The Problem of Hidden Money
Two cases were reported recently about the Indian government finding huge boxes filled with money in the homes of two Indian politicians. The Indian government arrested these politicians and sent the illegal money to the Indian government’s treasury department.
Hiding illegal money is a major problem for criminals. The criminals have to figure out how to hide the money successfully and how to “clean” it afterwards to work as normal money.
Those in government seek to identify, expose and confiscate hidden money and invest this money to improve the lives of citizens.
Here we seek an understanding of how hidden money takes place and what governments can do to find, tax, or retrieve this money.
The Problem of Hidden Money
Let’s distinguish two types of hidden money. The first type deals with persons who derived their money criminally. Here are six sources:
1. Money from selling illegal products such as hard drugs
2. Money from selling stolen goods
3. Money from bribes paid to get better service from officials
4. Money from bribes paid to influence a major decision involving lots of money
5. Money from embezzlement or fraud committed within businesses
6. Money from illegal gambling.
The second type deals with persons who derived their money legitimately. However, they may want to hide their money. They don’t want others to know their level of wealth. They may want to practice tax avoidance (not tax evasion) by placing it in banks or shell companies operating in low tax havens.
Questionable money is usually held in a home safe or bank safety box.. The holder of this money uses discretion in spending this money. If he/she is in the poor or middle class, he/she must avoid buying expensive visible goods that seem unsupported by the person’s normal income. Often such persons pay cash at restaurants and stores instead of using a credit card.
The problem of hidden money is more pressing when the holder has great amounts of money to hide. Some huge holdings arise from criminal activity in the sale of hard drugs or in political activity when a politician such as Putin receives major side payments for services rendered. Other huge holdings arise from legitimate activity such as creating breakthrough innovations or businesses or earnings from high celebrity status.
The holders of illegitimate money want to hide it to avoid exposure and arrest. The holders of legitimate money want to minimize their taxes on this money.
Those holding huge amounts of cash cannot hide it safely in their home unless they build a huge safe. Even then, the money would not be earning anything.
The normal solution is to find a bank that will accept this money and agree to list it under a secret name or number. This was the specialty of major Swiss banks, some banks in Latin America and in Asia. The holder of this money would meet the “right” officer at the Swiss bank. Or in India, a wealthy Indian would give the money to a “hawala” channel in Mumbai who would deliver it to a “hawala” channel in Switzerland who gets it deposited in a Swiss bank.
Recently, Swiss banks have become less attractive for opening a secret account. Swiss banks now allow the U.S. government to track down U.S. citizens hiding money in Swiss bank accounts. There are other banks abroad ready to open a secret account in The British Virgin Islands, the Bahamas, the Cayman Islands, Cook Islands, and Belize.
Instead of using a bank, many wealthy persons set up or use a shell company. A shell company is a legally structured corporation that has no meaningful assets or business operations but does financial transactions. Shell company are often used to conceal illegal businesses, or to conceal business owners from law enforcement or the public.
Many unethical politicians put their money in shell companies. In authoritarian countries, the ruling party has the power to take money from individuals, especially those individuals who might be threats, such as rich business people who could spend that money to challenge the regime. These rich people would have reason to send their money offshore in case the government might come after them. Even if they are arrested, their money is safe in a shell company.
Wealthy people worry about other threatening groups such as militia or criminal groups. They will often put their money in another country, especially one where taxes are low, called tax havens.
In 2021, the International Consortium of Investigative Journalists (ICIJ) produced the Pandora Papers. This worldwide journalists collaboration exposed the offshore secrets of wealthy elites from more than 200 countries and territories. They based their findings on a data trove from 14 offshore service providers. The Pandora Papers came after an earlier investigation that produced the Panama Papers that unearthed 2.5 million files related to offshore accounts of individuals and countries.
Included in the lineup of owners of hidden accounts was the King of Jordan, the presidents of Ukraine, Kenya and Ecuador, the prime minister of the Czech Republic, Putin’s “unofficial minister of propaganda” and more than 130 billionaires from Russia, the United States, Turkey and other nations. There were 4,000 Americans affiliated with offshore accounts identified in the documents.
