WEBVTT - Why Money Launderers Love $100 Bills 0:00:03.880 --> 0:00:06.420 Hello, Odd Lodge listeners. I'm Joe Wiesenthal. 0:00:06.620 --> 0:00:07.560 And I'm Tracy Alloway. 0:00:07.700 --> 0:00:10.270 We're the hosts of the Odd Lodge podcast, and we've 0:00:10.300 --> 0:00:11.479 got something exciting for you. 0:00:11.740 --> 0:00:13.970 That's right. So one of the best parts of hosting 0:00:14.070 --> 0:00:16.830 our podcast is we get to actually meet and interact 0:00:16.950 --> 0:00:19.709 with our listeners. And we know we have some listeners 0:00:19.850 --> 0:00:20.989 over in Los Angeles. 0:00:21.170 --> 0:00:23.709 That's right. So if you're in L.A., we're going to 0:00:23.750 --> 0:00:27.350 be recording a live show, some live recordings at the 0:00:27.370 --> 0:00:29.510 Vermont Theater in Hollywood on September 17th. 0:00:30.240 --> 0:00:32.979 We have some really exciting guests lined up, have some 0:00:33.140 --> 0:00:36.450 really great conversations planned. So go ahead and get your tickets. 0:00:36.470 --> 0:00:39.890 You can find those over at Bloomberg.com forward slash oddlots 0:00:40.030 --> 0:00:42.529 or click the link below in the show notes and 0:00:42.690 --> 0:00:43.750 come and say hi when you're there. 0:00:49.490 --> 0:00:52.330 Bloomberg Audio Studios. Podcasts. 0:00:52.650 --> 0:01:06.560 Radio. News. Music. Hello and welcome to another episode of 0:01:06.580 --> 0:01:08.610 the Odd Thoughts Podcast. I'm Tracy Alloway. 0:01:08.770 --> 0:01:09.910 And I'm Joe Weisenthal. 0:01:10.250 --> 0:01:14.110 Joe, everything I know about cash came from that tour 0:01:14.170 --> 0:01:18.950 we took of the Chicago Fed's cash facilities with its president, 0:01:19.010 --> 0:01:19.690 Austin Goolsbee. 0:01:20.050 --> 0:01:22.490 That was really fun. I'm trying to think. What do 0:01:22.510 --> 0:01:25.949 you remember? I remember just seeing lots and lots of cash, ink. 0:01:26.360 --> 0:01:30.440 I remember appreciating the smell of the cash. It has 0:01:30.480 --> 0:01:34.640 a very idiosyncratic smell. smell. I remember the color of 0:01:34.680 --> 0:01:37.440 the cash, which you don't really notice all the different 0:01:37.540 --> 0:01:41.570 shades of dollar bills until you see them stacked up. Right. 0:01:41.590 --> 0:01:42.750 We just think of them as green. 0:01:42.830 --> 0:01:43.069 Yeah. 0:01:43.090 --> 0:01:45.830 But there's like pinks in there and oranges. Yeah, absolutely. 0:01:45.870 --> 0:01:48.690 Fifty shades of green. And then one thing that I 0:01:48.730 --> 0:01:52.320 remember is Austin actually telling us that 85% of the 0:01:52.320 --> 0:01:59.050 $ 2. 4 trillion in circulation is happens to be $ 100 bills. 0:01:59.090 --> 0:02:00.890 Do you remember that? Yeah. 0:02:01.090 --> 0:02:03.510 And this is one of those sort of like facts 0:02:03.590 --> 0:02:06.110 about the world that people seem to know, but don't 0:02:06.270 --> 0:02:09.030 really think through. It just sort of comes up every 0:02:09.110 --> 0:02:12.269 once in a while. This phenomenon that, you know, by 0:02:12.310 --> 0:02:14.630 and large, like two things I think people may know 0:02:14.690 --> 0:02:17.540 about the cash economy, which is by and large, people 0:02:17.639 --> 0:02:20.780 use less and less cash in their daily lives. That 0:02:21.020 --> 0:02:24.100 fact seems to have actually had no effect on the 0:02:24.139 --> 0:02:25.700 amount of cash in circulation. 0:02:25.840 --> 0:02:26.960 Right. It keeps growing. 