When people hear the term money laundering today, they envision the most evil of acts, in which gangsters process satchels of cash through a fabricated company to show it as business revenue. Words and semantics are very important in this post-9/11 world, and as far as creating a negative connotation, that parlance has been extremely effective.
At its essence, money laundering is the act of concealing money or assets from the state to prevent its loss through taxation, judgment enforcement, or blatant confiscation. However, as the late J. Orlin Grabbe wrote: "Anyone who has studied the evolution of money-laundering statutes in the U.S. and elsewhere will realize that the 'crime' of money laundering boils down to a single, basic prohibited act: Doing something and not telling the government about it."
Protecting one's wealth is interwoven with the history of trade and banking which has existed since the dawn of commerce. Sterling Seagrave's Lords of the Rim describes how some 2,000 years before Christ, merchants in China would hide their wealth from rulers who would simply take it from them and subsequently banish them. This concealment involved moving the wealth and investing it in remote provinces or outside China.
Part myth, part rumor, the plausible tale of Mafia gangsters running huge amounts of cash from extortion, prostitution, gambling and bootleg liquor through existing Laundromats accounts for the phrase money laundering.
Also during this period, Al Capone was convicted in October 1931 for tax evasion, which is what earned the prosecutor's conviction rather than the predicate crimes that generated his illicit income. Capone's episode inspired Meyer Lansky, the mob's accountant, who structured elaborate international and Swiss financial facilities for safely securing money and vowed never to suffer Capone's fate.
Lansky is credited with designing one of the first real laundering techniques, the use of the "loan-back" concept, which disguised allegedly illegal money within "loans" provided by compliant foreign banks. The money could then be justified as revenue and a tax deduction for interest expense obtained in the process.
Without any method of tracking cash or bank activity, Congress passed the Bank Secrecy Act in 1970, heralding the age of transaction reporting, including the Currency Transaction Report (Form 4789), the Report of International Transportation of Currency or Monetary Instruments (Form 4790), and the Report of Foreign Bank and Financial Accounts (Form TD F 90-22.1). In the United States, the Money Laundering Control Act formally made money laundering a federal crime.
Internationally, the elements of the crime of money laundering are set forth in the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances and Convention against Transnational Organized Crime. Also, the Financial Action Task Force on Money Laundering, founded in 1989 on the initiative of the Group of Seven industrialized nations, is an intergovernmental organization whose purpose is to develop policies to combat money laundering and terrorism financing.
From President Roosevelt's 1933 seizure of personal gold to the Nazi confiscation of Jewish wealth to the recent deposit theft at Cyprus banks, asset plundering by governments has a long and colorful tradition. Protecting wealth from oppressive regimes continues to this day.
It's highly political and also a matter of perspective whether protection from confiscation is a justifiable activity. Government access to wealth is at the heart of the issue and it matters not if it's hiding money or cleaning money.
Therefore, the artificial crime of "money laundering" had to be invented, mainly because more direct and traditional methods of enforcing certain laws yielded little result. Think of it as driving without a lightbulb above the license plate being a felony because thieves might drive away in the night. All must participate in illuminating the way to be tracked. More than anything, this is a clear sign of regulatory desperation.
Money laundering has been called the thoughtcrime of finance. Isn't it really just banking with someone's possibly nefarious intentions attached to the act? It's like buying a drive-thru donut in a stolen vehicle. The theft of the vehicle may have been illegal and immoral but the act of purchasing a donut is not. Money laundering is not pre-crime but post-crime. And, it's difficult to identify the victim, other than the bank shareholders that must expend millions of dollars for the proactive compliance required as the state's deputized enforcers.
Moreover, money laundering is guilt by association. If the monetary flows resulting from associated businesses are deemed illegal, then the banking activity is defined as money laundering. But, in the absence of victimless crime laws against drugs, gambling, and prostitution, the majority of banking labeled as money laundering would simply be banking.
According to the International Money Laundering Information Bureau, "Money Laundering is also the world's third-largest industry by value." Apparently, it happens in every country in the world. Well, breathing by humans also happens in every country in the world. If money laundering is actually the third-largest industry in the world then it's either being calculated wrong or it's too easily defined.
In his Rolling Stone article "Gangster Bankers: Too Big to Jail," Matt Taibbi mocks the anti-money-laundering regime as being hypocritical because large commercial banks like HSBC receive a light slap on the wrist and the blind-eye treatment as smaller fish are routinely scooped up in the net. Taibbi correctly distinguishes between an arrestable class and an unarrestable class. However, he misses the point of the law's arbitrariness in the first place. Thank you for the analysis, Mr. Taibbi, but dispensing enforcement of an immoral law more evenly is not a solution for justice.
Even as the money-laundering laws are said to exist for the fight against terrorism or drugs or gambling, the cashless utopia is simultaneously being thrust upon us as the monetary architecture of the future. Expect ever more increasing thoughtcrime enforcement as the international money flow tightens.
Jon Matonis is an e-money researcher and crypto economist focused on expanding the circulation of nonpolitical digital currencies. His career has included senior posts at Sumitomo Bank, Visa, VeriSign, and Hushmail. Currently, he serves on the board of the Bitcoin Foundation. Follow him on Twitter @jonmatonis.