How Money Laundering Works

on anorex yet. No, it's not. Actually it's on money laundering, which we can't or you can or can't say, I think is one way to put it. Whether or not Karen Carpenter ever engaged in that, God Rest her soul. I believe that she did not do. You never know, Chuck. I'll go on record, Chuck, you ever see scar Face? Are you kidding me? So you have seen it? Oh? Yeah, many times? Edward g Robinson, James Cagney, Oh and I thought you're talking to us. I just don't like it

when you gloat. Um. So you know that one scene when he's sitting there laundering the money with the guy who turns out to be the cop, and for some reason to Palma made it so like, uh, it actually simulates the eight hours that they're supposedly sitting there doing it. That was actually pretty good lesson in what not to do when you launder money, and I think the moral to it was never louander money with an undercover police officer.

My favorite part of that movie is when he buries his face in the huge mountain of cocaine on his desk at the end. That is a good part. And thousands of bullets, hundreds of bullets could not even take him down at that point, but they did eventually. No, no, yeah they did. Yeah. No. I couldn't remember if he died in an explosion, but there because there are grenades

in that scene. That is a good, good movie. Anyone who hasn't seen that can sign up to be derided by Chuck and I um on our blog, which we'll talk about later. But first let's talk about money laundering shock Lets. So you know, like for the most part, it's a well you would think for the most part, it's it's the realm of drug dealers, like they use cash almost exclusively. They've got to wash it. It's dirty money.

They can't account for it. Um and the the text system, especially in the US, is set up in such a way that that's supposed to be obvious where which is where money laundering comes in. It's a way around this, you know, declaration of Hey, I made a bunch of money by selling heroin, which you can't really do because they bust you for selling heroin. I'm surprised the government,

wouldn't you say that's great. Yeah, I mean really, honestly, what would the I r S contact the DA or would the I r S just be like, you're an upstanding citizen, you're drug dealer. Well, that's one of the big arguments for legalization of drugs is you can just tax the heck out of it and legitimize it and make a lot of money off of it. And again, remember when we were talking about how Moon's Done works.

During prohibition, it kind of added this forbidden aspect to to drinking, and so of course drinking increase, right, So that makes you wonder if drug use would drop. But

that's neither here nor there. It isn't. But what I was saying was is you would think it's mainly drug traffickers engaged in money laundering is because a million dollars in cocaine estimated at twenty ki lows, right, um or twenty key lows for our metric friends, Yeah, um and uh, a million dollars in cash weighs two hundred and fifty

six pounds, So it's kind of tricky, right. The thing is, though it doesn't it turns out it's not just drug dealers who are laundering this heavy, heavy cash because the UN estimates this is a two thousand five estimates. The latest I can find that the global drug trade is valued at about three billion dollars annually. It is a lot of dope, but it's estimated that the value of all of the money that's laundered every year globally is

somewhere between five hundred billion and one trillion. So clearly the entirety of the drug trade three times over couldn't account for the high end estimate now of of all the money that's being laundered in the world every year. Terrorists, terrorists, big white collar guys, um, basically anybody who's come across a substantial amount of money that you can't just walk around within your pockets and you don't want to pay taxes on right, you you launder the money, right, So

how how do you do this? Oh? And also I should probably say the vast majority of the cash that's getting washed is the U. S. Dollar for two reasons. Number one, it's pretty much the de facto international currency. We learned about that in our audiobook, right, I'm sorry, our spoken word album um. And Uh. Also because the US is some of the strictest banking transparency laws in

the world. So if you have some dollars and you want to get it back into the US, you've gotta wash it first, Right, So how do you do that? Let's talk about the three steps Chuck. Number one is called placement three steps the money long. Placement basically means that the launderer UH inserts dirty money into a legitimate um financial institution, Like so they'll put their money in a bank, but it's dirty money. This is the point.