No wonder why many governments are not quick to identify, prosecute and end offshore financial abusers.
We need to remember that hiding money is not just done by those who obtain their money illegally but also by people who want to avoid or reduce taxes. A banker said: “People think of banking secrecy as all about terrorists and drug smugglers, but the truth is there are a lot of rich people who don’t want to pay taxes.”
How “Dirty” Money is Laundered
Persons holding “dirty” money have found a large number of ways to “clean” the money. Here are the major types of money laundering:
1. Cash business laundering. Many businesses get a lot of cash from their customers. Among them are restaurants, car washes, strip clubs, and laundromats. In fact, gangster Al Capone owned a chain of laundromats for “laundering” his illegal money. That’s how the term arose. Any of these businesses can report higher cash received than were actually earned. They pay taxes on their income and thereafter use the money as they wish. Often a cash business will invest extra money in land, construction, or the stock market.
2. Casino laundering. The illegal money is used to purchase chips which are then used in gambling. Afterward the remaining chips are cashed and then used for normal purposes.
3. Real estate laundering. A person could purchase a real estate property with cash, and quickly sell it at a profit or a loss. The money can then go into other legitimate use.
4. Money orders/cashier’s checks. A person can purchase money orders or cashier’s checks and use them to buy goods or turn them back into cash.
5. Trade-based laundering. A company can alter invoices to report higher earnings or profits.
6. Bank capture laundering. The money launderers can own or run a financial institution and legally transfer money to other banks.
7. Smurfing laundering. The illegal money is passed out in small amounts to relatives and friends to be spent carefully.
How Government Forces Work to Reduce Hidden Money and Laundering
The U.N. Office on Drugs and Crimes estimates that annual illicit proceeds total more than $2 trillion globally. In the United States, it was estimated in 2010 that money laundering totaled $300 billion, or about two percent of the overall U.S. economy at the time.
Recent investigations revealed that corrupt foreign officials have laundered their funds in luxury real estate and hotels and in private jets, artwork, and motion picture companies. The flow of laundered money distorts our markets and threatens the integrity of our financial system. When criminals buy up real estate, legitimate purchasers are foreclosed from buying or investing in those properties. There is an undermining of trust in government and private institutions and in the fairness of free and open markets. This breeds contempt for the rule of law.
Money laundering is a very serious offense. Persons caught doing money laundering can be fined up to $500,000 or sentenced in a federal prison for up to 20 years.
In the U.S., the money laundering problem is in the hands of the FBI and the Treasury Department. The FBI employs a variety of tools and collaborates with its domestic and international law enforcement partners. The FBI’s Anti-Money Laundering (AML) efforts are housed in the Criminal Investigative Division’s Money Laundering, Forfeiture, and Bank Fraud Unit (MLFBU).
The U.S. Treasury Department is fully dedicated to combating money laundering at home and abroad, through the Office of Terrorism and Financial Intelligence (TFI). TFI utilizes the Department’s many assets and laws to identify and attack money laundering
Since money laundering is an international problem, international co-operation is a critical necessity in the fight against it. International organizations, such as the UN or the Bank for International Settlements, took initial steps at the end of the 1980s to address the problem. In 1989, regional groupings — the European Union, Council of Europe, Organisation of American States — established anti-money laundering standards for their member countries. The Caribbean, Asia, Europe and southern Africa have created regional anti-money laundering task forces.
Finding and Taxing Hidden Money would Boost Our Economy and Society
I was astonished to learn how much illegal money takes place in our and the world economy each year.
I was astonished at the amount of untaxed or low taxed money that owners of hidden money pay.
I did my best to research the sources of illegal money, how it is hidden, and how it is washed and then circulated as “clean” money. Most people, like myself, knew very little about hidden money and money laundering.
I hope that this article sensitizes you and others to the outrageous size of this problem and leads you to join others — businesses, government and the public — in the anti-money laundering movement.