As used here, money laundering refers to measures that are used to provide an apparently legitimate source for illicit funds in order to deflect suspicion when they are spent or invested.
In the most common money laundering schemes, the illegal funds are attributed to:
- “Legitimate” business front
- Manipulated purchase and sale transactions
- “Off shore” financing
“Legitimate” business front
A fraudster can attribute illegal income to an apparently legitimate business. Cash businesses such as bars and restaurants are favored. The subject might pay taxes on the income or reduce the taxes by creating fictitious expenses.
Businesses used to launder illegal funds report more income than they actually earn and can be identified by showing that their cost of sales or customer traffic is too low compared to the claimed revenue.
Manipulated purchase and sale transactions
The subject might show more profit from the sale of real property or other commodities than was actually earned and use it as a source of allegedly legitimate income. For example, real property records might reflect that a subject bought an apartment house for $2 million, invested another $1 million in improvements and then sold it for $5 million, yielding an apparent profit of $2 million. In fact, the subject bought the property for $4 million (paying $2 million under the table to a related party), invested the extra million, and sold it at his cost.
The same principle can be used in the purchase and sale of other commodities to generate apparent profits, especially between related entities that invoice at false prices. For example, an exporter can sell goods worth $2.00 to a related importer for that price, but prepare an invoice showing that the goods were sold for $1.00. When the importer re-sells the items, he has an immediate apparent profit that can be used to conceal illegal income. The exporter can generate apparent legitimate income by reversing the pricing.
These schemes can be detected by showing that the amounts paid were too high or the amounts charged too low, compared to market transactions, or that the claimed costs or prices were falsified.
“Off shore” financing
The subject might claim a fictitious off shore transaction – such as a loan or investment – as the source of his funds, or actually move money off shore and then invest or “loan” the money back to himself.
This scheme is more difficult to prove because records are beyond subpoena power, although it occurs rather infrequently in routine fraud cases.