Michael Levi and Peter Reuter Money Laundering ABSTRACT Techniques for hiding proceeds of crime include transporting cash out of the country, purchasing businesses through which funds can be channeled, buying easily transportable valuables, transfer pricing, and using “under- ground banks.” Since the mid-1980s, governments and law enforcement have developed an increasingly global, intrusive, and routinized set of measures to affect criminal revenues passing through the financial system. Except at an anecdotal level, the effects of this system on laundering methods and prices, or on offenders’ willingness to engage in various crimes, are unknown. Available data weakly suggest that the anti–money laundering (AML) regime has not had major effects in suppressing crimes. The regime does facilitate investigation and prosecution of some criminal participants who would otherwise evade justice, but fewer than expected by advocates of “follow the money” methods. It also permits the readier recovery of funds from core criminals and from financial intermediaries. However, the volume is very slight compared with income or even profits from crime. Though the regime also targets terrorist finances, modern terrorists need little money for their operations. AML controls are un- likely to cut off their funds but may yield useful intelligence. Money-laun- dering controls impose costly obligations on businesses and society: they merit better analysis of their effects, both good and bad. People who commit serious crimes for economic gain want not only to evade imprisonment but also to enjoy the fruits of their crimes. This enjoyment often takes the form of immediate (sometimes conspicuous) consumption. For the more disciplined and those who make vast prof- its, “enjoyment” may take the form of savings for future economic opportunities. The latter group (plus transnational criminals who have Michael Levi is a professor in the Cardiff School of Social Sciences, Cardiff University, Wales. Peter Reuter is a professor in the School of Public Policy and the Department of Criminology at the University of Maryland and codirector of the Drug Policy Research Center at RAND. This essay draws significantly on Peter Reuter and Edwin M. Truman, Chasing Dirty Money (2004). We are grateful to Dr. Truman Edwin and to the referees for their comments. Jeri Smith-Ready provided valuable research assistance. ᭧ 2006 by The University of Chicago. All rights reserved. 0192-3234/2006/0034-0004$10.00 289 290 Michael Levi and Peter Reuter to move funds before spending them), how they do their business, and how public and private sectors respond around the world are the focus of this essay. The conversion of criminal incomes to forms that allow the offender unfettered spending and investment has been an ongoing concern to both criminals and the state since at least the early days of the Amer- ican Mafia. Meyer Lansky’s claim to fame was partly his supposed skill in concealing the origins of funds used to buy real estate and legitimate businesses. His goal was to avoid tax evasion charges, which had fa- mously brought down Al Capone, by making it difficult to trace the connection between wealth and its criminal sources.1 Laws against han- dling stolen property traditionally referred only to the physical prop- erty obtained in the course of the crime. Only in the last generation has the disguise or concealment of funds obtained from crimes itself become a criminal activity, in a sense created by a new set of laws and regulations aimed at “money laundering.” Developed initially in the United States in the 1970s to combat use of international banks for tax evasion, money-laundering controls be- came a significant component of the war on drugs. More recently they have grown into an extensive and global set of controls aimed at a wide array of offenses, from cigarette smuggling, through corruption of high-level officials, to terrorist finance. The extent to which money- laundering laws include tax evasion remains an issue of divergence, both in national legislation and in mutual legal assistance. The array of institutions involved in anti–money laundering (AML) is impressive. The control regime in the United States has extended beyond banks,2 the original subjects, to a wide range of businesses such as car dealers, casinos, corner shop money transmission businesses, jewelers, pawnbrokers, and certain insurance companies. All these are now required3 to play an active role in crime control through, inter alia, reporting on those customers whom they suspect of obtaining funds from crime or of using funds (whether from crime or legitimate sources) for terrorist activities. In the United Kingdom, any business handling high-value goods must report a “suspicious transaction.”4 In 1 Mark Haller provided helpful clarifying comments on this matter. 2 There were also some other regulated retail savings firms. 