WHALES, SHARKS AND FLOUNDERS: CONCEPTUALIZING REAL WORLD MONEY LAUNDERING

By Paul Camacho
Vice President, AML, Station Casinos 
January 25, 2018

If you are in the Anti-Money laundering (AML) profession there is no doubt you are familiar with the Placement, Layering and Integration (PLI) model. It has been used by academia and in the AML industry as their theory of relativity to explain all things money laundering.

The model was developed decades ago based on the money laundering habits of large criminal enterprises, such as the Colombian Cartels who were earning not bags but pallets of cash on a regular basis.

But in today’s criminal ecosystem, does “E” always equal “em” squared?

The PLI model is premised on the belief that the ultimate goal of a money launderer is to change the character of their dirty currency so it appears to come from a legitimate source. Simply put, clean their dirty money hence, the term “money laundering.”

And in order to do this, the PLI model postulates the illicit funds must undergo a three-stage process of Placement, Layering and Integration.

The Association of Certified Anti-Money Laundering Specialists (ACAMS) states that in the initial stage of placement, “the money launderer introduces the illegal proceeds into the financial system.”[1]  Why? Because a pallet of currency does not get you far in the United States when trying to acquire a luxury home or yacht.

The PLI model presumes you need the ability to write checks or make bank wires to unlock the full purchasing power of the illicit funds.

But depositing pallets of currency into a financial institution is fraught with hazards given that banks are required to report to the federal government any currency transaction over $10,000 on a form called a Currency Transaction Report (CTR).

The objective of the Placement stage is to bleed currency into the financial system without raising suspicion. To this end, placement includes the technique of breaking up currency deposits so not to trigger the filing of a CTR, a task referred to as structuring.

The placement process, though, produces a hazardous byproduct: money trails. Currency is untraceable, but once deposited into a bank, the funds become linked to the holder of the account.

Stage 2, Layering, as described by ACAMS, is “creating complex layers of financial transactions to disguise the audit trail, source and ownership of funds.”

This process involves bouncing the dirty money between shell companies to obfuscate the money trail so it is beyond the detection capacity of law enforcement. Simply put, this is the hiding stage.

Once the traceability of illegal proceeds is adequately obfuscated, the money then goes through the final stage of Integration.

ACAMS describes the Integration stage as, “supplying apparent legitimacy to illicit wealth through the re-entry of the funds into the economy in what appears to be normal business or personal transactions.”

For instance, the criminal establishes a front company, such as a consulting or construction business. Money is then transferred from one of the dummy companies created in the layering stage to the front company and recorded as gross receipts.

This way, the dirty money is used, according to ACAMS, “in seemingly normal transactions to create the perception of legitimacy.”

The PLI model works admirably when applied to cartels and transnational organized criminal groups: the big fish. But in the sea of criminal activity there are a lot more flounders and sharks than whales.

And these small to medium size criminals – in terms of profits generated – also engage in money laundering. Trying to use the PLI model to explain flounder and shark money laundering, though, is often like trying to fit a round peg in a square hole.

This is because if you are not a big fish you may not need to place, layer and integrate your dirty money to stay off law enforcement’s radar.

The PLI model is also more suited to currency-generating crimes where there is a need to unlock the purchasing utility of large amounts of currency by infusing into banks. But today there are lots crimes that generate illicit funds in forms other than currency.

But the biggest challenge with using the PLI model as a universal tool is that it does not harmonize with the federal crime of money laundering.

Agents with IRS Criminal Investigation (IRS-CI) — the primary agency entrusted by Congress to investigate money laundering — will tell you that many times their money laundering cases do not pan out as the PLI model prescribes.

There are even those convicted of money laundering that had no intention to launder their money at all, where there is no placement, layering or integration of transactions.

For Flounders, avoidance rather than placement

According to the 2015 United States Treasury’s National Money Laundering Risk assessment (NMLRA), only 14 cents of every dollar earned in the illegal drug economy goes to major drug trade organizations such as the cartels.

Street to mid-level drug dealers, flounders and sharks, make up the bulk of criminals in the narcotic economy.

