Term Paper on "Money Laundering in Illegal Drug Trade and Illegal Gambling"

Term Paper 7 pages (2261 words) Sources: 4 Style: MLA

[EXCERPT] . . . .

Money Laundering: An Overview of the Use of Money Laundering in the Drug and Gaming Industries

What is money laundering?

In order to invest their ill-gotten gains from gambling and drug trafficking, criminals must make it seem if the money they have earned through their activities came from legal sources and enterprises. The process by which they accomplish this fiscal slight-of-hand is known as money laundering. "According to a 1996 IMF estimate, money laundered annually amounts to 2-5% of world GDP (between 800 billion and 2 trillion U.S. dollars in today's terms). The lower figure is considerably larger than an average European economy, such as Spain's" (Vaknin 2005). Money laundering takes place in a variety of enterprises, however two of the dominant sources of this illegal activity can be found in the drug trafficking and illegal gambling industries.

Drug Money Laundering

The usual process of laundering drug money entails three basic steps. The first stage involves depositing the drug proceeds into clandestine domestic and foreign financial institutions that do not seem obviously illegal. Sometimes the profits are broken up into small amounts, usually less than $10,000 to avoid currency reporting requirements or through creating sham companies, casinos, wire transfer companies, or simply smuggling the currency out of the United States in suitcases or concealing the cash in some other manner (Zagaris & Ehlers 2003). In the case of a pseudoephedrine smuggling ring an airline employee was recruited at O'Hare airport in Chicago to help smuggle drug-derived cash outside of the United States, sometimes stuffing the bills in empty cereal boxes that were packed in a suitcase ("Cash Smuggling Case at O'Hare Airport," U.S. Drug Administration Press Release, 2004).

Money laundering can involve complicated financial accounting, or be as simple as a coin-operated Laundromat or some other business that is difficult for the government to keep track of in terms of its profits, thus providing a 'front' for the profits derived from drug operations. Criminals may also invest drug money in ships, planes, art, automobiles, gems, and money to cover up the source (Zagaris & Ehlers 2003). In one recent drug 'bust' by the U.S. Drug Administration, members of one organization used the illegal proceeds of their narcotic sales to purchase and lease luxury cars along with real estate and jewelry while concealing the drug-related source of the money with pseudonyms and purchasing the goods through intermediaries. "Members of the organization would provide false employment and income information to car dealerships and banks in order to obtain vehicles and real property" ("16 Additional People Indicted in Large Scale Drug and Money Laundering Case," U.S. Drug Administration Press Release, 2007).

The second stage involves the trafficker's efforts to cover up any connections between the real criminals and the source and ownership of the funds to disguise any money trail. "This can involve complex manipulations and the use of wire transfers, shell companies, bearer shares, and nominees in offshore financial centers (OFCs)" (Zagaris & Ehlers 2003). Creating such a cover-up has become easier and easier over the years as the legitimate use of technology in the financial industry has increased. "The sheer volume of financial transactions, many via wire transfers or electronic messages between banks, is staggering. Within the U.S., more than 465,000 wire transfers -- valued at more than $2 trillion -- are handled daily" and a verified 0.05% of transfers on average turn out to be laundered, although countless more go undetected (Zagaris & Ehlers 2003). One drug trafficking organization, for example, was alleged to have deposited large amounts of cash derived from the sale of cocaine into bank accounts and then purchased cashier's checks and money orders to wire transfer these funds. "These funds would then be used to purchase assets and pay personal expenses with the goal of concealing the true source, nature and ownership of the funds which had been derived from the organization's cocaine sales" ("16 Additional People Indicted in Large Scale Drug and Money Laundering Case," U.S. Drug Administration Press Release, 2007).