0:02:27.500 --> 0:02:29.820 And then quite a bit of that cash in circulation 0:02:29.980 --> 0:02:34.380 is in relatively high denomination bills that are even used 0:02:34.500 --> 0:02:36.470 less than, say, the fives or the 20s. 0:02:36.590 --> 0:02:38.609 Yeah, I don't know about you, but I do not 0:02:38.650 --> 0:02:41.550 walk around with a lot of $ 100 bills in my pocket. 0:02:41.610 --> 0:02:42.390 No, me neither. 0:02:42.810 --> 0:02:44.489 On the rare occasions when I do go to a 0:02:44.510 --> 0:02:48.609 cash machine, I always choose 20s or even fives and 10s, right? 0:02:49.110 --> 0:02:52.040 So the question is... What are people doing with all 0:02:52.090 --> 0:02:54.850 these $ 100 bills, right? And when we talked about it 0:02:54.910 --> 0:02:58.130 with Austin, he described it as a disconnect between the 0:02:58.169 --> 0:03:02.160 stats and the daily use of cash of most Americans. 0:03:02.620 --> 0:03:05.700 But I think there's kind of an obvious answer here, right? 0:03:06.100 --> 0:03:07.359 What are people doing with $ 100 bills? 0:03:07.380 --> 0:03:08.980 Well, I have an answer because I can tell you 0:03:09.020 --> 0:03:12.169 the last time I walked around with a significant stack 0:03:12.190 --> 0:03:12.410 of $ 100 bills. 0:03:12.450 --> 0:03:12.549 Okay. 0:03:12.610 --> 0:03:17.110 Okay. I was playing in a poker game in New 0:03:17.130 --> 0:03:19.590 York City, and it was not a regulated poker game, 0:03:19.630 --> 0:03:21.970 and I didn't lose all my money that night. And 0:03:21.990 --> 0:03:24.109 so I walked home with a lot of $ 100 bills. 0:03:24.169 --> 0:03:25.950 So maybe that is a sort of. 0:03:25.970 --> 0:03:28.530 That's some good, humble bragging, Joe, about winning at poker. 0:03:28.650 --> 0:03:30.460 I didn't win. I said I didn't lose all my money. 0:03:31.590 --> 0:03:34.220 But maybe that's sort of a clue about the types 0:03:34.280 --> 0:03:39.280 of activities that might lend themselves to high-denomination individual bills. Yes. 0:03:39.340 --> 0:03:43.440 So this episode is- perhaps poker adjacent. We're going to 0:03:43.460 --> 0:03:45.580 be talking about money laundering, which we've never done an 0:03:45.660 --> 0:03:48.440 episode specifically devoted to money laundering. And it is in 0:03:48.480 --> 0:03:50.339 fact like a huge business. 0:03:50.780 --> 0:03:53.920 Some of the numbers you read about them and they're 0:03:53.960 --> 0:03:56.420 like staggering. And I almost like don't believe some of 0:03:56.480 --> 0:03:59.680 the numbers, but when you figure out it's like, okay, 0:04:00.060 --> 0:04:02.420 drugs are probably a big deal. Fraud is probably a 0:04:02.420 --> 0:04:05.940 big deal. Crime is a big deal. People are trying 0:04:05.980 --> 0:04:08.840 to get their money out of countries that have various 0:04:08.880 --> 0:04:12.350 sort of rigid capital controls. China being an obvious example, 0:04:12.830 --> 0:04:13.790 you could see how it adds up. 0:04:14.010 --> 0:04:16.750 Yeah, absolutely. And of course, money laundering is kind of 0:04:16.770 --> 0:04:19.390 the thing that makes a lot of crime possible, right? 0:04:19.410 --> 0:04:21.430 Like a lot of people wouldn't be in the crime 0:04:21.470 --> 0:04:24.390 business if they couldn't actually use the money they're generating 0:04:24.430 --> 0:04:26.820 from it and money laundering. is the way they're able 0:04:26.860 --> 0:04:29.060 to do that. So I think it's a worthy subject 0:04:29.100 --> 0:04:29.740 to dive into. 0:04:29.860 --> 0:04:31.580 I really want to learn more about how it all works. 0:04:31.700 --> 0:04:33.330 All right, let's do it. We do, in fact, have 0:04:33.370 --> 0:04:36.350 the perfect guest. We're going to be speaking with Oliver Bullough. 