What is Money Laundering?
Criminal activities can be very lucrative, but the amount of money they generate attract the unwanted attention of tax authorities and law enforcement. One must be able to give an acceptable explanation about the origin of their wealth. Admitting that you made millions from controlled substances, extortion or illegal gambling facilities simply won’t work. Therefore, criminal organisations invest considerable effort in masking the illicit sources of their funds and make them appear as legal. Money that’s made as a result of criminal activity is commonly known as dirty money. The process of ‘cleaning’ it is called money laundering. And while our entire article is about exactly that, there are many casinos that are against such policies. If you are an online casino lover and you want to feel safe and protected, you can see our list of trusted and licensed online casinos.
A Brief History
One of the most famous examples of money laundering was the purchase of multiple laundromats (known as launderettes in the UK) by Al Capone in the 1920s. As a cash-driven operation, they allowed the input of illegal money which was then presented as fair income from a legit business. A substantial portion of Capone’s huge stack was made by liquor trade during the prohibition period. Later it turned out that laundromats are not a very good front because the amounts made by smuggling alcohol were disproportionately high compared to what a coin wash can make without raising suspicion. Capone was convicted for tax evasion in 1931, which was rather ironic given that law enforcement couldn’t prove his connection to the criminal operations he was running for years. Simply put, he made more money than he could hide or launder. It’s interesting to note that there’s no direct link between Capone’s choice of laundromats and the term ‘money laundering’, as the phrase came to life much later.
Meyer Lansky, another figure from the prohibition era, is believed to be the first master of real money laundering. After Capone’s conviction, Lansky came to the obvious conclusion that even very successful ground-based businesses don’t match the scale of the criminal empire he was running. He pioneered in financial schemes that involved Swiss banks, and practically took money laundering to a much larger scale and a whole new level of sophistication.
How Does it Work?
The strategies and methods employed to facilitate money laundering are constantly evolving. Crime syndicates are always looking for new ways to move money undetected and remain a step ahead, while regulations are also being updated to allow prevention and counteraction.
Despite the growing complexity of the schemes, the process can be split into three main phases:
- Placement – this is when the cash earned from crime is introduced to the financial system while using different techniques to avoid detection.
- Layering – this is the actual process of separating dirty money from their source. It is accomplished by a series of fast transactions designed to bury the origin of criminal proceeds under a very long paper trail that makes tracing very difficult.
- Integration – this is when the laundering cycle completes. The money is reintroduced in the economy and can be used freely without the danger of incrimination. The source appears legitimate and raises no suspicion.
During the placement phase, the process is fairly simple. However, this is when criminals are most vulnerable because those involved can get caught with the cash. In contrast, the layering phase requires a lot more sophistication and knowledge of the loopholes in the legal and financial systems. Quite often layering involves international transactions with offshore companies and banks.
Common Methods Used for Money Laundering
Each phase of the process presents its own challenges and criminal organisations choose a variety of strategies to ensure flawless execution. Here are some examples:
- Structuring is essentially breaking the cash down to amounts that are below the reporting thresholds. The idea is to deposit the money in multiple small tranches to avoid detection. Structuring helps to remain under the radar but makes placement rather tedious.
- Smuggling of money abroad to a jurisdiction with loose requirements and depositing it into a bank account there. This is a riskier method for placement and the chances of getting caught are higher.
- Using cash driven businesses for masking criminal proceeds as revue from legitimate enterprises. This is what Al Capone did with his laundromats. Targeted businesses have a naturally high cash flow and a very high ratio between revenue and variable costs. Typical fronts are casinos, exotic dance clubs, car washes, bars and night clubs.
- Trading items with subjectively defied value, such as artwork sold in auctions. Money launderers can benefit from the huge potential for over or underpricing the traded items. Furthermore, on the art market, both buyers and sellers can benefit from strict confidentiality, which allows the moving of large sums of money between undisclosed parties in seemingly legal transactions.
- Shell companies are often used during the layering phase. They exist only on paper and don’t have a physical office location or any employees. However, they can own assets and participate in business transactions. This is a great environment for moving money between entities that cannot be connected to given individuals.
- Pretended or real gambling at legal casinos or other facilities. The former approach is based on using casinos as transaction layers without playing. Chips are bought with dirty money, then some time is spent on the floor without active gambling. After a while the chips are exchanged for money, which is then presented as winnings. The latter approach involves placing actual bets on all outcomes in a high probability game, e.g. betting both on red and black in at roulette.
- Transaction laundering is the processing of electronic payments by a business on behalf of another entity. This conceals the actual purpose of the payments. A known application of this strategy is the use of fake online shops to process payments for the online gambling industry. The main purpose is to facilitate transactions between online casinos and players located in jurisdictions where gambling is not allowed.
Why are Casinos Susceptible?
