What is money laundering?
In: Economics
Let’s say I’m a drug dealer who doesn’t work. I make 5k a week profit selling. The police are going to wonder how I am driving a nice enough car to question it. Hey look, I haven’t reported income to the IRS and now there is civil forfeiture (I won’t elaborate it is too off topic but basically the police take the car and I have to proof I lawfully obtained it)
so how do I get around this? Banks know to look out for large cash deposits as well but that is a collateral problem. But, how do I turn this ‘dirty’ money ‘clean’? Well there are a few ways. One is to buy a cash oriented business (laundromat, car wash) and report part of that 5k as business gains and pay taxes on it. No one is really monitoring the vehicles going in/out of the car wash all day tallying up how much I should be making. As long as I’m not super out of the ordinary no one is really paying much attention. Sure, most car washes in the area make 10k a week, mine makes 12, but hey maybe mine is a better deal/more people like it/whatever benign reason to justify a 20% boost.
Now, I’m reporting $624k to the IRS as income. Now the car at least appears to have been bought using legal income.
Now, this is a BASIC way to do this and for an ELI5 this is more than sufficient. But let’s get wild, with enough money that the car wash becomes impractical we can get into an army of shell companies in various countries using business to business deals that go through multiple banks. None of these companies actually exist but it becomes an incredible amount of work for multiple governments to dig through (and given that there are some countries that do not care at all it becomes nearly impossible to continue the chain once it goes in/comes out of that country)
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