Drug lords, terrorists and shadow-government operators (but I repeat myself) use third party intermediaries to cool off and sanitize hot, dirty, and therefore useless money into pristine-clean and productive money that can be used in legitimate commerce. It’s called money laundering.
Characters operating in the shadows also use a form of reverse money laundering to defile clean money or redirect dirty money while masquerading its source so it can be siphoned away, re-channeled and put to use financing illicit activities such as terrorism and off-the-books, shadow-government operations (but I repeat myself, again) that Congress won’t authorize or fund. Think of it as repatriating dirty money and expatriating clean money.
Private equity companies (“hedge” funds) are favorite vehicles for laundering dirty money. They are weakly regulated and thus are able to handle huge financial sums for parties who want to remain anonymous, moving money in and out of secret foreign-bank accounts and then on and off the books of legitimate companies in open commerce. If the origin of the newly cleansed money is ever questioned, the criminal has all the paperwork he needs to demonstrate that he has simply received large returns from a legitimate hedge-fund investment.
In both its public and private variants, money laundering depends on the participation of “legitimate” actors and, therefore, is usually a don’t-ask-don’t-tell operation. Not surprisingly, the government itself is frequently complicit in the willful ignorance that don’t-ask-don’t-tell money laundering requires, turning a blind eye to consistently huge investment returns, sometimes in excess of 150 percent annually—putting even Bernie Madoff’s Ponzi scheme to shame—a certain red flag that a money laundry is in operation.
A research paper on hedge funds and money laundering by Oracle Financial Services explains:
“The [dirty] money is channeled [into the hedge fund] through an intermediary and supposedly comes from [say] a wealthy Asian business executive who wants a higher rate of return than he believes he can get with traditional investments. The hedge fund is eager to recruit new investors and does not want to turn any money away. They take the ‘Asian business executive’ story at face value and do not dig too deep to verify that the business really exists. The layering step is complete; the money has been distanced from its criminal origins.”
The Federal Reserve also operates its own financial Laundromat for troubled, in some cases criminal banks. The Fed’s loan laundry and downscale resale consignment shop first takes in the wash by purchasing non-performing, and therefore largely worthless financial assets (loans and loan-backed securities) to remove them from the books of private banks. (Another variant is for the Fed to swap the banks’ bad paper at face value for federal debt instruments, which replaces the banks’ non-performing assets having little, if any, resale value, with safe, interest-paying and highly marketable assets.). The Fed then launders the loans by reselling them back to the same group of banks at a fraction (10 percent or less) of the face-value price it paid the banks for them. Once the banks repurchase the spiffed up dirty loan laundry, it not only has turned a nifty 90-percent-or-more profit on the turn around, it also has a new asset it can put back into the stream of financial commerce at a price reflective of its true value.
Read More at Forbes . By Lawrence Hunter.