Why is money laundering necessary?
In: Economics
Suppose you’re a drug dealer and you earn a lot of money that you can’t admit to having. Usually, one presumes, this money is in cash. So, practically speaking, what can you do with this cash? There are several problems you have to deal with:
– Security: having tens or hundreds of thousands of dollars in cash makes you vulnerable to theft. Where do you physically put this cash so it’s safe from loss or fire, etc?
– Loss of value: inflation increases over time. $10 in 1980 is worth $2.75 or so in 2024. If you keep your money in cash, you’re losing some of its value every day.
Most people address this problem by putting their money in a bank (solves security problem) and subsequently investing it in some way (solves loss of value problem).
The issue is that you cannot do that because both things are reported to the IRS and you’re going to have to come up with a reason why you have all that money and why it’s in cash.
Enter money laundering. There are lots of ways to do this, but here’s an easy one: suppose you have a store with walk-up sales like a bakery. You sell cookies. On a given day, you sell 10 cookies for $2 each, a total gross sales of $20. You can enter in your cookie books that you sold 100 cookies for $2 each, a total gross sales of $200, which allows you to add $180 of your drug money to the till and legally deposit it in the bank. This money can be declared and taxed legally and you are free to spend it. It’s unlikely that the IRS is going to be counting the number of people that walk in the door to buy cookies and, generally speaking, local law enforcement won’t care about it at all.
There are issues with this approach, of course. You would still have to have enough flour and eggs to make 100 cookies in case the IRS came poking around. It’s just an easy model to understand. A better one would be a service-based establishment that didn’t rely so much on raw materials, but, that’s the basic model.
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