This is the riskiest stage. This is like the water making that tense, hollow sound is it's filling up in the drum of the washing machine. Right. And it's risky because cash, large amounts of cash are always a red flag UH these days, and in fact, in the US, I believe the limit is a ten thousand dollar deposit. It's not just the US that holds that standard, but

definitely sure. Yeah, the International Task Force, well, they're required to report anything ten thousand or I believe it's anything totally in ten thousand within like a five day period, Is that right? I think one day, one day. Okay, you're right, but yes, still the golden number if you're laundering money is to stay below tan grand in a day, right, in deposits. So once you've got that done and your dirty money is in a bank, lots of it, you move on to step two, which is called layering, and

that means you start to send this money out via transactions. Right, we're talking bank to bank transfers, wiring money, um, investing in some high value items like you can go buying yacht or something like that. And you're basically just trying to send the money out and spread it around to all different sorts of places. This is why I consider the rent cycle the rent cycle. Yes, yeah, it's so it's being agitated and and um yeah, so this is

and that's the most complex. This is part of laundering money as well, because you're taking one lump sum and then dividing it into as many things as you possibly can, which makes it hard to trace, which is really essentially the whole point to money launderings. You want to make it really hard to trace back to you. So then we come, Josh Josh E to integration, which is phase three, and this is when the money comes back and the

mainstream economy um looking like legitimate transactions. You divest from those legitimate businesses you invested in, you sell that yacht um, or you transfer money from these kind of shady banks or or or banks in in countries of shady systems, which we talk about in a minute, into you know, US banks again or something. And at that point, as Joe Pesci would say, the money is laundered, yes, and that that was too I think I call it. That's sad that you know that I'm ashamed of you right now.

The next thing, you know, you're gonna tell me you watch The Closer. I know I've never seen that show, but I'm a big alright, so so good, this is nice. I was at one point until The Closer. Let's get offer so um, you know, since there's so many different countries out there, that have banking secrecy UM protection. Basically, there's so many places where you can go buy a yacht and they're not going that. They don't have to

buy laws say where'd you get this money? Um, And businesses don't have to say, hey, where'd you get this money? If you're investing in them. That it seems like it would be impossible to catch. It's it's hard to catch too. It is, well, Josh is certainly not from a lack of looking, because there are a lot of places that try to find money launderers, like the Department of Justice, State Department, FBI, I R S, d e A. They've

all got money laundering departments or money laundering. They're not laundering money obviously, no, they're they're looking for money launders. So um, yeah, the I R S can find you, and I imagine if you're a money launder, they can find you to write. And there's also since we're talking about those are the United States based organizations. It gets global too because it's it usually involves global transactions. That's

kind of the key to the whole thing. So there's something called the Financial Action Task Force on Money Laundering, the f a T That was the other organization. I was saying that has that ten tho dollar reporting required. Well, that's fantastic. The UN gets involved to our buddies at the u N. Yeah, the World Monetary Fund, So that's who's looking out for International Monetary Fund. I'm sorry about

that one, right. So do you want to talk about the some of these methods, Josh, Like the Paco exchange, Yeah, that's pretty cool, hit it? Okay, so, um that is the black market Colombian payso exchange system. And this is like the the the world standard um and actually it is centered in Colombia. What happens is is like say you are a drug trafficker and you have a bunch of dirty money. Chuck, say it. I am a drug

trafficker and I have a load of dirty money. Well I just happened friend to be a paso broker, and I can clean that money for you. And you want to hear how I'm gonna do it. Well, what do you mean by clean, Josh? I'm gonna make it so that it's legitimate again. Okay, So what's going to happen is you're going to give me your dirty money. Okay, I'm going to give it to a Colombian importer who's going to buy a bunch of American made goods, and we're gonna buy him on the black market because we

don't want to pay any taxes on any of this. Right, So the importer goes in orders a bunch of stuff, gets it under the radar, UM, imported to Colombia, sells it for paces, takes the paces, the the the Colombian importer is going to give me the pasos, take a little bit for himself, any profit he can make off of it. He's gonna pay me back the equivalent of the U. S. Dollars I gave him in pasos. I'm gonna skim a little off top and bot a boom bout a. Being my friend, you have just converted your

dirty U. S. Dollars to clean Colombian pasos. Thanks than go forth, do whatever you like. We've got a deal.

