A lesson in how to launder money

Lets say you are in the import/export business of large amounts of agricultural products and you need to facility the transfer of funds from your partners in your target countries to back home.

Let’s also say that your agricultural product (perhaps the elusive High Andean swamp turnips) is deemed illegal by both your and your partners government. In fact all governments except for Belgium (They do love their turnips) have banned it and are trying to halt the sale of it.

To halt the sale of it the international association of anti turnip enforcement has come up with a plan to halt the flow of money in the said illegal turnip trade. Their plan is that all banks need to get to know their customers and ask them what the money transfered are for and where it came from.

So lets say your partner Peter’s international turnip importing business had to send money back to you, his bank would say:

Peter, you seem like a nice guy, but why are you sending $15,000,000 to “Lechugas de Calidad SA” in Colombia? Also where did you get the $15,000,000 in the first place?

If Peter managed to persuade his bank you would most likely receive the same treatment in your Panamanian bank.

Señor Lechugon where did this $15,000,000 come from? Why are they sending it to you? Perhaps it’s best if we call the police.

Damn, international turnip trade halted right in it’s tracks….

.. not so fast. I have an idea. Lets say that you buy 500 room all inclusive hotel on an island in the Pacific. Lets call it “Hotel Lechugera”. It’s a beautiful kind of place. Nice beaches, friendly people. Maybe in the need of a slight renovation, but no worries.

You get your pal Peter to set up “Peters Holidays Inc”. Peter block books 400 of the rooms in your hotel and sends payment via his bank to your new company “Grupo Hoteles Lechugera SA”.

Peter’s bank asks:

Peter, We’re glad to see you are expanding your business into the travel business. It looks like your business is doing very well. We will send the money right on.

Your bank says:

Señor Lechugon we are so glad you are helping support the local tourist economy. Remember to talk to us about financing if you need help renovating.

Now as you bought the hotel you probably negotiated 20 years tax holiday with the country’s government. Everyone is happy except perhaps the micro economy of the island where the hotel is located. All of a sudden there are 400 fewer couples visiting during high season. Some of the restaurants have to close, some people have to move off island to find a job in the city.

So what exactly happened in this little tale? You invoice the other party for a plausible yet fictitious service. This is one of the most common and easiest methods of money laundering. While it could perhaps be controlled with closer monitoring of hotels, I don’t think that is exactly the way to go. Anyway travel charter agencies block book and as far as I know pay the hotel if it is occupied or not. So that wouldn’t really work.

The real moral of the story is that the Anti money laundering tools in place right now are not particularly effective. Panama has very strict anti money laundering rules as part of their banking system. They are so strict that I really see them more as a hinder to the local economy than anything else. They make real foreign investment so much more difficult for in particular smaller entrepreneurs. Yet money laundering is still as active as earlier.

Is the above story based on a real story? Well you be the judge.

Of course as a libertarian I am wildly opposed the war on turnips. The war itself causes lots of problems for normal every day people and gives government throughout the world more excuses to mess with our civil liberties. If people want to eat turnips let them eat turnips. If the peasants of the High Andes mountains want to grow turnips in their swamps, by god let them earn a living. At least that way we might avoid the head of the Turnip growers association in Bolivia reach government and destroy the country even more than it already is.

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