How Corruption Money Is Laundered

Money laundering is the process of making legal, money that was illegally obtained. Under certain circumstances the morally grey (eg. politicians, government officials, corporate employees, lawyers, judges etc) can launder their illegal cash gains if the money passes through a legitimate business.

(The cartoons are courtesy of www.clipartguide.com).

(1) The morally grey person and the gift bearer agree on the deal.

(2) The cash paid by the gift bearer is funneled through the bank account of the morally grey person's rookie to avoid direct association.

(3) The rookie withdraws the cash and funnels it through a legitimate cash-based business owned by the morally grey person. This could be a restaurant, pub, disco, supermarket – preferably a business that provides services rather than products since it is harder to collate information on services for evidence. The company should have a constant flow of business and cash so that when the tainted money flows through it would appear as if it is part of daily transactions. (For large amounts the rookie may have to push the money through in stages.)

(4) As the owner of the business the morally grey person can legitimately withdraw the money from his company as dividends after paying tax on it and places it in his bank account.

(5) Once all the documentation are in place to make the money look legal, the morally grey person can then withdraw it and spend it openly since it is all "accounted" for.

How to Use Banks to Get Around the Cash Dilemma

Cash gifts in large amounts are of no use to the morally grey person if he can’t spend it without getting caught. Wily people on the take (eg. politicians, government officials, corporate employees, lawyers, judges etc) can get around the tainted cash dilemma by taking out loans and getting their gift bearers to repay them as part of their deal.

(The cartoons are courtesy of www.clipartguide.com).

(1) The morally grey person and the gift bearer agree on the deal and the amount.

(2) The morally grey person then goes to the bank and gets a loan based on his salary, networth and creditworthiness.

(3) When the loan is approved and all the proper documentation are in place the morally grey person can then legitimately splurge on big ticket items like a house, car, yacht etc.

(4) The monthly installments are deducted from his salary so the source of his splurges are legitimately on record for the public to view. The gift bearer then repays the morally grey person the monthly installments in cash. And so long as no one squeals everything will look legitimate.

How Tainted Money is Funneled Via a Bogus Business

Another way for the morally grey (eg. politicians, government officials, corporate employees, lawyers, judges etc) to conceal their deals is to funnel money through a bogus business owned by family, relatives or cronies. This is similar to using a rookie except more effort has to be made to make the money look legal.

(The cartoons are courtesy of www.clipartguide.com).

(1) The gift bearer and the morally grey person agree to the deal.

(2) The gift bearer fabricates requirement for some bogus business service that is hard to detect (like consultancy or marketing services) that he will contract and pay to a sham business owned by the morally grey person’s family, relatives or cronies.

(3) The sham business makes a pretence at delivering the bogus service and quite likely will also fabricate delivery notices and invoices to make it look legitimate (if it’s hard working).

(4) The family, relatives and cronies withdraw the money from the sham business and gives it in cash to the morally grey person.

How Corruption Money Is Funneled Via A Rookie

One way the morally grey (eg. politicians, government officials, corporate employees, lawyers, judges etc) can hide his illegal financial activities is to use a rookie. Although the morally grey can always accept cash directly from the gift bearer the link is too direct. Adding a rookie to the process creates another layer of opacity which the corrupt person can always use to his advantage.

(The cartoons are courtesy of www.clipartguide.com).

(1) The gift bearer has a verbal agreement on the amount due to the morally grey person.

(2) The morally grey person decides to use his rookie to process the money. The rookie chosen should be an ordinary person who has regular amounts of cash flowing through his bank account – possibly also an entrepreneur; the rookie is unlikely to attract attention from the tax department and has no criminal record. The ideal rookie should also be morally grey, loyal, financially greedy and ready to accept some payment or favour in return for helping the morally grey person. Lastly, the rookie must be either sufficiently stupid, desperate or gutsy.

(3) The rookie goes to the bank and opens a personal bank account in his name.

(4) The gift bearer deposits the cash (preferably rather than a cheque to avoid a trace) in the rookie’s bank account.

(5) The rookie withdraws the cash and gives it to the morally grey person.

The Tainted Money Dilemma

The most primitive way for the morally grey (eg. politicians, government officials, corporate employees, lawyers, judges etc) to take bribes is to accept cash from their clients. Yet accepting large amounts of cash directly from the gift bearer presents two dilemmas for the morally grey.

Wot to Do With Da Loot?