These criminals are not earning millions, but rather thousands of dollars, and flounders in particular can live quite comfortably in the realm of currency and avoid PLI money laundering all together.

According to the Wall Street Journal “Hard currency as a percentage of U.S. gross domestic product is now at 8.6 percent, the highest level since the early 1950s, an era long before the widespread use of plastic and smartphones. Europe, Japan, and Australia have similar trends.”

Without a doubt, cash is still king. Many business establishments welcome cash payments, which have zero risk of insufficient funds nor come attached with processing fees. And cash has no risk of credit card fraud or identity theft, which has skyrocketed in recent years.

Even in the medical field, there are doctors and dentists that hang signs in their window that read, “cash only.” So much for the cashless society that futurists have long predicted.

When the PLI model was developed, it was before banks were required to file Suspicious Activity Reports (SARs) and before the Patriot Act mandated Know your Customer (KYC) rules and due diligence.

Banks today are nosier about their customers and use sophisticated analytics to detect the slightest hint of what can be very nuanced suspicious activity. Seasoned criminals know traditional financial institutions are hazardous places and, accordingly, many avoid banks as much as possible.

But in reality, it’s not that hard to live without a bank account in today’s economy. With increased Anti-Money laundering (AML) regulations, financial institutions have tightened up their requirements for new customers, causing a significant increase in the un-banked population.

The collateral effect has been a dramatic uptick in non-traditional banking services to assist the un-banked to fund the expenses of life. For example, there are kiosks that can pay common utility bills by just inserting currency.

As you can imagine, if a flounder wants to live in a nice condo, then Craigslist can quickly lead them to landlords more than eager to take cash. And then there are those willing to sell cars for currency and even understate the purchase price to the Department of Motor Vehicles (DMV).

Businesses are required to report currency receipts of $10,000 or more, but a flounder’s living expenses are usually under this amount. For these bigger cash expenditures, flounders often have others conduct the transactions on their behalf or use false identification.

Another trick is to get customers to pay the expenses of the person selling the contraband. For instance, the drug dealer provides the drugs in exchange for the customer paying his Airbnb luxury home rental in Vegas. This is all money laundering outside the PLI model.

Purchasing gift and preloaded debit cards is another bank avoidance strategy.

These cards can allow criminals to make online purchases or transfer money to confederates.  There are PLI purists that will say this is a placement transaction given the funds ultimately end up in the financial institution. That may be the case but the criminal does not endeavor to complete the layering and integration stages.

Saying this is money laundering as defined by the PLI model — the presence of only one stage in a three-step process — is like calling an engine a car without the body and wheels. Why not make it simple and just call it an engine?

A flounder is a bottom dwelling fish that is well camouflaged and by nature is secretive. They are rarely spotted by predators. Street criminals can avoid having their money trails put them on law enforcement’s radar by being like flounders.

This can be done by spreading their currency around town and numerous restaurants, night clubs, clothing stores, sporting events, gaming establishments, prostitutes and drugs – all of which can be done without providing identification.

By blending in and being secretive, hundreds of thousands of dollars can be enjoyed without creating readily traceable transactions.

Leapfrogging placement  

The idea behind the original PLI model was that bad money starts out as currency. That was before the invention of the Internet and the explosion of fraud and identity theft.

According to the NMLRA, out of the $300 billion dollars of illegal income generated in the United States each year, only 21 percent results in the sale of illegal drugs. The remaining $236 billion comes from various frauds, including identity theft, investment schemes, internet scams and embezzlement.

The proceeds of these crimes are usually in the form of checks, credit cards, money orders and bank wires. The illicit funds are already in the financial system.

For non currency-based crimes, criminals can skip the placement stage and go directly to the layering stage by depositing the illicit proceeds into a series of shell companies. In the case of street gangs engaged in identity theft and government subsidy fraud, their money laundering strategy is often the opposite of placement.  Their goal is to get the funds out of the financial system and convert them to currency.

Crypto currencies also add a modern-day twist to the application of the PLI model.

