By now anyone who reads these articles knows that money laundering is the process of taking money from criminal activity and cleaning it up to look like fresh and clean taxable income. Additionally the fact that if a drug dealer or would be terrorist walks into the bank with a suitcase full of cash sets off every warning bell in the building has also been beaten like a dead horse. Therefore, what can a chemistry teacher turned drug kingpin do to hide his cash? Find cheap businesses to operate as front companies and wait for the money to roll in. Be aware though, having a lousy front is just as bad as not having one at all.
How front companies operate
Front companies serve as the official face of drug dealers, terrorists and other criminal organizations looking to hide illegal money. The process sounds simple. Criminals buy a business, then take the proceeds of from their illicit acts, and then mix it in with profits from the legitimate sales. Once deposited into the bank, the criminals directly pay themselves a salary based off seemingly legitimate earnings.
While the process may be simple, success comes from choosing the right type of business. For example, businesses requiring complex operations, government oversight or heavy usage of traceable currency like credit cards usually fail as fronts. Criminals want simple companies that people associate with cash transactions.
Cash is king for now
Criminals generally operate in cash driven environments. This comes from the fact that unlike credit cards, which leave a digital trail, the government rarely tracks currency. For this reason, most drug deals, prostitution or sales of stolen goods go down in with greenbacks. For this reason, criminal groups regularly invest in convenience stores, gentlemen’s, restaurants and construction companies.
While cash still rules, technology will eventually find ways to catch up. Currently, peer-to-peer payment systems offer a niche for tech-based launderers. Using a system like Airbnb, Russian online scammers created fake rental listings. A second party then rents the property and leaves a fake review. A similar scheme exists with Uber drivers conducting ghost rides for fake passengers. As online retail moves away purely from large end retailers, to smaller personal stores, so will the opportunities for trade-based money laundering.
How front companies are spotted
Even though front companies hide criminal activities, they still operate as real businesses and a lousy business means trouble. See if any of these scenarios ring a bell. A clothing store only runs from 9:00 a.m. – 5:00 p.m. and closes up on the weekend. A convenience store never restocks the shelves. A restaurant serves crappy food and never has customers, but still stays in business. If these sound familiar, then feel free to tip the police, because they are probably fronts.
Good front companies rely on sound business. A strong front will generate a profit, to mix in criminal funds discreetly. Hence, a good front company will not just move cash. It purchases stock, pays taxes generates sales revenue and create false receipts for the illegal money. Pablo Escobar bought a soccer team and used it as a money-laundering vehicle from the cash proceeds generated by ticket sales.
Picking the right front company
Fans of the TV series “Breaking Bad might remember a scene where Saul Goodman explained money laundering to Jessie Pinkman and tried to convince him to buy a nail salon. Financial crime experts agree that if Walt and Jessie took his advice, they would still be in business. Despite the name connection, laundromats and car washes make bad front companies.
While they both generate lots of cash, both businesses share a fatal flaw. Municipalities all over the nation regulate, track, and tax water usage. The makers of industrial washers know this fact and design their machines for the most efficient water usage possible. Therefore, if the DEA just cross-referenced the water bills of the A1A Carwash with the user manual for a power washer, the disparity would be grounds for an investigation.
Providing a service with no set price might be just as vital as cash usage. Products like nail treatments and meals at restaurants lack a fixed price. Two chicken restaurants might offer the same product at vastly different rates. Thus, to an auditor, Gus Fring’s high sales at Los Pollos Hermanos might be his more “expensive” ingredients and not the meth sales.
Out of pattern transactions
Money always moves with a purpose. After looking at a few hundred bank accounts patterns emerge when people conduct transactions. A construction companies expenses seem different from those of a gas station. For that reason, when transactions break the habits of normal usage, they stand out.
A chain of chicken restaurants might make regular purchases from meat packers or beverage distributors or pay for advertising. Multiple wires to Juarez Mexico might be entirely legitimate, or they may be payments as part of a vast drug trafficking network. Because money laundering by design masks illegal money as legitimate transactions, investigators must look for telltale signs as red flags for closer inspection.
Layers of layers
This article provided simple examples of front companies. In reality, the process varies in complexity. A cartel or a terrorist group might not want to announce their ownership of a business. For that reason, criminal mask their ownership stakes by using shell companies or intermediaries like law firms. This tedious but necessary process dilutes the overall return of the illegal funds. Most criminals expect to lose 20% off the top to launder money properly. However, the beneficial ownership keeps most criminals out of the spotlight and enjoying their money, while investigators try to unravel a web of entities.
When done correctly, front companies offer a proven way to legitimize illicit funds. The reliance on cash for many businesses provides criminals the ability to blend in and mask their actual purposes. However, the cover of legitimacy depends on numerous small factors ranging from what type of business the criminal to pick to how well they manage the operation. By looking for minor irregularities, even the best fronts give away small details of the criminal enterprises covered by seemingly legitimate activities. So, if the opportunity to buy into the Albuquerque car wash market ever comes up as an investment opportunity, take a hard pass!
Featured image courtesy of IMDb.