0:04:36.410 --> 0:04:40.680 He is a journalist and author of Everybody Loves Our Dollars. 0:04:40.710 --> 0:04:42.839 So Oliver, thanks so much for coming on All Thoughts. 0:04:43.760 --> 0:04:45.280 And thanks for having me on the show. I'm really 0:04:45.320 --> 0:04:45.920 pleased to be here. 0:04:46.740 --> 0:04:50.100 Talk to us about the scale of money laundering, because 0:04:50.140 --> 0:04:53.250 you sometimes hear these statistics thrown out, like bigger than 0:04:53.310 --> 0:04:57.690 the entire GDP of Germany, certainly bigger than a lot 0:04:57.730 --> 0:05:01.170 of big tech companies and things like that. How large 0:05:01.210 --> 0:05:02.130 are we talking about here? 0:05:03.010 --> 0:05:05.880 Well, it's worth saying in advance that obviously no one 0:05:05.900 --> 0:05:09.260 really knows. The criminals are not filing accurate tax returns. 0:05:09.300 --> 0:05:12.000 So there's a lot of supposition going on here. But 0:05:12.040 --> 0:05:16.000 the most widely used estimate is that We're talking about 0:05:16.190 --> 0:05:19.500 between 2% and 5% of global GDP. And since global 0:05:19.540 --> 0:05:24.940 GDP is approximately $ 100 trillion, that means between $ 2 and 0:05:24.940 --> 0:05:29.589 $ 5 trillion being laundered globally. And that's a pretty decent 0:05:29.990 --> 0:05:32.310 amount of money. You could build quite a lot of 0:05:32.350 --> 0:05:35.409 data centers with that. And that's growing all the time. 0:05:35.430 --> 0:05:38.930 I like how we measure everything in data centers now. 0:05:38.990 --> 0:05:40.480 How many data centers can you build? 0:05:40.500 --> 0:05:43.630 Yeah. Yeah, I mean, I don't know if the criminals 0:05:43.670 --> 0:05:45.230 are building a lot of data centers. I mean, they 0:05:45.350 --> 0:05:49.210 are choosing almost any avenue they can find to launder 0:05:49.230 --> 0:05:52.080 their money. So perhaps that's the new new thing. But 0:05:52.260 --> 0:05:55.820 the old things are still very much current. We're talking about, obviously, 0:05:56.140 --> 0:05:59.540 cash money earlier. And although we like to focus on 0:05:59.700 --> 0:06:02.850 shiny things, crypto for laundering money, I mean, criminals are 0:06:02.870 --> 0:06:04.909 pretty traditional in a lot of the ways they move 0:06:04.930 --> 0:06:08.090 their cash. So we are often talking about literal banknotes. 0:06:09.150 --> 0:06:11.390 Do you have a sense of how that 2% to 5% 0:06:11.390 --> 0:06:15.550 number is derived? Because yes, we've seen that stat, et cetera. 0:06:15.589 --> 0:06:18.810 But also, as you've said, no one is filing these 0:06:18.870 --> 0:06:23.080 things in any sort of official manner. It's a lot 0:06:23.120 --> 0:06:25.440 of money. Do you have a sense of why people 0:06:25.480 --> 0:06:26.480 think it's in that ballpark? 0:06:28.339 --> 0:06:30.860 That's a really good question, actually. It derives from an 0:06:30.920 --> 0:06:34.040 estimate given by Michel Candesso, who was the head of 0:06:34.100 --> 0:06:37.220 the International Monetary Fund back in the late 90s, a 0:06:37.279 --> 0:06:41.230 French central banker. And he came up with this idea 0:06:41.290 --> 0:06:43.750 in the late 90s that it was between 2% and 5% 0:06:43.750 --> 0:06:47.570 of global GDP, which was based on a couple of economists' 0:06:47.630 --> 0:06:50.289 work at the time trying to work out the size 0:06:50.330 --> 0:06:52.480 of the global economy. And it was very much a 0:06:52.520 --> 0:06:55.660 guesstimate at