Drug dealers can now avoid banks and currency all together. Street dealers are being replaced by individuals logging onto the Dark Web and using Bitcoin to purchase drugs from an anonymous distributor, then selling the product to an anonymous customer using illegal online drug bazaars.

The true identity of the distributor, dealer and customer remain unknown to each other. The money laundering is baked into the anonymity of the system.

Today, the drug dealer can choose from a multitude of legitimate retailers, vendors and service providers that accept Bitcoin. No need to convert all the Bitcoin to currency, then place the virtual value into an exchange and finally into the formal financial system.

Cleaning is a Whale’s game

Big time criminals earning pallets of currency and buying high dollar traceable assets are generally sitting ducks, especially to the astute financial sleuths of IRS Criminal who — if they cannot prove the crook was a drug dealer — can just build a tax evasion case on the unexplained wealth, just like they did on Al Capone.

But there are less than 2,400 IRS special agents nationally who have to analyze an estimated $300 billion in unreported income taxpayers fail to report annually. Suffice to say, IRS-CI only has the resources to deal with the biggest fish.

Flounders are generally not worth the effort tracking down all their cash expenditures. Why? Because typically it would require too much effort and usually results in a dollar amount that would not even meet prosecutorial guidelines for tax evasion cases.

It’s the sharks and whales sitting on more illicit proceeds and contemplating bigger transactions that need to go beyond the avoidance strategy.

Just Google “how to launder money” and you can find an endless list of people pontificating on methods to easily make dirty money look clean. But in reality, cleaning dirty money takes a lot of work and, if not deployed correctly, could create unwanted money trails.

Take for instance the challenge of setting up a front company, such as a restaurant or clothing store. Establishing these type of businesses to a degree of believability means you need to pay for employees, inventory, utilities and rent.

It requires advertising costs to bring in enough foot traffic to give the illusion the business is a going concern. The fake operation would need to have all the trappings of a legitimate business, including books and records for noisy auditors or law enforcement to rummage through and find unexplained variances.

And with books and records comes the exposure to income taxes. Criminals, by nature, hate paying income taxes.

For whale watchers, these massive sea faring creatures are often easy to detect. They are really, really big and by nature swim close to the surface. Whales are somewhat analogous to big time criminals whose financial transactions are so big and bold, it is hard for them to swim through financial waters without drawing the attention of sightseeing law enforcement.

Out of necessity, criminal whales need to integrate their dirty money in seemingly legitimate transactions. But these big criminals have the resources to hire full time professional money launderers who ensure no money trail detail is left to chance.

And the cost of money laundering, as a percent of gross revenue, is more acceptable given economy of scale. In reality, though, the integration process may be too costly, time consuming and risky for many to deploy

Sharks are stealthy by nature and travel thousands of miles to find suitable environments to feed.

For medium-sized criminals, the gold standard in being like a shark is to open an offshore bank account in a tax haven country. Funds can be accessed in a stealth manner through a credit/debit card tied to the offshore account.

Law enforcement cannot obtain the detailed records of the transactions because the processing of the transactions occurs offshore. And being like a shark means it is wise to travel to global destinations to enjoy ill-gotten gains or purchase real estate.

Shell companies – layering – can be used to purchase real estate domestically, but a wise shark does not draw too much attention to his association with the property.

The criminal shark must first get funds into the offshore bank and if it is a non-currency-based crime, they could simply convince their victim or contraband customer to wire funds to their offshore account.  Or, they can deposit the funds in a domestic shell company, then wire the money offshore themselves. No need for placement.

For currency-based crimes, they may need to structure currency – placement – into domestic banks, then wire the money overseas. But there are ways to avoid structuring and still fund offshore accounts.

Enter the dirty money broker.

Illicit money brokers earn a healthy living taking the dirty money of criminals and giving it to those in the United States in need of dollar currency. This includes foreign visitors that hale from nations— such as China and Vietnam — that limit the funds their citizens can take out of the country for personal reasons.

The broker will arrange for a multitude of transactions that eventually allow the foreign recipient to pay for the dollar currency and have an equivalent amount, less a broker’s fee, wired to the criminal’s offshore account.

