Authors: Heather Lowell
Tessa winced at the phrase, thinking of Kelly.
“I’m sorry if I offend you,” Chantal said softly. “But it’s best not to sugarcoat the process.”
When Tessa nodded, Chantal continued. “Ricky has no way to declare these ill-gotten funds as legal profits because an audit of the club’s books would show that his legitimate sales cannot possibly account for a million dollars of profit in a month.”
“So he has an extra million bucks and no place to spend it. Poor guy,” Luke drawled.
“Indeed,” agreed Chantal. “It is a very frustrating situation. If he tries to spend the money, he risks an audit that could result in his losing his whole business. Government seizure laws are positively Draconian when it comes to racketeering and organized crime. So Ricky must launder these funds. But a million dollars is a lot of money, and doubtless it is mainly in small-denomination bills. He must have a way to get this money into the banking or financial systems without drawing attention to himself.”
“That much cash would be suspicious,” Luke pointed out. “And heavy. A million bucks in tens and twenties would weigh around three hundred pounds. Despite the movies, cash isn’t exactly a portable instrument in those sums.”
“He can’t just deposit the money?” Tessa asked. “Maybe in his personal accounts?”
Chantal shook her head. “The Federal Bank Secrecy Act, or BSA, requires that paperwork be filed for any deposits of $10,000 or more that banks receive. And the details from any such paperwork are then entered into a nationwide database—which has computer programs running algorithms designed to flag suspicious deposits and law enforcement officials trained to see patterns that could indicate illegal activity. So BSA regulations create complications for
those who have dirty money to place in the financial system, who want to deposit the funds without drawing attention to themselves.”
“How do they get around the regulations?” Tessa asked.
Chantal sighed. “Unfortunately, there are literally dozens of ways, with varying levels of sophistication. The degree of complexity employed in placing funds is often directly related to the level of sophistication of the criminal organization.”
“How sophisticated is Club Red?” Luke asked.
“About middle of the road, based on my review of the financial records, though that seems to be changing over the last year. It’s my belief that Ricky has been using a couple of the more popular methods to place his money, which you will recall is the first step in laundering it. One of his methods is an old favorite for cash-rich businesses—inflating legitimate revenues. He simply says that some of the illegal funds come from cover charges, stripper revenue, drinks, food, parking, etc.”
“But you don’t think that could be the case?” Tessa asked.
“I don’t believe so. From my initial calculations based on his deductible expenses—which include overhead like liquor and food—Club Red would have to be charging outrageous sums per drink, or serving about two to three thousand people every night of the week to account for the amount of profit he’s indicated in the club’s financial statements. I’d have to do an inspection of his inventory and observe the activity at the club, but it seems clear to me that he’s padding the books.”
“Not very well, if all it took was a twenty-four-hour audit,” Luke pointed out.
“Well, I can suspect it, but proving the crime would take subpoenas and warrants. To get those, I need proof. The legal system here is quite complicated sometimes,” Chantal said. “It didn’t take me long to spot the potential for this activity, though, because I’ve got a lot of experience
looking for it. This is not a sophisticated system that Ricky uses, but it’s also not his only method for placing illegal funds. He’s also engaging in some labor-intensive methods—structuring, it’s called. He uses runners or smurfs to structure his deposits in such a way that they come in under bank radar.”
“Smurfs? What do cartoon characters have to do with this?” Tessa asked.
“Picture a beehive of activity, or a herd of smurfs running here and there doing work. This is where the name comes from—many, many low-paid runners who take small cash deposits to banks all over the city and state, then put them into a series of accounts held by Club Red or other companies owned by Ricky Hedges. This is all these smurfs do, day in and day out. I call them the worker bees.”
“I get it,” Tessa said. “These smurfs deposit money in amounts under $10,000 to avoid the reporting requirements of the banks. They do a high volume of low-value transactions so they don’t trigger the suspicions of the banks.”
“Very good. This is the preferred method of many drug smugglers, who try to ‘structure’ their deposits to avoid suspicion. It’s also a crime in and of itself, but it is almost impossible to prove without a tip-off from the banks and intensive surveillance to catch them in the act,” Chantal said.
