This book covers risk taking by financial institutions and how some of their activities can be used to facilitate crime, especially money laundering. It serves as a useful starting point for smaller financial institutions—which may have significantly less expertise in spotting money laundering than their larger counterparts—to gain much-needed insight. The book also sounds a call for lawmakers to improve regulation and oversight in order to reduce the amount of criminal activity that is facilitated by the financial system.
Risk taking is an essential part of a healthy economy. In order for an economy to grow, entrepreneurs and established businesses must continually invest in new ventures and products for which future demand is unknown. These businesses count on the financial system to provide the capital needed to support their new initiatives. Although risk taking is essential, excessive risk taking can lead to the type of financial crisis the world faced in 2008. In Criminal Capital: How the Finance Industry Facilitates Crime, Stephen Platt, one of the world’s leading experts on criminal abuse and offshore financial services, takes the reader on a journey that covers risk taking by financial institutions and how some of their activities can be used to facilitate crime.
In Platt’s view, excessive risk taking and money laundering are linked by a failure of corporate governance, largely attributable to a shortage of qualified overseers. Differentiating his book from the many that have been written about the role of subprime mortgages and derivatives in the financial crisis, he tackles the less frequently discussed topic of money laundering. For Platt, any discussion of financial reform must consider a plan to regulate the conduct of banks that facilitate crime.
Most of Criminal Capital focuses on money laundering, but what exactly is it? According to the United Nations convention that laid the groundwork for national anti-money-laundering laws, a finding of criminality requires (1) the conversion or transfer of property derived from criminal offenses; (2) the concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property derived from criminal offenses; and (3) the acquisition, possession, or use of property derived from criminal offenses.
Money laundering is a sophisticated business that goes beyond the channeling of funds from illegal activities through such legitimate cash businesses as restaurants and casinos. Platt begins with the standard model, in which criminal property is placed into the financial system (placement), followed by transformation of the property through a series of financial transactions (layering) and the final step, in which the property is integrated into the legitimate economy to be used by criminals for their benefit and enjoyment. Platt shows that this model is being replaced by more sophisticated models that make money laundering more difficult to trace. The key to the new method of money laundering is to create a separation between each of the players in the scheme.
Criminal Capital covers the most familiar aspects of money laundering—including bribery and corruption, drug trafficking, and terrorism financing—and also delves into illegal activities that are less commonly associated with money laundering, such as piracy, tax evasion, and human trafficking.
When we think of bribery, we usually envision someone with a brown paper bag full of cash approaching a politician. Although this scenario no doubt occurs with smaller sums of cash, large bribes require a sophisticated network for transferring funds without drawing the attention of authorities. A more elaborate arrangement discussed by Platt might include loans, which the recipient of the bribe uses to purchase rental properties that can be a source of legitimate income.
In other instances, money-laundering techniques may be required to move funds from one country to another. Those who engage in legitimate business activities can lawfully use the financial system to transfer money from one country to another or to convert funds from one currency into another. People involved in illegal activities, such as drug trafficking, want to avoid the red flags that are raised when large sums of money are moved. Circumventing the authorities may require the participation of a number of actors—including shell corporations, legitimate businesses, and financial institutions—to avoid arousing suspicion.
Piracy on the high seas is another topic that is rarely discussed in the context of money laundering. News of Somali pirates hijacking an oil tanker or cruise ship conjures visions of an action film in which the good guys battle for their lives against a well-armed band of mercenaries. Almost never considered is the question of how the pirates raise the funds to conduct their unlawful activities. The necessary ships, crews, and weapons require substantial amounts of capital in a form that can be moved efficiently through the global financial system. In addition, once a ransom is paid, the proceeds need to be distributed to the investors. According to Platt, piracy occurs on a very large scale: Reuters reported in 2009 that there was effectively a stock exchange for piracy, which included some 70 companies of pirates that investors could back.
Platt’s style differs from that of the popular genre of historical nonfiction, in which the author draws on interviews and historical documents to recreate dialogue and produce a book that reads like a novel. Books constructed in that fashion tend to run 500 pages or more because the author needs that much space to set up and relate the story. Platt’s method, in contrast, is to lay out the concepts of money laundering and then provide examples of different types of criminal activity that have been facilitated by financial institutions. This approach enables him to cover the material in a comparatively short text and with relatively few notes, but it makes the book less entertaining than the sort suited for the big screen.
In the final chapter, “Causes and Solutions,” Platt returns to the subject of excessive risk taking, arguing that the collapse of Lehman Brothers and many other financial institutions resulted from their inability to assess risk adequately, as well as a failure of corporate governance. He provides an interesting perspective by pointing out that many jobs in finance are vocations more than they are professions. Many of the workers in these positions are long on experience but lack the professional training and ongoing education necessary to understand the intricacies of money laundering. According to Platt, none of the key positions—director, compliance officer, and money-laundering reporting officer—constitute professional disciplines that require a corresponding level of professional training. As a result, the key people are often ill equipped to deal with the issues discussed in the book.
Criminal Capital is a useful read for anyone interested in gaining a greater understanding of how the financial system can be used to facilitate crime—including managers of financial institutions and those who analyze and invest in them. As many larger financial institutions begin to shun cash businesses of questionable legality, criminals are turning to smaller financial institutions, such as credit unions, to handle their financial transactions.1 Platt’s book serves as a useful starting point for these smaller institutions—which may have significantly less expertise in spotting money laundering than their larger counterparts—to gain much-needed insight. It also sounds a call for lawmakers to improve regulation and oversight in order to reduce the amount of criminal activity that is assisted by the financial system.
—R.L.M.