By Chris Gillock
Most of us don’t think about money laundering very deeply, although the term is tossed about on a regular basis. The high level concept is straightforward – when a bad guy generates a pile of “dirty” cash from illegal activities (theft, sale of drugs, bribes, fraud, insider trading, illegal gambling, etc. etc.), it needs to be “laundered” to look look like legitimate funds. The laundering process can be sophisticated, and it is up to financial institutions to be on the lookout for sketchy stuff. Many, if not most, financial institutions miss money laundering activities due to the cleverness of the crooks and the inattention of employees.
Converting nasty money into ostensibly regular money involves three stages:
(1) Placement: This is the initial entry of dirty cash into the financial system via bank deposits, purchase of travelers checks, repayment of loans, purchase of chips at a casino, etc.
(2) Layering: This is the effort to separate the illegal money from its source. There may be multiple electronic transfers of funds internationally to exploit legal loopholes and escape detection/prosecution, subdivision of funds and investments into various securities, followed by sale of those securities, etc. This can be a very sophisticated stage of the crime.
(3) Integration: This is the stage when the money returns to the criminal from what appears to be a legitimate source. Often the cash is used to buy something valuable – fine art, real estate, luxury cars, jewelry, etc.
Money laundering has been exploding with the rising tide of financial crime and the increasingly sophisticated and anonymous world of technologically-enabled funds transfers. The UN estimates that the total money laundered equals 2-5% of annual global gross domestic product. Money laundering allows the Mexican drug cartels to equip their militias, ISIL to support suicide bombers and the Russian Mafia to buy Rolls Royces. The FIFA bribery case was the splashiest money laundering scandal in 2015, but there were many other prosaic cases that didn’t get much ink yet did serious damage. Here is a great “top 10” list from Richard Paxton in today’s American Banker:
AML Scandals that Flew Under the Radar in ’15
By Richard Paxton
January 21, 2016
In addition to anti-money-laundering scandals involving global banks and worldwide organizations such as FIFA that grabbed headlines last year, there were plenty of damaging laundering convictions and accusations in 2015 that went unnoticed but still took a heavy toll on midlevel banks.
Money laundering is a crime that occurs more often than the general public realizes, and in most sectors of our economy. In the past year alone, charity officials, a mortuary owner, a church director and a doctor providing chemo treatments were at the center of appalling cases you probably never heard about.
Here is my top 10 list for unheralded yet just as disturbing money laundering stories from 2015:
- Tayfun Karauzum, of Newport Beach, Calif., was sentenced to five years in prison for distributing $1 million to $2.5 million of Potion 9, which contained a solvent that metabolizes in the body to become gamma-Hydroxybutyrate, or GHB, a known date-rape drug. He then laundered the proceeds.
- Charles and Diana Muir were sentenced to 48 and six months in prison, respectively, and forced to return the $1.1 million they stole from a 140-year-old college scholarship charity in Louisville, Ky. — the Woodcock Foundation — that was run by Charles Muir. The couple then laundered the proceeds through Diana Muir’s dental business.
- Scott Gruber of Indianapolis was sentenced to four years in prison and forced to pay over $1 million in restitution for setting up two fundraising organizations designed to collect money for veterans and then failing to turn the money over to its designees. Of the $1 million collected for two separate veterans’ charities, less than 1% was given back. The rest was laundered.
- Farid Fata, a Michigan doctor, was sentenced to 45 years in prison and forced to pay $17.5 million in restitution for defrauding Medicare and other insurers by forcing over 550 of his patients to undergo unnecessary chemotherapy treatments. He then attempted to launder the proceeds.
- Brian Brown, former president of National Relief Charities, and a co-conspirator, William Peters, were sentenced for stealing $4 million from the organization. There were sentenced to 18 and 37 months in prison, respectively, and forced to pay $4 million in restitution, for using their positions with the charity to force it to fund scholarships for Native American students and using the money for personal purposes instead. The pair attempted to launder the proceeds through tax returns.
- Edward J. MacKenzie Jr. was sentenced to 12 years in prison and forced to pay $754,569 in restitution for scheming his way into a lucrative job at a Boston church, looting its coffers and then laundering the money to pay for cars, gifts to friends and family members and to cover his legal bills. MacKenzie has claimed to be a former enforcer for mob boss Whitey Bulger.
- John “Richard” Ceroni and Adale “Marie” Cernoni, founders of Carnegie Career College, were sentenced to 69 months in prison and 55 months in prison, respectively. They were ordered to pay $2.3 million in restitution for bilking the U.S. Department of Education for that amount in student financial aid and then laundering the proceeds to pay for property, vacations and jewelry.
- Katherine Le, a Houston socialite and jewelry designer, whose collection was once sold at Neiman Marcus, was arrested last October on charges of money laundering in connection with a Houston game room. Le, along with alleged six co-conspirators, is accused of laundering over $6 million in proceeds. The maximum sentence for this charge is life in prison.
- Robert L. Keys, an Oregon businessman, was sentenced to 70 months in prison and required to pay $1.1 million in restitution for committing wire fraud, money laundering and bankruptcy fraud. As the owner of the Private Consulting Group investment firm, Keys bilked one of his top clients, an elderly widow, for over $1 million and then tried to launder the proceeds.
- Claus Hansen, owner of Affordable Casket and Moanalua Mortuary in Hawaii, was sentenced to 30 days in jail, 300 hours of community service and $50,000 in restitution fees for pocketing a total of $85,886.18 that was supposed to go to survivors of Medicaid recipients. He then attempted to launder the proceeds.
After analyzing the data we found that the median of the top 10 unnoticed money laundering cases (minus Le’s, who has yet to go to trial) was $1.1 million laundered, $1.1 million paid in restitution and five years in prison. That might seem small compared with the whole of AML cases. The estimated amount of money laundered globally in one year is between 2% and 5% of global GDP, according to the United Nations Office on Drugs and Crime.
But even though the amount of money laundered by the criminals on the list pales in comparison to the cases making national and international headlines, these are hardly victimless crimes. Those cases that slipped through the national media’s radar last year likely had a dramatic effect on the people and communities where those crimes took place.
Richard Paxton is the founding partner and CEO of Alacer Group, a consulting firm and technology solutions provider.