“Pretty clever,” Tessa said, taking notes as she spoke.
“Yes and no. It is a very popular method, so I’ve learned to look for it. And it seems that Ricky Hedges realized this potential, because in the last year or so he’s been trying to incorporate more complex methods for placement of his money. Do you remember the credit cards you told me about?”
“The ones we found on Kelly?” Tessa clarified.
“Yes. When you said that the cards hadn’t been reported stolen—that in fact Club Red had been crediting those accounts for several months—I started thinking. I believe Ricky is taking illegally earned profits and depositing the
cash in the credit accounts of people who frequent the club, possibly as payment for services rendered,” Chantal said.
“Or it could be another way for Ricky to sweeten the pot and get people into the club. What if they were paying off gambling balances with those accounts?” Luke asked.
“You are a very cynical man,” Chantal purred. “I like that. I will have to dig further to verify, but what you suggest is very plausible. It seems that Club Red has been increasing its sophistication in the placing of funds in numerous ways.”
“Now that the mystery of the credit cards Kelly was holding has been solved, we can investigate those individuals and build a case against them if it’s warranted,” Tessa said. “How else does Ricky play the shell game with his money?”
“Another way he’s placed funds has been by starting a real estate development company, which enables him to play with property in a system we call reverse flips.”
“I take it we’re not talking about gymnastics here,” Luke said.
“No, this involves buying property, then flipping it, or selling it again immediately.”
“Lots of investors do that,” Tessa pointed out.
“Yes, but the trick with reverse flipping is for Ricky to buy property at a price that is well below its actual market value. Say he buys a retail property for $500,000. But if we did research on other plots of land in the same area, we would see that the true market value of Ricky’s purchase is closer to $1 million.”
“Maybe Ricky’s just a very good negotiator,” Luke said dryly.
“Not when he pays the difference between the documented sales price and the market value to the seller under the table. The documented price he pays in clean funds, and the under-the-table amount is paid in dirty money.”
“That’s pretty slick, as long as the seller is in on the deal,” Tessa said.
“Oh, it gets better,” Chantal replied. “In other permutations of reverse flips, Ricky could take a mortgage out for part of the documented sales price. Then he can turn around and sell the newly acquired property to a legitimate buyer for its true market value, realizing a profit of $500,000. He pays off any mortgage with this profit, which is clean money. He even gets a tax deduction on interest and any closing costs for the deal. And he looks like a legitimate real estate entrepreneur.”
“How does law enforcement keep track of this kind of activity?” Tessa asked.
“It’s very difficult, which is why it’s so popular. And there’s more going on with Club Red, I’m afraid. I believe that Ricky has begun to incorporate international aspects, particularly shell corporations and offshore banking, into his strategy to place, layer, and integrate his dirty money back into the economy.”
“How do things like shell corporations help out with money laundering?” Tessa asked. “I mean, I know they do, I just don’t understand the mechanics.”
“Well, so far we’ve only discussed placement of the funds in depth. There are two more stages in the equation,” Chantal said, over the sound of Tessa’s groan. “You can place all the money you want in the financial system, but if you don’t fully launder it, you still can’t spend it.”
“So how does Ricky layer, then integrate the funds?” Luke asked, giving Tessa a sympathetic pat on the back. The complexity of the financial schemes Ricky was involved in was requiring all his attention to follow. He could only imagine how tough it was for Tessa, with everything else going on in her mind, to say nothing of her injuries.
“That’s where these shell corporations come in. Let’s go back to the funds deposited by smurfs into local and state banks. These accounts undoubtedly belong to companies other than Club Red, Inc. They are probably held by numerous
phony corporations that are in reality owned and operated by either Ricky Hedges or individuals acting on his behalf,” Chantal said.
“Are these legitimate business partners or underlings?” Tessa asked.
