network (“FinCEN”).

These reports are used by the US government to track individuals that evade taxes and those who profit from criminal activities.

The above reporting obligation applies whether a retailer is a HVD or not.

3 

Reporting by Banks

 

Banks are required to file a report to FinCEN if an individual deposits more than USD 10,000 in cash in their bank account.
4Customs DeclarationThere is no limit on the amount of money that can be taken out of or brought into the United States.  However, if a person carries more than USD 10,000 in currency or negotiable monetary instruments, they must fill out a customs declaration.

A country where there are no requirements to make a customs declaration irrespective of the amount of cash that is transported is Switzerland.

4.     HOW EFFECTIVE ARE SUCH MEASURES AND CAN BANKS TAKE ANY ADDITIONAL MEASURES?

The measures described in section 3 have certainly made it more difficult for individuals, or group of connected individuals, to launder vast amounts of cash without being detected.

Those measures, however, have a number of weaknesses which include the following:

1.     It may still possible to deposit large amounts of illegal cash into the banking system through smurfing involving several seemingly unconnected individuals who operate in more than one jurisdiction.  A single individual might also be able to deposit smaller amounts of cash with a number of banks in the same jurisdiction without triggering a report.  This is because apparently banks do not generally communicate such deposits to each other or a central agency and therefore any relevant data is not pooled.

2.     It is still possible to smuggle large amounts of cash between borders without making a customs declaration.  Cash could be hidden in secret compartments of cars or trucks passing through the border.

3.     There is apparently a relatively low level of compliance with AML regulations and cash thresholds among retailers, currency exchanges, MSBs and HVDs (some of which might fail to register for AML purposes altogether) in certain countries.  Especially for the smaller operators, compliance with these requirements might be burdensome, impractical and perceived as being potentially detrimental to business.  Retailers often have to pay an ad valorem fee to card payment service providers in order to be able to accept card payments and that fee can be substantial in the case of sale of a high value item.  By contrast, there are no transaction costs when a retailer is paid in cash.  It is reported that the luxury goods sector submits a fairly low number of suspicious activity reports to authorities in the UK.

4.     Banks and other financial institutions have historically failed to adopt and implement fully compliant AML systems and controls.  This is evidenced by the large number of fines that have been imposed on banks by regulators around the world.  Fines have been imposed, for example, on Canara bank, ING, HSBC, Citibank, Coutts, the Commonwealth Bank of Australia (CBA) and Deutsche Bank.

5.     There are doubts about the effectiveness of AML reporting, be it made by retailers, banks or customs authorities.  FIUs around the world receive a very high number of reports every year but are apparently able to investigate only a small proportion of such reports.  This is partly because, in some jurisdictions, there is no legal basis for further investigation (paying in cash is generally not an offence in itself unless it breaches a cash threshold), and partly because of the sheer volume of such reports.  In the US, for example, FinCEN received apparently almost 16 million reports on cash transactions over USD 10,000 in 2006.  Moreover, most FIUs are apparently designed to assist in criminal investigations, but not to conduct investigations themselves.  In the case of FinCEN, reports are apparently received and processed, but there is no capacity to investigate them until FinCEN is approached by another law enforcement agency, such as the FBI.  In addition to the overwhelming volume of reports, there is also the problem that, as mentioned, there is nothing inherently illegal about using significant amounts of cash.  Thus, were law enforcement and tax agencies to seek to build criminal cases on currency transaction reports, they would generally need much more information than is typically given on such reports.

6.     The laundering of illegal cash on a “one-off” basis or over a long period of time might be particularly difficult to detect, even where it involves the laundering of relatively large amounts of cash.  It is reported that rule no. 1 of money-laundering (and crime in general) is “don’t be greedy”.

