about financial crime

5. A brief history of money laundering

The history of money laundering is, primarily, that of hiding money or assets from the state – either from blatant confiscation or from taxation – and, indeed, from a combination of both. And, of course from those seeking to enforce judgments in civil cases or to follow the money that results from other crime. It is interwoven with the history of trade and of banking.

Published 1996

No one can be really sure when money laundering first began. However, we can be confident that it has been going on for several thousand years. In “Lords of the Rim” Sterling Seagrave explains how, in China, merchants some 2000 years before Christ would hide their wealth from rulers who would simply take it off them and banish them. In addition to hiding it, they would move it and invest it in businesses in remote provinces or even outside China.

In this way, the offshore industry was born, and – depending on your point of view – so was tax evasion. And so were the principles of money laundering – to hide, move and invest wealth to which someone else has a claim.

Over the next four millennia, the principles of money laundering have not changed. But the mechanisms have. Parallel Banking is one of the most durable techniques, or to be more precise suites of techniques.

Over a period of thousands of years, people have used money laundering techniques to move money resulting from crime – but also often to hide and move it out of reach of governments – including oppressive regimes and despotic leaders. Many minorities in countries down the ages and around the world have taken steps to preserve wealth from rulers, both unelected and elected, who have targeted them simply because of their beliefs or colour. It is happening even today.

It was several thousand years ago that money and value were separated and value became represented by assets, often assets with no intrinsic worth but increasingly by assets that were recognisable and convertible. So, gold coins were – literally – worth their weight in gold and it was immaterial what country issued them – the only thing that mattered was the quality and quantity of the gold. Once gold is melted down, it does not lose its value, only its shape. It can be re-fashioned and having arrived in one place as one thing, it can leave there as something else – and that need not even be the same amount of gold. Gold remains one of the main non-currency means of holding money including laundered money. Diamonds are a particular favourite, too. There have been instances of “holy men” carrying laundered funds by concealed diamonds in to California.

Whilst it is true that, in the USA, prohibition and a restriction on gambling made large amounts of cash for those prepared to break the embargoes the most important fact about that time was that it caused a dramatic increase in financial crime – in our definition, financial crime is a crime that gives direct access to the proceeds of the offence. Sanctions busting was a financial crime because for every offence committed, the criminal immediately received cash in his hand. Thus it created an immediate problem over what to do with that money. Opening a cash business was the obvious thing to do. Laundries were a suitable business, and so – goes rumour – the term “money laundering” was invented. This may or may not be true.

Whatever the origins of the term, criminals moved into businesses where the cash crop was higher – including drugs. They formed law firms, accountancy practices, bought banks, film studios, engineering concerns, even governments. Addendum: in 2002, one person was trying to buy control of a central bank.

If criminals did not buy the whole organisation, they bought – or in some other way obtained the co-operation of – someone within the company. They have always used criminal money to fund the education of the children of the more senior members.

But money laundering also was developed in order to facilitate trade. It is often said (generally without any evidence to support the contention) that Nigeria is the money laundering centre of Africa and that Nigerians around the world are engaged in large scale crime and laundering. Insofar as that is true, the reason for it is because the networks that are now dominated by criminals were set up within the past twenty or so years by international traders who were unable to operate due to exchange control measures and a system of customs inspection that resulted in traders based in Nigeria operating their businesses entirely offshore. Other countries have had – and in the case of some which have strict currency transaction requirements still have – a similar development of laundering. Money laundering techniques are restricted only by the imagination of the criminals – and there are a lot of criminals trying to find ways to launder.