What is money laundering?
In: Economics
Casino table games here.
You buy in for 10,000$ in drug money.
You play 1 hand of blackjack for 100$.
You lost the hand.
You then proceed to the cashier and cash out 9,900$
She gives you the money and a receipt.
You have now laundered dirty money .
I sell you $18K worth of drugs. Suddenly I have a lot of money I didn’t have before. The government is going to want to know where that money came from (and get their cut in taxes). I don’t want them to know where that money came from, because if they did, I’d be in jail. I can’t even do much with that money, because if I did, I risk raising suspicion.
So I set up a business. Preferably one in a field that deals with a lot of cash, like a restaurant. Despite having only $2000 in sales for a week, I claim I made $20,000 in sales. Nobody is actually sitting outside counting how many customers I actually have. Pay the tax on that, and then take the profit. Now I have a sum of money that is “clean” – it’s been taxed and the government thinks it came from a legit source. Sure, it’s less than the amount of “dirty” money, but you can do more with clean money than with dirty money.
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)
Let’s say that you stole $50 from someone in school. You can’t buy candy or a new toy because your parents (the government) know that you don’t actually have that much money. So instead you open up a lemonade stand. You get real actual customers, but at the same time you make fake sales with your illegal money. Afterwards you show your parents how much money you made. Then you can buy candy or toys for your money because your parents thinks that the money is totally legit.
– Ben stole $500 from his friend.
– Ben’s father is a cop and jails thieves.
– Ben needs an alibi so his father wont find out and jail him.
– Ben puts up a lemonade stand in front of their house.
– Ben’s father sees Ben’s idea and waved bye to go to work.
– Ben happily tells his father when he came home that he made $500
– Ben’s $500 now looked like legit so his father had no issues with it.
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