Traditionally, Latin American money brokers dominated the illicit money broker industry, but now, according to the DEA’s 2017 Drug Threat Assessment, money brokers affiliated with Asian organized crime gangs are becoming big players.

The PLI versus the crime of money laundering

When Congress passed the Money Laundering Control Act of 1986 — the law criminalizing the act of money laundering — their intention was to make the money trails of criminals bite as much as possible.

To this end, the statutes were designed to go well beyond transactions contemplated in the PLI model.

In fact, nowhere in the money laundering criminal statutes are the terms, placement, layering or integration. The statutes rope in transactions that do not even involve financial institutions, including the transporting of bulk currency across state lines.

So, fish smaller than a flounder merely driving a car from one state to another with a trunk full of currency can be charged with money laundering.

Also, outside of the PLI model are transactions – as defined in Title 18 section 1956 – that are specifically intended to “promote” the underlying criminal activity.  For instance, a drug dealer can be charged with money laundering by using illegally obtained currency to purchase more contraband.

Or, a Ponzi scheme promoter can be charged with money laundering for making lull payments to calm investors who are growing antsy about the underlying investment. None of these promotion transactions have to go through any of the PLI model stages in order for them to be considered criminal money laundering.

And then there is Title 18 section 1957, which criminalizes the act of conducting a transaction over $10,000 knowing the source of the proceeds is derived from an illicit activity.

For instance, a bookkeeper embezzler causes $20,000 to be inappropriately issued in her name, then deposits it into her personal checking account.

In this case, there is no need to infuse currency into the bank to avoid a Currency Transaction Report – placement – and it does not constitute a layering transaction because it went into the embezzler’s personal bank account.

What you can call it is an imbecilic move that creates a clear evidentiary trail to the criminal, but the law does not discriminate between smart and stupid money launderers.

Attempting to regale the virtues of the PLI to a seasoned IRS special agent will often yield a cringe of consternation. When building their criminal money laundering cases — many of which are complex and in the millions — these federal agents don’t think in terms of the PLI model, but rather the element of the crime of money laundering.

And they certainly would not use the PLI model to explain to the jury the crime of money laundering. That would only serve to confuse them.

Modern day money laundering in a world fascinated by it

Just query the term “money laundering” and Google will return well over a million stories.

Much of this is due to recent scandals involving revelations tied to the historic “The Panama Papers” leak, FIFA and endemic soccer corruption and the FBI investigation into matters concerning Russian involvement in the U.S election.

Never before has the topic of money laundering been such a popular trending topic.

Hollywood is big on money laundering too. Popular shows like Breaking Bad, Narcos, Better Call Saul, House of Cards and Ozark have all woven into their plots criminals attempting to launder their money.

There is a bit of intrigue to money laundering.  The idea that a ruthless criminal can be brought down merely by a slip up in their money trails spices up a screenplay.

As more become interested in understanding money laundering, perhaps a holistic approach should be used in educating the masses rather than the confining and linear PLI model. The approach should stress that virtually any financial transaction conducted by a criminal could expose them to the crime of money laundering.

Furthermore, money laundering is only limited by the ingenuity of criminals and technology.   Also, non-currency-based crimes will influence the money laundering demand.

Finally, the size of a criminal enterprise will generally dictate the money laundering schemes needed to keep the money trails from being incriminating.

There is no one size fits all money laundering model. Money laundering is not limited to the criminal elite. The first question one should ask in seeking an understanding of money laundering is whether the criminal is a whale, shark or flounder.


About the author

Paul Camacho

Camacho played a significant role in assisting the American Gaming Association (AGA) in developing industry best practices for AML compliance.

Prior to his retirement, Paul served as the Special Agent in Charge for the Las Vegas Field Office of Internal Revenue Service Criminal Investigation (IRS CI) directing investigations of all IRS CI special agents in Utah and Nevada.

Over the course of his career in IRS CI, he has overseen sophisticated financial crime investigations across the spectrum of financial crime.