Ep. 19: Asset Laundering: It’s More Than Money with Oliver Bullough

I don't know. I did get contacted by someone the other day who'd been using ChatGPT to research an article, and they were asking me about an article that I'd never written, which ChatGPT had hallucinated. But I'm pleased to say that I don't think it hallucinated any of that.

Yeah, thanks. I mean, pretty sure there's probably been money laundering for pretty much as long as there's been financial crime, right? As long as any financial criminal has made more money from their crime than they can immediately spend, they're going to need to find a way of hiding that money, of making it look legal so that it's not going to be suspicious to other people. You know, there is this... I think it's probably a myth that the reason it's called money laundering is because the mob in the US in the 30s or 40s or whenever, it depends on who's telling the story, used to use cash businesses such as laundries to move their illegal earnings through, because, you know, who knows how many shirts you've washed? You can say you've washed a thousand when you've washed 100, and then you've legalized your money. I don't think that's true, simply because if you look at the usage of the term money laundering, it doesn't really pick up until the 1970s. So, but it's a nice story, and it does sort of illustrate perhaps what entry-level money laundering was like. I mean, in the good old days when mobsters were more or less sort of based in one city or one region, you know, you earned some money from your crimes, whether that's a protection racket or prohibition in the US or drug smuggling or whatever, and then you wash it through, you know, a laundry, a bar, you know, any kind of business that takes in a lot of cash, and you make it look good by claiming you've done more business than you have. But that all began to change in the 50s and particularly the 60s with the communications and transport revolution that just made it so much easier to communicate with people in other countries, to other countries, and essentially to live, if you were rich, in essentially more than one jurisdiction. You kept your money in one place and yourself in another. You could move your money through multiple different places. And you know, this is a story I tell in Butler to the World and also in a slightly different way in Moneyland, is this development of the City of London in its post-imperial role as no longer being the money center of a great empire, as a place to move money from India to Jamaica or whatever, but instead moving money between anywhere that had it to anywhere that wanted it and doing it in an untraceable way with the use of multiple sort of satellite, you know, veritable offshore territories such as the Cayman Islands, Jersey, Gibraltar, and sort of semi-detached territories like Hong Kong or Singapore, places that have an ancestral connection to the UK. Money laundering became not just about washing cash through a business, but through moving money through multiple bank accounts owned untraceably by anonymous shell companies in multiple jurisdictions in the Caribbean, in Central Europe, in the Far East or wherever, and it became almost impossible for governments to do something about it. And partly because I think this happened without governments noticing it had happened, and it took them a long time to catch up. But also it's just hard, you know, when you're trying to get evidence from lots of different places, a lot of those places don't really want to give you evidence, and if they do want to give you evidence, they'll probably be pretty slow about it because it's not a priority. So, you know, money laundering just took off. It was easy because of data protection rules that you could hide behind that as the, you know, investigator asks for information, and it's, 'Of course we would love to give you that information, but you need to go and get a court order, you need to get...'