(The cartoons are courtesy of www.clipartguide.com).

The first is what to do with the cash. Having too much money without any means to legitimise it nor spend it openly without attracting public attention is a problem for the morally grey (ie. harbouring the evidence).

The second dilemma is that accepting cash directly from the gift bearer can be easily traced. The morally grey can be easily found out if an insider on the deal decides to squeal. These days the savvy criminal will try to re-route the money through a fall guy or better yet launder it.

Corruption and Money Laundering

Three critical factors that the morally grey need to consider when conducting illegal money-taking activities are:

• how to keep their moonlighting activities hidden;
• how to avoid leaving a paper trail that can be traced back to the source and the recipient of the money;
• what should the recipient do with large amounts of tainted cash (which is the evidence).

In the past, a common way for the gift bearer to bribe his target was to give him cash in an envelop or suitcase. (Everyone's watched the Godfather.) Although direct cash bribes still occur today they are not necessarily the most convenient form of payment especially for scams that involve large amounts of money. The corrupt recipient could always hoard his money for the sake of hoarding. But generally speaking large amounts of money are useless if the owner can't spend it openly without attracting public attention. Hence, it is important for the morally grey to legitimise their tainted money (ie. money laundering) so that they can openly enjoy their gains.

However, graft is increasingly not tolerated nor legally acceptable in many countries today. Or at least, it can't be seen to be acceptable. Efforts have been stepped up in the war against corruption in the past few decades using modern investigation techniques; there has been greater cooperation on the international front to crack down on money laundering and push for greater transparency and accountability from public officials and corporations. However, it's difficult to ascertain just how much progress has really been made in stamping out corruption. With all this going on the morally grey have to work harder to conceal their activities and corruption schemes have just become more sophisticated and harder to detect.

Why Morally Grey Companies Do It

Businesses privately lobby their politicians to assist them all the time. Take the Jefferson case as an example (more on this). But why?

Obstacles to Closing A Business Deal

(Cartoons are courtesy of www.clipartguide.com).

There can be many bureaucratic, legal and market-oriented obstacles to closing a business deal. These obstacles can be daunting especially for companies trying to break into a new market, say in a foreign country. All these obstacles eventually translate into a financial cost for the firm and yet the prospects of winning over the customer are not always certain. Since there are costs involved the morally grey company might as well pay the equivalent to their equally grey counterparts who can help them remove these obstacles and or increase their chances of securing the deal.

How Political Corruption Works

Former Rep. William Jefferson, a US democrat, accepted more than USD400,000 in bribes and millions more in exchange for brokering business deals in Africa. Jefferson hid his bribes by funneling money disguised as consulting fees through sham companies controlled by his wife and brother. His name does not appear in the deals to avoid implications of impropriety. His defense argues that Jefferson was acting as a private business consultant and that his actions do not constitute bribery. (It's perception! and more on the Jefferson case.) Jefferson’s political-business wiles are common practice in many developing countries.

How Political Corruption Works (In The Simplest Case)

(The individual drawings are courtesy of www.clipartguide.com)

1. The morally grey company identifies a potential business project and some of the key constraints to securing the deal.
2. The company approaches its friendly politician and makes a verbal financial deal with him in exchange for his help.
3. The morally grey company pays off the politician through his stooge company and bogusly writes it off as a marketing expense. In exchange for the money the stooge company fabricates a bill for the provision of marketing consultancy services. Payment is made either in part or in full depending on their arrangement.
4. The politician either personally approaches the relevant personnel in his government to contact the foreign counterpart or uses his rookie to avoid direct association.
5. The stooge company then pays off the politician and possibly the key decision makers (most likely in cash to avoid a paper trail) if necessary.
6. The politician’s contact, if not himself, will then approach the key government official in the foreign country and persuade him/her to remove all bureaucratic obstacles so that the business deal goes through for the morally grey company. That could be quite a complicated process depending on the foreign country’s political system and legislation. Hence, more money might need to change hands in order for the morally grey company to succeed in getting the project.
7. If the foreign politician’s wrangling succeeds, the morally grey company signs a legitimate contract with the final customer.

The Optimal Environment for the Morally Grey

Politician-corporate back scratching occurs everywhere. Morally grey power brokers and their corporate counterparts thrive best when:

:: The Political Environment is Controlled

:: The Legal System is Weak

:: Socioeconomic Conditions Support Corruption

All drawings provided by courtesy of www.clipartguide.com

What’s the Big Deal About Corruption Anyway?