As indicated above, there’s more than one way of using casinos to launder money. Gambling venues are believed to be attractive for organised crime for three basic reasons:
- Huge cash flow is accepted as normal. Also, casinos can provide simple banking services with a decent level of anonymity.
- Casinos would accept people with a bad reputation. Simply put, being infamous won’t keep the door closed. Notorious or not, if you go to a casino and spend your money without causing trouble, you’ll always be welcome.
- Casino’s own business interest dictates that the venue should be profitable. In that sense, high rollers are clients that are wanted and well taken care of. Suspicious transaction reports are done at the discretion of responsible individuals who, in their effort to preserve a good client relationship, may abstain from reporting a certain activity.
It’s important to note that regulatory bodies well know the susceptibilities of gambling venues. Therefore, a lot of effort has been invested in setting an adequate legal framework and then applying it to control gambling businesses. That said, modern day casinos are under scrutiny and massive money laundering operations are becoming less probable.
We can confidently state that gambling is well regulated in European and North American jurisdictions where it’s been legalised. Communities are cautious about the open practice of activities that are associated with known social risks and danger posed to vulnerable groups such as minors. In response to these concerns national and local legislatures created an adequate legal framework that allows a safe practice and ensure that the industry contributes to the economy without posing any threats. Regulations are continually updated to answer emerging challenges and cover all potentially negative aspects of gambling. The three main goals at which effort is directed are:
- Promotion of responsible gambling and prevention of problem gambling;
- Restricting the access of minors and the advertising to vulnerable groups;
- Prevention of financial crimes, including measures against money laundering and the financing of terrorism;
Some of the existing requirements help in achieving more than one goal. For instance, before playing you need to prove you are of legal age. The only way to do this is to present a valid ID, meaning that you can’t play anonymously, especially online.
Other measures are strictly money related. Operators are obliged to exercise customer due diligence. This includes identity checks and the reporting of suspicious betting activity, as well as suspicious transactions and transactions above a defined threshold. In the UK for example, the threshold is EUR 2000 and applies both to land-based and online casinos. In addition, there are detailed guidelines about what constitutes suspicious activity. It must be pointed out that some measures are especially effective in online gambling because venues keep electronic records of transactions and betting activity. This makes analysis and detection of suspicious patterns much easier.
Recent Cases of Money Launding
Despite the existing regulations, there are examples of large-scale money laundering and other utterly illegal financial practices that got media coverage not too long ago. This proves that criminals become more inventive and keep adapting their methods to circumvent the continually updated regulations.
The Vancouver Model
In July 2018 The Globe and Mail published an article revealing details about a massive money laundering scheme that spread internationally and involved land-based casinos in British Columbia. This became known as the Vancouver model. In a nutshell, Chinese high-stake gamblers were recruited to spend money in B.C. casinos. However, China’s currency restrictions don’t allow the export of the large amounts needed for gambling. That’s why the whales deposited money to a Chinese bank account that belongs to a criminal organisation. In exchange, this organisation arranged the delivery of the same amount of cash upon the gambler’s arrival at a given venue. The benefits are simple. The gamblers spend millions playing abroad without the necessity of taking money out of their country. Crime groups get rid of illicit money and in return get the same amounts at a bank account in China, completely unreachable for local law enforcement.
In official statement quoted later the same year the B.C. Attorney General claimed that authorities were evidently unable to control local casinos. It was also announced that regulation updates were already in progress. The biggest concern expressed by the authorities was that people were able to show up at a casino with bags full of cash and remain unreported for a long time.
Transaction Laundering via Online Shops
In June 2017 Reuters published the findings of an investigation which delved into several e-commerce sites that accepted orders and payments but never delivered the purchased items. It turned out that the websites were a front used to disguise online casino payments. Payment processing companies have designated codes for different types of purchases and can block casino deposits when the user is in a jurisdiction that prohibits online gambling. The “dummy shops” were used to conceal the true nature of the payments and present them as purchases of trivial items. The report outlines that enabling illegal services to enter the financial system is in violation of anti-money laundering laws.
Our Sources: “Exclusive: Fake online stores reveal gamblers’ shadow banking system”, Reuters, June 22, 2017;
“Exclusive: How B.C. casinos are used to launder millions in drug cash”, Vancouver Sun, January 15, 2018;
“How criminals used Canada’s casinos to launder millions”, The Guardian, 15 Oct 2018;
“How organized crime uses B.C. casinos to launder money”, The Globe and Mail, June 27, 2018;
“B.C. has failed to prevent money laundering through casinos: Attorney-General”, The Globe and Mail, June 25, 2018;
“What is a suspicious transaction report?” , January 2019, Financial Transactions and Reports Analysis Centre of Canada;
“Best Practices for Anti-Money Laundering Compliance 2017”, American Gaming Association;