It's really interesting looking at the history of the world's first money laundering legislation, which is the slightly ironically named Bank Secrecy Act. It's, that's not its official name, but that's what everyone always calls it in the US, which was passed in 1970. You know, that grew out of concern in the late 60s about people embezzling money from the US military, which was then fighting obviously the war in Vietnam, and stashing that money in Switzerland and the difficulty of getting any kind of information out of Switzerland. But it was also concerns about places like the Bahamas, places like the Cayman Islands, these multiple offshore jurisdictions that had grown up and were just so easy to get to in the age of jet air traffic, that they were so easy to communicate with now that you had intercontinental phone lines. I mean, there still weren't very many. I mean, it's hilarious to hear from people who worked in the City of London in those days of just how hard it was to communicate with New York, but there were phones for the first time. It was possible. That kind of revelations from legislators and officials in the US led to that piece of legislation, the Bank Secrecy Act, but it's just something you can't legislate about in one country because, you know, if you're dealing with crime in the US but the money is in Switzerland or the money is in the Bahamas or the money has gone through the Cayman Islands and is now back in the US but apparently belongs to someone completely different, that's not something you can do just as one country, even if you're the most powerful country in the world, there's nothing you can do about that. So the money laundering becomes much more about international efforts, you know, with the creation of the Financial Action Task Force in the late 1980s at the Paris G7 meeting, and you know, and that kicks off a whole attempt to raise international standards to make it essentially impossible for there to be these hidey holes for illicit wealth. But the problem I write about in the book is the fact that there's almost very little understanding of what money laundering is at official levels. There is a failure to understand that certainly money laundering in a lot of the world looks very different to how it looks in, you know, Europe or the US. If you look at the Hawala network in the Middle East, you know, they're very well-rooted trade-based money laundering where you're not moving money at all, you're moving value by the movement of stuff. But that is something that Western countries have always really struggled to recognize. That's very much the model for wealthy Chinese people trying to get their money out of China. You can't move money out of China except $50,000 a year, but yet money pours out of the country. How is it getting out of the country? It's going out through the movement of stuff, and that's something which Western countries, Western officials just don't really understand, they don't really engage with. And you know, there are so many of these loopholes, not so much in... I mean, there are loopholes in behavior, there are loopholes in legislation, there are loopholes in jurisdictions, there are so many loopholes, but for me really importantly there is this giant loophole in comprehension, which is that people just don't understand what criminals are capable of. There's this fixation on banks, the role of banks, you know, and they have, banks have been real villains, you know, whether it's HSBC moving money for the Sinaloa cartel or Danske Bank, you know, moving money for the world's kleptocrats, particularly Russia's kleptocrats and so on, and many, many more. But you know, that's just a fraction of the picture. The more you squeeze on banks, the more the criminals just move money in other ways because they have multiple options. And so essentially, despite now, what are we at, 1970, 55 years of effort to tackle money laundering, we're not even started doing it properly as a civilization, and that is a really troubling issue. And I mean, you mentioned the fact that asset recovery is obviously a sort of function of money laundering. Money has to be laundered before it could be recovered. Money laundering in turn is a function of a different crime. You don't have money laundering without another crime being committed. So the problem with asset recovery is it's built on a foundation which is terrible, which in turn is built on a foundation which is terrible. So it's no wonder it's hard, right? You know, it's a miracle it happens at all.

Yes. I mean, I was talking to a guy from the Middle East about how Hawala works, and he described it well. He's actually Iranian, which is technically not Hawala, because Hawala tends to be more of a sort of Sunni Muslim thing, but it works in the same way. Iran is under these extraordinarily strict sanctions, its banking system is largely almost completely isolated from the rest of the world. And I was asking him, you know, he runs a business that operates across borders, like how is this possible? And he was saying he takes some money to the bazaar in Tehran, he gives it to, you know, an exchange guy and says where he wants it. He wants it to be picked up in Paris or in London or in New York, and the guy will say, all right, gives him a code, send the code to someone in Paris, London, in New York, wherever you want it, it's available in two hours. In Islam, the charging of interest is prohibited, so the fee is charged on the exchange rate. You get the best exchange rate available is on the bazaar in Tehran, and then essentially that exchange rate, depending on how difficult it is to move money somewhere, that exchange rate rises or falls. So, but moving to Paris, London, New York is incredibly simple, that's done very quickly, very straightforwardly, but it's not done by the movement of money, it's done by the fact that there are traders who are moving goods, and they have built up a surplus in one country, a surplus in another, and essentially they all know each other, they all trust each other, they're all connected, and they just pay out at one end and then they settle up by moving goods between each other. What's really interesting about this is that this model repeats itself in multiple other places. We've seen it in the trade between North and South America in what's called the black market peso exchange, which grew up in the 1960s and happens in exactly the same way, as you can imagine, because of the cocaine trade. It's huge, huge volume of traffic between the two countries, and then American goods, legal goods, going in the other direction. Hidden in that volume of traffic is our banking services. You see it with what's called Chinese underground banking, which is moving money for wealthy Chinese people who want to be able to access funds outside China, which they can't get out because of capital controls, you know, whether they want to gamble in Vancouver or buy luxury goods in London or, you know, just have a nice holiday in Paris. A similar system makes this happen whereby the value is moved by the movement of stuff out of China in huge quantities, I mean, you know, hundreds of millions of dollars every year. But what's really interesting to me about this system, whether you call it Hawala or black market peso exchange or Chinese underground banking or whatever, is this is how the Medici banked in the Middle Ages. This is the model of Italian Renaissance banking. They didn't move bullion from London back to Florence or to Venice, you know, they just traded. They moved silk or spices north, they moved wool south, and hidden in the transaction, sufficiently well hidden so no official would ever spot it, with mismatches in the value to move money from one to the other, which just meant in exactly the same way that a trader from Iran is able to move value in and out of Iran, someone from Florence or from London or from Bruges could just turn up in another city where the Medici banked with a letter from the Medici, hand it over, and would be given money that was good enough.