3 Garland (1996) offers an inelegant but evocative term, “responsibilized,” that might be used for this. 4 Technically, these should be labeled “suspected transactions,” since they represent the aftermath of a cognitive process rather than an inherent quality of the act. But as Gold Money Laundering 291 Canada there have been moves to require accountants to affirmatively report any suspicions of money laundering by their clients, though analogous requirements for lawyers had to be withdrawn following constitutional attack. In Switzerland, long regarded by the media and by anticorruption campaigners as an iconic laundering nation, even hotels that offer money exchange facilities above a modest level are subject to money-laundering regulation and are required to identify customers and record dealings. The regime aims to be truly global, with both the International Monetary Fund (IMF) and the World Bank playing an active role within a policy framework set by a “temporary body” with a renewable mandate created in 1989—the Financial Action Task Force (FATF). They and a myriad of regional bodies monitor how well each nation complies with at least the formalities (and, increasingly, the substance) of the regime (Levi and Gilmore 2002). Thus, from small beginnings in 1995, by November 2005, the Egmont Group contained 101 Na- tional Financial Intelligence Units (FIUs) that meet internally devel- oped criteria for receiving, analyzing, and processing reports (including Suspicious Activity Reports [SARs]) from the regulated institutions mentioned in the previous paragraph. Since 1999, there has been a formal process for imposing economic sanctions on countries that do not play their part, by slowing down their international transactions and making it almost impossible for their banks to clear funds through other countries. There is considerable pressure to expand the regime to other businesses and professions throughout the world, mostly jus- tified since 9/11 as a method for fighting terrorism. Given the small sums involved as direct operational costs in major incidents such as the Madrid bombing of 2004 and the London bombings of July 2005 (not much more than $10,000 in total), it is difficult to predict where this broadening of coverage will end. Money laundering is difficult to study in part because it is concep- tually elusive. Is it a separate activity, like the fencing of stolen goods, or is it better thought of as an element of certain criminal acts, as is conspiracy? There appears to be a disjunction between the legal con- struct of laundering, which includes acts as modest as the placing of proceeds of crime in a bank account in one’s own name, and the an- and Levi (1994) note, it is difficult to shift even misleading terminology once it has entered into routine use. Another example of this might be the continued use of the term “organized crime.” 292 Michael Levi and Peter Reuter alytical construct of laundering, which one would expect to mean the sanitizing of proceeds of crime so that one can spend the funds as though they had been acquired legitimately. Most crimes for significant gain generate more funds than their perpetrators can spend in cash in the short term, and storing large sums creates risks from law enforce- ment and from other criminal predators. In that sense laundering (or at least “hiding,” which has become “laundering” through legal exten- sion of the concept) is an integral part of the serious crime process. But how distinct is the process from the commission of the under- lying “predicate” crimes? There certainly are persons uninvolved in the underlying crime who have laundered money. For example, Lucy Edwards—a senior executive in charge of Eastern European operations at the Bank of New York—and her husband, businessman Peter Berlin, earned large sums by laundering billions of dollars for some Russians who were either evading taxes or concealing the fruits of criminal en- terprise. They have no other connection to criminal activities.5 How- ever, in many instances—especially fraud and tax evasion—the act is built into the underlying criminal offense. In accusations against Enron (Andrew Fastow) and HealthSouth (Richard Scrushy),6 senior execu- tives were charged with money laundering as well as fraud and em- bezzlement; but these cases currently involve no person who is charged with having acted as their money launderer. Pragmatically, enforce- ment authorities may find it useful to be able to charge people with laundering or (in the United States) with structuring payments in order to avoid reporting regulations (discussed later), even where the laun- derer is in fact the person committing a substantive offense such as drug trafficking or robbery.7 Knowing the balance between laundering as a separate activity and as part of the offense is important in judging the likely effectiveness of the AML regime. If the same evidence that might be used to convict people of laundering could also convict them of a substantive offense, there is little marginal benefit from the existence of the offense.