In the third stage of money laundering, integration, the sources of the proceeds that have been concealed and stashed are given legitimate explanations for their existence. In the case of 'front' companies this can be done through false invoicing, buying stocks, bonds, and certificates of deposit (CDs), or investing in legitimate businesses like in real estate. "These wealthy and powerful drug syndicates employ professionals and use the latest technology, intelligence, and methods, including buying influence in smaller countries, so that they are always a step or two ahead of law enforcement" (Zagaris & Ehlers 2003). Although measures have been taken to curb the use of money laundering by drug traffickers, the trade in illicit drugs is estimated to be worth $400 billion a year, or 8% of all international trade, thus it has not been entirely effective (Zagaris & Ehlers 2003).

Money Laundering: Illegal Gambling

Unlike the majority of the drugs dealt through the illicit drug trade, there is an extensive array of types of gambling that are thoroughly legal and regulated. States derive substantial revenue from gambling enterprises. However, there are many more forms of gambling that are not legal. Often such enterprises are specifically constructed so the perpetrators will not have to pay taxes. The money from illegal gambling enterprises is laundered through extralegal means much like drug profits. An additional concern specific to illegal gambling is that it diverts funds that should be legitimately directed to legal means of gambling that benefit taxpayers, while illicit gambling only benefits the criminals involved. Illegal offshore gambling has proliferated with the rise of Internet gambling. Today, there are Internet sites that allow people from all over the world to wager, even though 'offshore' Internet gambling sites violate U.S. law ("Internet Gambling: An overview of the issues," GAO, 2002, p.20). Unlike drug trafficking, illegal gambling can exist as entirely 'virtual' transactions with little paper trail, other than an electronic one.

Gambling is generally regulated at the state level but under the Commerce Clause of the U.S. Constitution, the federal government can pass laws to supplement state laws and regulations to ensure that interstate and foreign transactions to not circumvent state laws. Federal law prohibits betters from using interstate or international telecommunications wires to place wagers. Because online gaming, unlike more traditional forms of illegal betting such as placing a bet through a 'bookie,' is so difficult to keep track of and foreign countries have such varied policies regulating online gaming, U.S. federal laws have often proved ineffective in reigning in money laundering of illegal gambling profits ("Internet Gambling: An overview of the issues," GAO, 2002, p.20).

It is often much easier to launder money by creating sham enterprises because gambling also exists as a legitimate enterprise. Also, unlike drug trafficking, credit card use is endemic to the gambling trade, particularly online: "Neither VISA nor MasterCard has issued policies to its members that restrict the use of the association's credit cards for Internet gambling. Instead, both associations have developed procedures that enable member banks wanting to block Internet gambling transactions to do so. Officials from both associations explained that reaching a consensus on a blanket policy among members around the world would likely be difficult. Some member [banks] s are located in countries where Internet gambling is legal and, according to one official, [represent] an expanding business market" ("Internet Gambling: An overview of the issues," GAO, 2001, p.21). Thus simply finding an arena where the particular form of illicit gambling one is engaged in happens to be legal is one easy way to conceal the illegality of the operation and the profits derived thereof by making it appear as if the source of the funds derive from that area.

The types of gambling involved in illegal gambling and money laundering span a wide range of activities, including sporting activities and casino games. This was seen in a recent 2007 Washington D.C.U.S. District Court case against William Scott, Jessica Davis, Soulbury Ltd. And WorldWide Telesports, Inc., (WWTS) for violating federal anti-money laundering laws. Soulbury Limited was a "shell" corporation used to hide the criminal's profits derived from the illegal gambling enterprise, the defendants used toll-free telephone numbers and Internet websites to "illegally entice gamblers to send funds from the United States to Antigua with the intent that these funds would be used for wagers on Internet casino games and sporting events, such as the National Football League's Super Bowl and the National Collegiate Athletic Association's men's basketball championship tournament, as well as baseball, hockey and other sporting events... Soliciting such wagers over the Internet violates the Wire and Travel Acts" ("Money Laundering Indictment Unsealed Against Major Internet Gambling Site Operators, Alleges $250 Million in Online Wagers," U.S. Department of Justice Press Release, 2007).

The indictment against Soulbury Limited noted that by causing funds to be sent from places within the United States to places abroad with the intent to promote Wire and Travel Act violations, the accused also engaged in a money laundering conspiracy to hide $10… READ MORE

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