There is probably little that banks and other financial institutions on their own could do to improve their detection rates of the laundering of illegal cash beyond existing levels even though, in conjunction with tax authorities, more statistical analysis could perhaps be used to detect outliers (e.g. cash businesses depositing statistically abnormal amounts of cash in the financial system).  Having said that, it remains the case that FIUs are unlikely in most countries to have sufficient resources to properly investigate the large number of reports they receive every year.

5.     WHAT ADDITIONAL STEPS COULD GOVERNMENTS TAKE TO PREVENT THE LAUNDERING OF ILLEGAL CASH?

The following are examples of steps that Governments could take (or have taken) to eliminate or reduce the laundering of illegal cash (in addition to the steps mentioned in section 3):

1.     Abolish the use of cash.  There are retailers in London (e.g. Natural Kitchen) that have already ceased to accept cash from customers as a means of payment.  Mostly out of convenience, they now accept only card payments.  It is unlikely however that a Government would be able to abolish the use of cash in its territory given that certain segments of the population (e.g. the elderly and poorer households) might not have access to, or regularly use, payment cards.  Equally, even if a country were to take the extreme step of prohibiting all cash payments, unless all other countries were to take the same step at the same time, it is likely that a parallel currency market (e.g. based on a foreign currency) could develop and cash smuggling would increase.  A parallel market based on an alternative currency (e.g. a crypto-currency) could also develop.

2.     Encourage the use of electronic money.  As an alternative, Governments could take action to encourage the adoption of electronic money and change the cultural attitude of the population to the use of cash, especially for high value transactions.  In the EU, Sweden has apparently one of the lowest levels of cash outstanding relative to GDP (at 1.73%, compared with 10.63% for the Eurozone and 7.9% for the US) and cash usage is declining as consumers and businesses increasingly use electronic alternatives for all types and sizes of payments.  After eliminating Sweden’s highest-denomination note (1,000 krona, worth approximately GBP 94), the Swedish government apparently smoothed the transition to electronic payments also through other measures such as distributing card-reading devices to churches and homeless people to enable them to receive donations.  Having said that, the attitude of individuals to the use of cash changes from country to country and, as mentioned, cash remains heavily used in some countries such as Austria and Germany.

3.     Issue new banknotes.  Cancelling banknotes on short notice and requiring individuals to exchange at a bank old banknotes with new banknotes within a limited period of time has the potential of making illegal cash held by individuals worthless as those individuals would be deprived of the opportunity to launder that cash over a longer period of time without being detected.  India attempted to do this in November 2016 but its banknote recall (which was part of a demonetisation programme that included other measures such as the imposition of cash reporting limits and cash thresholds) did not apparently flush out significant untaxed wealth.  It is reported that, according to the Reserve Bank of India, 99.3% of the banknotes withdrawn from circulation were returned to banks, indicating either that there was less “black money” than expected or that schemes to launder money were more successful than the India’s Government thought.  Even though the initiative is considered by some commentators to have been ill conceived and badly implemented, it is reported to have however accelerated the adoption of electronic payment methods in India.

4.     Abolish high denomination banknotes.  In May 2016, the ECB announced that the EUR 500 note would no longer be issued from the end of 2018 due to concerns that it could facilitate illicit activities.  The essence of the argument was that high-denomination notes are increasingly rarely used for legitimate purposes, yet are heavily used by criminals, since they enable large sums of cash to be moved, stored and transacted covertly.  Although it is not the highest value bank note in the world (apparently Singapore’s SGD 5,000 note (approximately GBP 2,900) and Switzerland’s CHF 1,000 note (approximately GBP 810) have higher value), the EUR 500 note is reported to have by far the largest outstanding stock – worth more than EUR 300 billion – and there is ample evidence of its use in drug trafficking and other crimes.  It is worth noting however that the ECB has adopted a gradual approach to removing the EUR 500 note.  Issuance has stopped but the note continues to be legal tender and there are reportedly no plans to withdraw it from circulation from the time being.  This is probably because, as mentioned, there are countries in Europe that have a strong cultural attachment to the use of cash also for high-value transactions.

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