Thank you, thank you for It's basically it is UH and actually sadly it is very easy and it was fine under the radar, like we said, for many many years, and apparently the Colombian government UH and the American government we're trying to figure out, um what was going on with all of these illegal u S imports and came to figure out also, oh yeah, well Columbia also has a huge money loan doing problem and they're known understand it, ye right, Yeah, so that's the old black market Columbia

pays so exchange two steps shuffle, very nice and apparently that's just a one stop shopping deal. If you want to laund your money, that's the place to go. But there's also another one, and I know this one's your favorite because of the name smurfing. Uh, structuring deposits is uh the formal name, but they call it smurfing. And basically this entails when you break up large amounts of

money into smaller um less suspicious amounts. So in the US that's got to be below ten tho dollars um because, like we said, that's when banks have to report you. And uh, it's the money is deposited. The smaller amounts are deposited into one or more banks by people called smurfs, that's what they call them. Yeah, for no apparent reason. So smurf that unless pay O, the creator of the Smurfs, was caught doing this, maybe that's where it was, Maybe

that's where it originated. It sounds like a smurfing good idea to me. Have you ever seen the smurf carpet bomb ad? No? I think it was for um UNICEF. It was a UNICEF ad and they played it in Belgium and basically it was an anti war public service announcement and they used the Smurfs and the Smurf's villages just carpet bombed and they're all like killed, and they showed the aftermath and burning smurfs are walking around. It's really something you should look it up. Jeez. Uh. So

that's disturbing onto overseas banks, which is always big. You always hear about offshore accounts and you know, growing up you hear this from watching chips and stuff like that in my era, and you hear about offshore accounts and always pictures some like bank floating in the ocean. You know, that's not what's going on there. But they're basically countries have really lax or not lax, but they just have

secrecy laws and allow anonymous banking to take place. Yeah, like bah rain Um is one that's not in the Caribbean, Hamas, the Caymans, Caymans, Hams, Caymans, Hong Kong shore. Uh, there's a place called Macau off the coast of China underground alternative banking, which kind of cracks me up. I don't know that I would invest in an alternative bank. This seems kind of like tribal in nature. Yeah, exactly, like

it's existed long before any banking regulations. Very popular in Asia and now than Pakistan, the Hawalla system in Pakistan and India and the five Chin system in China. Yeah, so basically it's a it's a trust system. There's no paper trail, no paper, which is key because you want to lounder money, you don't want paper. That's all point. It's pretty it's very much like the offshore accounts, Like

these are secret accounts. You they won't reveal your identity. Um, there's no paper trail that's public in any way, shape or form. So these are really good places to use if you plan on laundering any money, right, not that we would encourage that, because it's illegal, You get busted, you go to jail. No, although if you look at if you put together some of these seemingly random podcasts we've done, you could make move Chine sell it lounder money.

Londer money and exactly early on and then get out. So there you go, and here we are not making take your own advice, right. And then Josh, there are shell companies. Of course, when you have like a fake company, you'll set up that really doesn't sell or manufacture anything. What's the difference between a shell company and a front company? Is there a difference? There's a difference. You want to know? Then why don't you talk? I was just trying to set you up. But the shell company is set up,

it doesn't really do anything. It's only it only really exists on paper, um, and it's express purposes the longer money. A front company is real company, right, but it's meant to longer money too. But you could say it's a store. You could actually go into the store and buy something, but it really the purposes to longer money. And that actually leads us to one of the problems with money laundering.

I mean, you ask, why why would I care if people are laundering money, you know, aside aside from the obvious one like I hate drug dealers, you know, and and don't want them laundering the money, or I hate terrorists.

Clearly everybody hates terrorists. Yeah, but but for this reason, the last part with the front company, it affects local economies and that small businesses can't compete with the front company because they're not trying to turn a profit off their product, so they can sell it like add or below cost if they want and drive other companies out of business. Well that seems a little flashy to me. If you're a front company, sure, I would think you

just kind of want to stay even keel the whole time. Right, Yeah, But greed, brother, it's true. Same with the ponse it's greed takes a hold and then you're screwed. Same with the what it's a Ponzi scheme, but on a much a much larger level, there's other bigger problems, like it can affect whole financial sectors or economies if enough money

is is laundered through. Well. One of the reasons why is a lot of these countries that these things are running through were small countries and they don't have like the big, huge economy United States does. So someone's laundering you know, seventy five million dollars through a tiny little country. It's all vaults. You know, that's gonna affect the economy

in that country. Yeah, Plus no one pays taxes on it, so you and I end up making up, well, not you, because apparently you don't pay taxes, but I do now, pal Okay, I just didn't in the mid early decade. Yeah uh so, yeah, we end up making up for that taxpayers do by having to pay higher taxes. Right. But I think ultimately the reason why the d o J, the FBI, the I R S, and the d e A are all involved in trying to catch money Launders because the government ain't making any money off of it. Exactly,

