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Tuesday, October 19, 1999 Published at 11:57 GMT 12:57 UK

Business: The Economy

Following the rouble: Russia's trail of crime

As the US authorities try to unravel the trail of illicit cash from Russia to the US, politicians renew their pledges to crack down on money laundering.

Already three people have been charged for the part they allegedly played in illegally channelling billions of dollars through the Bank of New York.

[ image: Deregulated financial markets make money laundering easy]
Deregulated financial markets make money laundering easy
As US Treasury secretary Larry Summers urged investigators to follow the money, he said: "Money laundering may look like a polite form of white collar crime, but it is the companion of brutality, deceit and corruption."

Some $7bn is thought to be involved in the Bank of New York affair, a drop in the ocean of the $300bn estimated to be laundered annually.

Money laundering is the process by which money gained from an illegal activity is given the appearance of having originated from a legitimate source.

Essentially, it takes three steps to launder money.

The first step is to move the ill-gotten gains away from direct association with crimes. Then, the trail is disguised, while the third step is to make the cash available to the criminals, who now have a legitimate explanation as to where they got it from.

In practice, this can involves putting money in a bank account and moving it through a series of accounts or financial transactions so it eventually appears to be the proceeds of a normal business activity.

Banking on clean cash

Banks play a key role as services such as travellers cheques and wire transfers help hide the source of cash. In Russia, fears that criminals could have infiltrated the shaky banking system heighten fears that dirty cash is being funnelled elsewhere.

It is banks that regulators are now targeting, urging them to co operate with investigators.

Indeed the Bank of New York case began when the bank filed a report to regulators about accounts in which there had been a lot of activity in a short space of time.

While money laundering has known many incarnations, liberalised markets and exchange control deregulation are thought to have made it easier.

The two have conspired to open up more channels for laundering dirty money and more opportunities to hide the source of funds.

Russian roulette

While the Russian scandal bears all the hallmarks of the typical money laundering scheme, it is complicated by last years' financial crisis.

[ image: As Russia's financial crisis hit, customers tried to get their money back from banks]
As Russia's financial crisis hit, customers tried to get their money back from banks
As the rouble plummeted, everyone tried to get money out of Russia. This created some confusion over what was capital flight and what was money laundering. Some reports have raised questions about banks, who went bust, but who have stashed away hard currency outside of Russia.

The scandal also turned political amidst allegations that the money the International Monetary Fund had lent Russia had been funnelled out of the country. These are allegations that both Russia and the IMF have refuted.

It started with Al Capone

In popular myth, money laundering was invented by the Italian mafia.

When Al Capone was jailed for tax evasion - and not the crimes on which he made the cash - it prompted gangsters to think again about how they managed their cash.

The term money laundering is said to originate from Mafia ownership of laundromats in the United States.

The easiest way to hide the cash the Mafia earned from amongst other things, extortion, bootleg booze, prostitution and gambling, was to mix dirty cash with clean cash. As laundromats were cash businesses, they were seen as a good bet.

More recently, financial markets are also thought to have offered a channel for hiding illicit cash, as brokers don't trade in their clients names. They can buy and sell the same commodity, paying for one in "dirty cash", then receiving a cheque which legitimises their profits.

In some other systems, no money is moved at all, electronically or otherwise. Underground banking systems operate. Most commonly known as hawallah, they are said to operate in Russia, the Middle East and Asia.

A "payment" is made in one country, then someone picks up the cash from a member of the syndicate in another country. At a later date there is a settling up within the system.

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