Reverse Money Laundering

Finance isn’t all about transactions that end up on the front page of the Wall Street journal. Some of the more interesting aspects of the industry are kept low key. Today we take a look at one of these issues, Reverse Money Laundering.

A picture of euro money laundering

What is Reverse Money Laundering?

Most people have a passing familiarity with money laundering. It’s the practice of converting illegally gained stacks into stacks that you can deposit in your bank account without alerting the authorities. Think Walter White’s car wash in Breaking Bad.

Reverse Money Laundering is, unsurprisingly, the opposite. In this case, one is focused on pulling legal funds out of circulation for use in various illicit activities.

Walter White is washing his ‘dirty’ meth money to make it ‘clean,’ but a reverse money launderer is taking ‘clean’ money and turning it ‘dirty.’ In a reverse money laundering scenario, Mr. White takes his legitimate proceeds from washing cars and uses them to buy precursor for his meth operation.

There are now a few PE-backed car wash roll-ups, so Mr. White really would’ve printed money either way.

How is it Done?

Just like money laundering, there are infinite methods to achieve the desired reverse money laundering outcomes. A few of the most common methodologies involve cash couriers, payment service providers, hawala transfer systems, false invoices, and occasionally the purchase of bullion or other high-value items. This frequently happens in countries with generally weak anti-money laundering (AML) tools.

So, Why Do People Reverse Money Launder?

This brings us to the next obvious question, what is the point of reverse money laundering? In a broad sense, any illegal activities requiring significant funding are reasonable choices for a reverse money laundering strategy. Think things like bribery, under-the-table salaries, tax avoidance, compliance/regulatory avoidance, and even terrorism.

Practical applications are essentially endless. Here are a few potential scenarios, but this list is far from comprehensive.

  • A cartel indirectly owns a mining operation in Central America. The cartel has a regular corporate front for the mine and legally sells output in the commodities markets. But, the cartel still needs a way to access the cash. They devise a scheme to submit fake invoices to the mining operation. This allows them to funnel liquidity into their own coffers. Now they can finance new weaponry for the crew while maintaining the ‘legitimacy’ of their mine.
  • Donkey Capital, a failing Wall Street bank (think Credit Suisse or Deutsche), has a very active infrastructure finance arm operating in developing countries. There’s a juicy deal coming to the table in Syria. Unfortunately, Donkey Capital will need to pay a bribe to secure the business. They set up a sham purchase of precious metals from a trader with ties to the Russian government (no metals are actually purchased). The trader then funnels the money to the Syrian government, while Donkey Capital marks the metals purchase in its books. The Syrians then hook up Donkey Capital with the mandate. Using a portion of fees from the mandate, they can pretend to sell back the imaginary metals to the trader. Nothing changes hands, but Donkey Capital removes the metals from its balance sheet.
A cartel's mining operation to facilitate reverse money laundering activities

The Role of Terrorism in Reverse Money Laundering

The majority of academic research on reverse money laundering has focused on its role in terrorism financing. Terrorist organizations have frequently used the method as a means to support everyday operations. Typically this involves siphoning proceeds from charitable organizations and legitimate commercial activities.

Anti-money laundering controls have historically targeted drug trafficking and large scale fraud. However, evidence emerged that reverse money laundering played a role in the September 11th attacks. Since then, increasingly strict AML protocols have primarily targeted terrorism. This is one of the reasons that banks and financial institutions have expansive AML and KYC (know your client) departments.

Next time you see someone ragging on the AML/KYC back office homies, just remind them that they are on the front lines of global terrorism defense. Realistically I’d say they’re one step above the Navy Seals. Chaz in the Goldman TMT group would be lucky to be in their shoes.

Sam Hillier

Sam Hillier is a reporter at Transacted, covering private equity and investment banking. He previously spent time as an investment professional focused on direct buyouts, as well as an earlier strategic advisory stint.