you know what I mean. I mean we're talking if we're if it's a trillion dollars, you know what's thirty of that billion? I gotta tell you, the U S could use that three billion right now if you can get you that much of a chunk of it, right and we'd go give it to some institution that's collapsing exactly exactly. Yeah, that's that's robbing Peter to pay Paul. Oh wait, that was from the Ponzi scheme when wasn't it. Yeah,

but that's still a nice term. Okay, thanks a lot, um, So, Chuck, you want to talk about a couple of famous um any laundering busts. I would love to talk about Crazy Eddie. Okay, good, because I want to talk about Franklin GIRARDA. Didn't that great? When it works out like that, it's different Crazy Eddie. And I remember this guy when I lived in New Jersey seeing the Crazy Eddies TV commercial. Oh yeah, he was one of those guys that it's exactly how you

would think Crazy Eddies. Uh. This is in the nineteen eighties, Eddie and Tar Crazy Eddie's Electronics. He skimmed millions of dollars uh from his own company to hide it from the I R S. So he was doing this, he had some co conspirators and eventually he thought, you know what, I should send this money back into my own company. Disguised his revenue right because he was going to launch an initial public offering, so I'll inflate my soon to

be stock quote And he did substantially right bucks or something. Yeah, but that's false money. So it was over inflated and the result for him was bad news. He laundered more than eight million bucks and was busted and flew to Israel and they found him in nine they extradited him back to US. To stand trial and he went to the Who's Scott for eight years? Yeah, which isn't that bad.

I imagine he probably had a lot of money staffed away waiting for I know, I was kind of surprised most of these prison sentences in here, like six to eight years. I think it would be a little more than that. That's why I think the Bernard made Off sentence is gonna be so cute, just gonna get like a hundred plus years. Yeah. So, um, can I talk about my guy now, Franklin Girardo. Uh and you want to put an R toward the end of it, but it's not. It's Gerrado Grado. Um. So he was actually

an economist. Um. And apparently economists are really good people to get to to longer money for you because they know exactly what they're doing. You just need to get a crooked economist pretty much. And from what I understand, this guy was it. Um. There was a Colombian drug kingpin named Jose Santa Cruz Londono and uh he had Gerrado basically placed the drug money into Colombian banks, right, which we've already seen Columbia not that big on the

banking regulation. Laws, right, and then from there he started making wire transfers and deposits to a hundred different accounts that have been set up some and made up names, some in family members names. Um in sixty eight banks in nine European countries, right, and he was doing this really well for a while. Um. I think he managed to launder thirty six million bucks. Um, but he was smurfing. Actually, do you mean something else there or you mean smurfing?

He was smurfing as far as money laundering goes. I thought, you're just using smurflight? Does your mind the getter there? Um? He was. He was probably doing that too because you know, he's laundering millions of dollars. So all the smurfy wanted um the uh the he just threw me off there, chucks sorry um so, but he was smurfing in that. Like none of his deposits top ten thousand dollars, right, So imagine how active this guy was, and he had a lot of money to deal with. He got busted

basically in two ways. Um. A red flag was raised when a bank in Monico collapsed, and UH an audit revealed that that he had a bunch of accounts that didn't have his name on it, but could be traced back to him, which is fairly unusual. And then really what when he was actually arrested? This is great. His neighbor called the cops to file a noise complaint because Gerardo was running his money County machine all night. The cops show up and this guy surrounded by millions of

dollars in cash. I love those machines you see m in the movies. Yeah so cool? Right, yeah, they are pretty cool. I've never had enough money to put him. Mine would go yeah, it would be over. Yeah, you have fifteen dollars lucky. Um so yeah, that that's how Gerardo got busted. He got seven and a half years, and he's in Harvard. Man, we should note. Yeah, so it's not all just untoward. Uh That's why I purposely left off the Harvard educated economists, because I mean, I think,

look at made off. He's an intelligent guy, as crooked as they come. It's called white collar, dude. It surely is for a reason. Um, So I guess do you want to just quickly go over operation Juno? Uh? Yeah, do you you know what I'm talking about? Because you know it happened right here in Atlanta. This is the headquarters for it. That was a part of it. What do you really know? But this was in Atlanta and