Yeah, I mean, if you imagine it, I mean, the Medici didn't invent this, right? It's just that we know about them because we have their records. I'm sure people did it thousands of years before then. But the challenge for the Medici is if they want to move value from London or Bruges to Italy, they have to move a cargo of wool, or if they want to move value from the other direction, they have to move silks and spices. The joy of digital assets, right, is that you don't have to fill a galley with wool and row it from Southampton to Florence, or not Florence obviously, but the port nearest to Florence, but you know, is you can just do it in an instant. It's done. And so yeah, the amazing thing about digital assets is they take this system and just shorten it. It's instant, it's instant trade-based money laundering. And what's really challenging about this is that so much of our focus in terms of the compliance on money laundering legislation is focused on the formal financial system. It's focused on banks or intermediaries, so lawyers, accountants and so on. You know, and they have these, you know, frankly really expensive requirements placed on them which cost, you know, I don't know, I sort of try to work out how much the global compliance industry costs, and it's, if you add it together, it's about as much money as would provide clean water for everyone on Earth, food for everyone on Earth, and have about $50 billion left over every year. It's a colossal amount of money being spent on financial crime compliance.

But it's always a little bit like that old joke about the drunk looking for his keys under the streetlight. He's on his hands and knees looking for his keys, and the policeman comes up and says, 'Is this where you lost them, sir?' And he goes, 'No, I lost them in the park, but it's dark over there.' You know, you're looking for financial crime in the easy place to look. You know, it's easy to look on a spreadsheet, but it's really hard to look in trade records or in the kind of value which has moved through the shipment of used cars, as we know Hezbollah likes to move value through the shipment of used cars, or the shipment of illicit animal parts, like one of the biggest illicit trades in the world is the shipment of baby eels, pangolin scales, or leaving aside, you know, precursor chemicals for drugs manufacturing, or just mismatched ordinary stuff, a shipment of sinks which have just got the price mismatched by $10 per sink. You can move a lot of value like that, and no one notices.

I think we need to recognize there will always be money laundering. The fact that it will be profitable to commit some acquisitive crime is just a fact. There's nothing we can do about that. But the theory behind tackling money laundering is to make crime less attractive because it's more expensive, essentially. You make it more difficult for people to keep their illegal, illicit earnings. That's the point. That's what we're trying to do. So we need to stop thinking we can get perfect. Perfect isn't going to happen. But at the moment, in a way, there's a sort of boiling the ocean problem right now, and that trying to do everything, you're failing to do anything. Now, Jason Sharman, who I'm sure you know, a professor at Cambridge University, a great expert and researcher on the issues around particularly shell companies and so on, I've heard him say at a conference, we should just abolish compliance altogether, right? It's not achieving anything, so why bother spending money on it? Just get out of the way, spend the money on something else. I think he's just being provocative. I don't think he actually means that, but you know, I do think that we need to think much harder about what we're spending the money on, because part of the problem with the financial crime world is that governments have outsourced so much of the work to the private sector that they can just say, 'Do more, here's another regulation you need to follow,' but in a way they don't care how much money it costs to do all of this because it's not their money, and it's just passed on to the...

