INSTANCES: CASE STUDIES

Money laundering is the process that takes place every day in every part of the
world. Here
are few instances when they were unearthed and resulted in a great lesson for
our policy
makers.

Russian Money Laundering Scandal

This scandal became public during the summer of 1999, with media reports of $7
billion in suspect funds moving from two Russian banks through a U.S. bank to
thousands of bank accounts throughout the world. Two Russian banks deposited
more than $7 billion in correspondent bank accounts at a New York bank. After
successfully gaining entry for these funds into the U.S. banking system, the
Russian banks transferred amounts from their New York bank correspondent
accounts to commercial accounts at the bank that had been opened for three
shell corporations. In February 2000, guilty pleas were submitted by a bank
employee and spouse and the three corporations for conspiracy to commit
money laundering, operating an unlawful banking and money transmitting
business in the United States.
Operation Wire Cutter

The U.S. Customs Service, in conjunction with the Drug Enforcement

Administration (DEA) and Colombian Departamento Administrativo de Seguridad,
arrested 37 people in January 2002 as a result of a two-and-one-half-year
undercover investigation of Colombian peso brokers and their money laundering
organizations. These people are believed to have laundered money for several
Colombian narcotics cartels. Laundered monies were subsequently withdrawn
from banks in Colombia in Colombian pesos. Investigators seized more than $8
million in cash, 400 kilos of cocaine, 100 kilos of marijuana, 6.5 kilos of heroin,
nine firearms, and six vehicles.
Wire Remittance Company
Both a wire remittance company and a depository institution filed SARs outlining
the movement of about $7 million in money orders through the U.S. account of a
foreign business. The wire remittance company reported various persons
purchasing money orders at the maximum face value of $500 to $1,000 and in
sequential order. They received amounts ranging from $5,000 to $11,000. The
foreign business identified by the wire remittance company also was identified as
a secondary beneficiary. The money orders cleared through a foreign banks cash
letter account at the U.S. depository institution.

The Franklin Jurado case: a strange silence on an issue in favour of

Luxembourg
http://ethiquedesplaces.blogspirit.com/archive/2006/07/28/the-franklinjurado-case-a-strange-silence-on-the-issue.html
In the late 1980s and early '90s, Harvard-educated economist Franklin Jurado ran
an operation to launder money for Columbian drug lord Jose Santacruz-Londono.
His was a very complex scheme. In its simplest form, the operation went
something like this:
Placement: Jurado deposited cash from U.S. drug sales in Panama bank
accounts.
Layering: He then transferred the money from Panama to more than 100 bank
accounts in 68 banks in nine countries in Europe, always in transactions under
$10,000 to avoid suspicion. The bank accounts were in made-up names and
names of Santacruz-Londono's mistresses and family members. Jurado then set
up shell companies in Europe in order to document the money as legitimate
income.
Integration: The plan was to send the money to Columbia, where SantacruzLondono would use it to fund his numerous legitimate business there. But Jurado
got caught.
In total, Jurado funneled $36 million in drug money through legitimate financial
institutions. Jurado's scheme came to light when a Monaco bank collapsed, and a
subsequent audit revealed numerous accounts that could be traced back to
Jurado.
Jurado's neighbour in Luxembourg filed a noise complaint because Jurado had a
money-counting machine running all night. Local authorities investigated, and a
Luxembourg court ultimately found him guilty of money laundering. When he'd
finished serving his time in Luxembourg, a U.S. court found him guilty, too, and
sentenced him to seven-and-a-half years in prison.
When authorities are able to interrupt a laundering scheme, it can pay off
tremendously, leading to arrests, dirty money and property seizures and
sometimes the dismantling of a criminal operation. However, most moneylaundering schemes go unnoticed, and large operations have serious effects on
social and economic health
The Jurado case is an example of the increasingly sophisticated means drug
cartels employ to secure assets. But it also indicates that the very profits that
motivate drug organizations are an Achilles heel and that national legislators, law
enforcement agencies and international bodies are stepping up efforts against
money laundering.
In this context, Luxembourg did a very good job.
Something striking is that the case, which is in favour of Luxembourg to
demonstrate the action to refuse criminals, is forgotten in
Luxembourg (it is not actually presented in the Codeplafi Database, it is not