Life is hard and everyone needs money to pay bills, buy cars and big houses, pamper themselves with luxuries, pay for their kids, save for the future etc. But all that is hard work and money’s not always easy to come by.

So what’s the big deal if an extra bit (actually, a large amount preferably) comes our way? And from the donor's point of view, it’s not a big deal to pay a bit to get things done exactly the way he/she wants especially if the potential rewards are much greater than the cost of bribery.

Societies with a Moral Vacuum

That, however, is from an individual’s perspective. But what if everyone thought and behaved like that? If left unchecked, corruption will spread like a virus to all segments of the population. Entrepreneurs, accountants, lawyers, doctors, judges, the police, politicians, real estate agents, bankers, priests, mothers, fathers, siblings, relatives, neighbours etc will all be on the take. Sounds exaggerated? Actually, no not really if you think about it.

We are all human and hence not infallible to the temptations that would bring a more comfortable lifestyle. All the more so if the Joneses' are oozing with material comforts. It just takes a few unscrupulous individuals and long periods of legal abuse and social neglect to corrode ethical standards for corruption to spread. Over time, corruption will become a way of life. It’s not impossible to corrupt entire societies.

Costs Increase

But then what? Nobody will do anything even if it’s their rightful paying job without an extra hand out. Now why would anyone want to pay extra to get things done? Public services are paid for out of our taxes. So why pay the civil servant extra to expedite the administrative process? Judges, public prosecutors and the police are suppose to provide a public service in the form of maintaining law and order. Why pay more to get them to deliberately remove themselves as obstacles to serving law and order? Politicians are elected representatives of the people. Why should ordinary citizens have to pay them in dark alleys (actually these days payment is more likely to take place in plush hotels over a glass of bubbly) to do their job rather than only serving special interest groups for their private gains?

What about corporate corruption then? If businesses have to start paying all round for “special commissions,” “brokerage fees” or “marketing expenses” the cost of doing business will rise. In order to maintain profit margins, there has to be a pass through effect. And consumers will end up paying more for products and services. Prices of everything tainted by corruption ie. cars, houses, education, healthcare, luxuries, food etc will go up and up. So how good is that? Not. We’ll be right back at the beginning of this blog.

Standards Deteriorate, the Incentive to Cheat Increases

Corrupt practices are based on an informal “verbal contract” between the giver and the receiver. So what if you had to go in for a major health operation? You’ve paid the receptionist extra to be sure you get the room you want, you’ve paid the surgeon extra to encourage him to show up for the operation, you’ve paid off the nurses to remember to check in on you…. How do you know if they really will do as agreed? And who will you complain to if after such hefty expenses they don’t deliver on their word? At the very best you can try to lodge a police complaint but you will be guilty of bribery if you’re lucky; if, however, you are unlucky you’ll have to bribe the police officer to lodge your report thereby adding to your escalating costs and you might still be found guilty of corruption. At worse nobody shows up in the operating theatre and you die an unfortunate death having been financially cheated at the same time. Hmmm…….. such pessimism, yes? An exaggeration and an impossibility? No.

Nothing Functions As It’s Suppose To

If nobody can be trusted to do the job that they are employed for, nothing will function smoothly without money changing hands. Customers won’t trust businesses and service providers, suppliers won’t trust businesses, consumers and businesses don’t trust the government, politicians and the legal system. The government doesn’t trust itself……. The ethical conduct required to ensure a civil society functions for the benefit of society as a whole will break down.

Corruption, corporate tax evasion, money laundering, illegal organ sales by priests, ministers falsely making expense claims will have negative feedback effects in the human ecosystem.

Tax Collection Evaporates, Public Services deteriorate

Besides being costly for individuals eventually all these financial leakages will just slip through the taxman’s fingers. Government coffers will begin to look emptier. It’d be great if we could all pay less taxes (and none is even better) but like it or not public services still need to be paid for. So don’t expect much improvement in public health, education, transport, law and order (haha) etc. So as we grow older, we had best stash away enough to ensure we can pay comfortably for our golden years ‘cos the country may no longer be able to afford quality services for the public.

If we can not envisage the impact of our individual actions on society we might wake up many years down the line asking ourselves whatever happened to professionalism, standards and good governance? If there was ever any that must have happened a long time ago and would have faded away from memory. We might not recognise them then.