“Probably a combination of both,” Chantal replied. “So when Ricky’s illegal profits are shipped out in small amounts all over the state of California, they are deposited by smurfs into the accounts of Company A. This Company A may very well be a wholly owned subsidiary of Company B, which in turn is part of a consortium headed by Company C, which is part of a limited liability joint venture as a junior partner with Company D, and so on to Company M. Company M is owned and operated by Ricky Hedges or someone he trusts with the task.”
“Sounds like a lot of people would have to be involved,” Tessa said.
“Not at all,” Chantal corrected her. “Each company would be set up in various offshore havens by a single individual in the name of owners who may or may not actually exist. It costs less than five hundred dollars to file articles of incorporation in most states and countries. Many criminals have a dozen or more related shell corporations to layer the funds, that is, to distance them so far from their illegal origins that it would be almost impossible to follow the trail unless you knew it was there.”
“What is it exactly that they do to muddy the waters?” Luke asked.
“A popular method of layering would be to have Company A take out a loan from an offshore bank, let’s say the Bank of Curaçao. Company A will secure the bank loan with the illegal profits that smurfs have deposited into its accounts in California. With the loan from the Bank of Curaçao, Company A can then buy certificates of deposit—or some other highly portable monetary instrument—and sell them to Company B for cash. Company B can do whatever it
wants with these monetary instruments—for example, it can liquidate them and buy property, which is then flipped, or it can take out another loan with the CDs as collateral.”
“Doesn’t anyone follow up on what’s done with loan funds to make sure there’s nothing illegal going on?” Tessa asked.
“No. Certainly not at international banks, where investor privacy is guaranteed. And so the layering of funds continues,” Chantal said. “Once the monetary instruments are liquidated, Company B can also buy luxury consumable items from Company C, which are sold back to Club Red at a cut rate, or it can invest the money on the stock market and generate legitimate profits, which are invested in Company D or parked in its accounts, and so on. The possibilities are virtually limitless. Every transaction further layers the money and makes it almost impossible to trace.”
“So the money is pumped back into the economy in the form of ‘clean’ funds that are impossible to connect back to the original deposits made by Ricky’s smurfs,” Tessa said. “The lightbulb just went on.”
“This concludes my lecture on the basics of money laundering,” Chantal agreed with a smile.
“These last steps you’re talking about, the layering and integration—they seem much more complicated than placement itself,” Luke mused.
“They are,” Chantal said. “However, the placement of funds is often the most vulnerable and dangerous step. It’s a simple idea, but there are many ways for it to go wrong. This is why you hear tales of illegal enterprises that literally have suitcases or boxes full of cash lying around—they don’t have the know-how or sophistication to place and launder their dirty money.”
“But you also said the level of sophistication of Club Red’s operations seems to be increasing, right?” Tessa asked.
“It does. The credit card activity, real estate ventures, and
reverse flips—these are new. The linking of Club Red with companies incorporated in the Caribbean and Mexico is also new. If I had to guess, I’d say that Ricky has been getting investment and financial advice, starting sometime in the last nine or ten months.”
“Who would do something like that?” Tessa asked. “Does Ricky just start advertising for a crooked financial advisor?”
“Certainly not. He would need to find a legitimate financial advisor, because that individual would be able to shield his illegal operations on behalf of Club Red with his genuine and legal investment activities. Unfortunately, many accountants and money advisors out there are willing to turn a blind eye to the provenance of funds given to them to invest, as long as they get a good cut of the profits.”
“I don’t know,” Tessa said. “I would think in this case that the financial advisor would have to be deeply involved in where the funds come from, because as you said, it seems that Ricky is being guided in some way. At least in the last year or so, you said he seems to have an investment partner. Someone who’s helping him deepen the level of his money laundering.”
Chantal considered that for a moment. “I believe you could be right. One thing we’ve found about these shady financial advisors is that the primary service they provide is the use of shell corporations. Many of these accountants will incorporate various shell companies around the world, then just park them—meaning they stand inactive until a client needs to use them. Then the system of shell companies is already set up, and the advisor can quickly get things started with particular transactions when there is a need.” She tapped a marker on the whiteboard as she considered that. “I think you are definitely right, and I know what might have happened to Ricky and Club Red.”