quoted by professionals to promote the ethics of the financial center) all the
more as at the time of the trial, Etienne Schmit, who was deputy prosecuting
attorney had said "We hope this makes the criminals understand that we do not
want their money" (quoted by the International Herald Tribune). As if some
pragmatic people wanted the criminals do not understand Luxembourg do not
want their money. After the Jurado case Luxembourg had adopted a moneylaundering law in 1989, but critics had said that it was full of holes. At the same
time, the government had been concerned not to undermine the banking secrecy
laws on which much of Luxembourg's wealth depends. Other text came later:
Law of 5 April 1993 updated on 18 October 1999 and recently law of 12
November 2004.
We saw the same bad pragmatism in the framework of the debate relating to the
current law on money laundering (12/11/2004). Luc Frieden's draft text was
credible and appreciated by the IFM, but some professionals refused the wording
as they wanted a text that would not have a negative impact on the commercial
objectives and would be strictly limited to European requirements. The
Prosecutors' Office underlined some international recommendations and
especially those of the FATF-GAFI and explained it is no use having texts if the
implementation is not effective. The Prosecutors' Office had even understood
when reading comments on the draft that it was expected "to close the eyes on
some obvious cases of dysfunction".
"Pragmatic people" won, which is a shame as Luxembourg could have
anticipated some of the requirements of the new 3rd European directive. and
therefore become a market leader in business ethics.
Bernie Madoff Investment Scandal: This scandal was perpetrated by Bernie
Madoff and is considered by many to be the biggest hedge fund scandal of
the century. He defrauded investors out of nearly $50 billion. The modus
operandi that he used was getting in new investors and using the money from
them to payoff the old investors rather than generating profits from
trading. Unlike other Ponzi schemes, Madoff didn't promise astronomical
returns but regularly paid off returns between 10-15% which raised red
flags because maintaining such consistent returns weren't
possible. Bernie Madoff was a broker-dealer also and therefore the funds in his
wealth management fund was kept in his own brokerage accounts thus
protecting them from investigation. Madoff mostly managed money for charities
which meant that he was on the hook for paying off just 5% of his money . This
allowed him to be safe from unexpected withdrawals. Madoff kept an aura of
eliteness around himself which convinced investors to keep their money with
him. When a few investors wished to withdraw, he promptly paid them off giving
confidence that the firm was solvent.
Madoff liquidated his holdings at the end of each period thus avoiding filings with
the SEC. He also kept all the auditing responsibilities with his own auditor and
thus perpetrated one of the biggest accounting frauds in history. He kept a veil of
secrecy around his operations citing that he didn't wish to disclose his
proprietary trading strategies. He was basically called by many as running an
unregistered hedge fund of funds. He has also been accused of front running i.e
he used the knowledge of the orders of his brokerage clients to trade against
them. This is evident by the fact that he paid many brokers a "kickback" for

executing their orderflow. He was caught when in the general market

downturn in 2008, investors wished to withdraw $7 billion, he couldn't
pay them off as he had only $200 million. Madoff was asked to pay $17
billion in restitution.
Madoff investment scandal
2.) LIBOR Scandal: This is called by many to be the biggest scandal in history
of Financial Services Industry. I will not go into the details of how LIBOR
[London Interbank Offered Rate] is fixed but it is fixed by banks operating in the
London InterBank Market twice a day. Now LIBOR is a very important rate as
the entire U.S Derivatives market is based on these rates since these
rates are the basis of a range of financial products. Many floating rate
bonds are indexed to this rate. Now many banks with proprietary trading
operations in these derivatives manipulated LIBOR to their advantage. Infact
phone and mail records have been found of traders which said that LIBOR rate
fixing was now a cartel and they could get LIBOR to whatever value they
wished. The main perpetrators of this were Barclays, Deutsche Bank, JP
Morgan, Citigroup, Bank of America, RBS etc.
In 2012, new rules were passed which subjected LIBOR to increased UK
regulatory oversight. A few banks did pay monumental fines in this
regard and Bob Diamond, then CEO of Barclays plc even had to resign.
Libor scandal
3.) Enron scandal: Probably the most famous scandal, this was perpetrated by
Enron, an energy, commodities and services company. This company was
accused of using a series of creative accounting strategies like mark-tomarket accounting which allowed it to state future profits even before
they were earned. This was done so that corporate executives could drive
stock prices up and thus be paid higher bonuses. They also received stock
options as part of their compensation which could then be sold for higher prices.
Enron was at it's peak called as one of America's most innovative
companies. Enron also concealed a lot of their losses in off-balance sheet
special purpose vehicles designed by their CFO, Andy Fastow.
The collapse of Enron had widespread ramifications across the business world as
it lead to the passing of the Sarbannes-Oxley act and fall from grace of
Arthur Andersen which was considered to be one of the Big 5 accounting firms
alongside PwC, KPMG, E&Y and Deloitte. This also questioned the coexistence of accounting and consulting firms and forced many big
auditing firms at that time to sell of their consulting practices (Though
they have rebuilt them now)
Enron
Other notable mentions are Charles Ponzi (The name Ponzi scheme has come
from this person), WorldCom, Harshad Mehta stock scandal etc.

Updated 3 Feb. 394 views. Asked to answer by Abhishek Malhotra.

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