But this is essentially a tax on all of our economies. We're all paying for this. It's not free money. The banks aren't paying for it and then, you know, saying, 'Well, thank you very much, we'll pay for that, we'll let you get away with not paying for it.' It just goes on to everyone else in fees. So it's a hidden tax that everyone has to pay, and I think we need to ask far more about whether it's value for money, about whether it's working, because it isn't working. But it's really interesting that you mentioned carousel fraud, MTIC fraud back then, because I think there is a real lesson to be learned in how to tackle financial crime from how particularly the UK tackled carousel fraud back in the early 2000s, because it was a colossal problem. The sums of money involved were absolutely enormous and just getting bigger. And because it grew out of the design of value added tax across the European Union, it was very hard to do anything about it. And yet via, you know, really patient, well-resourced, well-intelligence policing and diplomatic work, the HMRC in the UK did manage to severely restrict carousel fraud. It's not solved, it will never be solved, but it is, you know, a fraction of what it used to be. And I actually, in the new book I'm working on at the moment, I do use that as an example of what you can do if you put your mind to it. And what that really was, was a proper partnership between a really well-resourced public sector, not just like five guys with a deluge of suspicious activity reports coming into them and no idea what to do with them, but like genuinely like hundreds of really well-informed investigators and, you know, a private sector who really knew what was expected of them and with reasonable demands upon them. And that combination with a really intelligent diplomatic effort going around the world trying to crack down on the safe havens, like in those days Dubai, still a safe haven but in a different way, was really successful. And that is what's not happening with money laundering. It's like the government seems to think, or governments, or governments seem to think that, you know, you just pass a new regulation, you issue a new demand, the banks go off and do it, and that'll deal with it. Well, no, it isn't dealing with it. It hasn't dealt with it for decades, and it won't deal with it again. You know, what it requires is far more investment of time and effort by governments, and that's going to be...

Expensive, but the end product, the end goal, is to really reduce this, you know, stealth tax on the economy, which is the compliance industry, which is certainly in the UK tens of billions of pounds, and then fraud, which because of our failure, fraud is, you know, hundreds of billions of pounds. If you can reduce both of those even just by 10%, that's really freeing up people who are being defrauded and whose lives are being ruined. It's freeing them, which is a real win in and of itself. Economy-wide, it's freeing up people being defrauded to spend their money on other stuff, which is a win in and of itself. So the challenge for me, and I think for, you know, other journalists who are working on this, is trying to tell this in a compelling way. You know, it's really hard to write about financial crime because, as I'm sure you noticed all the time, people are just like, 'Oh God, you know, oh boring.' And you're, no, it's really interesting. You know, this is like the support mechanism for the worst people in the world. You know, if it wasn't for money laundering, you wouldn't have got Putin. If it wasn't for money laundering, 450,000 murders in Mexico since 2006, unbelievable volumes of murders because of the war on drugs. It's relentless and appalling. And, you know, and then if you look at people trafficking, all of that, that, you know, 'stop the boats', that whole issue that's such a big political issue in the UK about people traffickers, that wouldn't exist without money laundering. I think our challenge is to try and always make clear that when we're talking about money laundering, we're just talking about a support industry for this colossal, colossal world of crime that is just preying on all of us with pretty much impunity.

Yeah, I mean, there is always a tendency to say, you know, what's the shiny thing? And that's a journalistic failing as well as a political failing. It's exciting, it's crypto, yay. Those of us who like these things like talking about it because it's new and exciting and we haven't done it before. There was a really interesting investigation at the end of last year in the UK called Operation Destabilize, run by the National Crime Agency in cooperation with authorities in Spain, I think, elsewhere in the EU, and then the US, which mirrored investigations that there's been in other places, particularly the US, where you had a, you know, traditional street drugs gang collecting cash and then that cash was being swapped for crypto and then the crypto was being used by the drugs gang to pay for other product to sell on, while the cash was being recycled. In this case, Destabilize, a lot of it going to Russian oligarchs who were cut out of the financial system and needed money. It was so, you know, we can focus on the role of, I think specifically Tether, the stablecoin, in that crime, but also we need to look at the role of cash. Cash is not the shiny thing. On the contrary, it's been used by criminals sort of going under the radar a little bit.