the d e A pulled this one off. And it was not a sting operation for pregnant teens the movie Juno. This is pre pre that. This is is when it ended. And basically it was a sting operation. They set up drug traffickers, gave them resources to to turn their drug money and from dollars into pay so's used in the original uh Paso scam, and they busted uh you know, forty people, ten million bucks they seized. And what substantial

is the amount of cocaine that they seized. Yeah, thirty six kilograms of cocaine, No, buddy, thirty six hundred yea, three thousand, six hundred kilograms of cocaine. That puts scar face even to shame, it really does. You can't stick your face in that mount and walk away from it. No. So that was Operation Juno. That was the d e A. That's about as successful as it comes from what I understand. Yeah, I always have mixed feelings about staying operations though, to

be honest, it's shifty, it's susceptive, It is well. At the same time though that you're getting you've busted these people, so the end result is nice, but you know, macabillion and justifies the means. Sure in some cases. I think that's a definite model for a lot of law enforcement. I just think it's interesting that a cop can go up and say, hey, man, you want to launder this money, and we'll make it happen, and then we'll arrest you for it. Clearly, the Colombians who are busted never saw

a scarface, so that's a money laundering. Um. If you want to try your hand at it, you know pretty much everything you need to know right now. Yes, but you should not do that. And we want to thank JR. From Portland, Oregon. Jr was who suggested this. Yeah, thanks j R. That was a good idea right out of the suggestion. But we wonder why j R. But whatever he actually said his email, I don't want to try this.

I'm just curious. So if yeah, if he follows up with counterfeiting, he'd like to hear that one then or PONTI, Well, actually that we're digging your way out of prison, right Yeah, Well, if you want to know a little more, this is actually a great article by our colleague Julia Layton. Excellent writer. Um, you can type in money laundering in the handy search

part how stuff works dot Com. Don't go anywhere because we're about to blast your ears with our spoken word plug a right, Josh and I and Jerry, I'm sorry, Josh and me. We don't write in correct? Me again, grammer police and getting that a lot. I know. Yeah, it's called the Stuff you should know, super Stuff Guide to the Economy, and we get to go out and interview folks and go on location and we really break down economics and the economy into the way that everyone

can understand. It was a lot of fun to do, Yes, it was. We recommend it highly for three nine on iTunes and type and super stuffed in the iTunes search part should be the thing that comes up. And what's most amazing to me is it doesn't suck. No, it's good. We're very proud of it and we appreciate your support thus far. And if you guys can support us with this, we might get to record another one yea, something more interesting than the economy, because you know, Chuck blogged me

yes blog. We also need to give a quick shout out to our blog called Stuff you Should Know on the website how stuffworks dot com, post today, Me in the morning, Chuck at night. You should visit twice yes to see you. And we do a podcast recap on Friday's so that's where we can all sit around and chat about what we do here. And you said you can find on the right rail of the homepage. Yes, sir, and uh that means thank you for bearing with us. We tried to do a little shorter than usual because

it's listening mail time. So this comes to us from Meg and I'm just gonna call this exceptional listener mail only in one today. Can know which one this is? It's good epilepsy, Yes, yeah, it's good. So in our Deja Vu podcast we talked a little bit about epile te and that it's tied to deja vu many times, as is smelling lavendar before you have a seizure. So Meg writes in and she wanted to thank us for

talking some about epilepsy as she is an epileptic. She has a temporal lobe epilepsy, and she said she does suffer from deja vu on a fairly regular basis, but it doesn't necessarily mean wait for a seizure, which is what you said. Um, it is a seizure basically. Oh really, that's how she describes it. H deja vu is a simple partial seizure. It can give way to a complex partial or generalized seizure, but it doesn't always have to. And she is she's pretty amazed by her own epilepsy.

She and she said, the brain does crazy things when it's working normally. Just imagine what it can do when it's not. Some of the simple partial seizures I've included smelling lavender, deja vu, tunnel vision, sparkly lights, and they sometimes but not always, give way to complex partial seizures that can leave you drained for quite a while. So there's obviously downside. It's not all and lavender. So we just want to thank Meg for writing in. And she said,

one day maybe we can do something on epilepsy. But I know eventually we're gonna have a health podcast here, so we're probably not allowed the clam burder, but thank you Meg for that and good luck with your epilepsy. Thanks thanks for sharing Meg, that's pretty pretty cool. Exceptional listener mail indeed, Um, if you have anything exceptional to say, or you just want to say hi, or you want to tell us, UM that we say we interchange iron

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