the time. And it's been attacked from lots 0:06:55.680 --> 0:06:57.700 of different directions, trying to work it out in a 0:06:57.700 --> 0:07:00.120 sort of a macro way, looking at it in micro way, 0:07:00.140 --> 0:07:04.250 trying to work at various dimensions. guesses. And people do 0:07:04.310 --> 0:07:06.750 keep coming back to this kind of a range. So 0:07:06.970 --> 0:07:09.130 the estimate that tends to be given is two to 0:07:09.150 --> 0:07:10.920 five percent. It's the same estimate that was given in 0:07:10.940 --> 0:07:14.000 the late 90s, which is it's a kind of uncomfortable 0:07:14.580 --> 0:07:16.980 truth hidden in that estimate, which is that if the 0:07:18.140 --> 0:07:20.300 scale or the share of the global economy that is 0:07:20.360 --> 0:07:22.360 criminal is the same now as it was in the 1990s, 0:07:22.460 --> 0:07:26.380 it means that everything we've done to try and tackle 0:07:26.420 --> 0:07:31.970 money laundering, which has been an failed to do anything 0:07:32.110 --> 0:07:35.790 except perhaps prevent the criminal economy from getting bigger. Criminals 0:07:35.850 --> 0:07:40.630 have been able to outmanoeuvre regulators and law enforcement agencies 0:07:40.650 --> 0:07:43.900 and governments' attempts to limit them by a sort of 0:07:43.950 --> 0:07:47.820 ceaseless entrepreneurial nature ever since there have been attempts to 0:07:47.860 --> 0:07:50.280 stop them from laundering money. And the fact that their 0:07:50.320 --> 0:07:52.640 share of the global economy just grows alongside the global 0:07:52.660 --> 0:07:53.860 economy is proof of that. 0:07:54.140 --> 0:07:56.880 Yeah. The fact that it's growing in tandem with like 0:07:56.960 --> 0:08:00.440 broader economic growth. Absolutely. So, okay, what's going on with 0:08:00.480 --> 0:08:04.080 our efforts to actually tackle money laundering? Because I used 0:08:04.100 --> 0:08:06.080 to cover the banking industry. And one thing you would 0:08:06.100 --> 0:08:10.020 hear from banks all the time is how onerous KYC regulation, 0:08:10.060 --> 0:08:13.120 know your customer regulation was, how terrible it was that 0:08:13.140 --> 0:08:16.320 they had to file thousands and thousands of like suspicious 0:08:16.380 --> 0:08:20.280 activity reports, lots and lots of complaints about everything they're 0:08:20.340 --> 0:08:25.330 doing to stamp out suspicious or illegal activity. But at 0:08:25.370 --> 0:08:28.050 the same time, per your commentary, it doesn't seem like 0:08:28.090 --> 0:08:29.050 it's actually been effective. 0:08:30.210 --> 0:08:33.550 It's obviously easy to dismiss what banks say as special pleading, 0:08:33.570 --> 0:08:35.469 but actually they do have a point. We have an 0:08:35.510 --> 0:08:39.829 incredibly intrusive and onerous system put in place to try 0:08:39.890 --> 0:08:43.590 and stop money laundering and terrorist financing, which was, I mean, 0:08:43.630 --> 0:08:47.260 it was created the first AML legislation. The sort of 0:08:47.270 --> 0:08:51.140 rather weirdly named Bank Secrecy Act was passed back in 0:08:51.140 --> 0:08:54.250 1970 in the US, and then it spread in globally 0:08:54.309 --> 0:08:57.170 when it became clear that one country couldn't fight money 0:08:57.210 --> 0:08:59.000 laundering on its own, because it was pretty easy to 0:08:59.340 --> 0:09:02.979 just fly your banknotes to the Bahamas, Cayman Islands or Panama. 0:09:03.000 --> 0:09:05.500 And then, so it's pretty important to have their cooperation 0:09:05.520 --> 0:09:07.240 and then everyone had to cooperate. So we ended up 0:09:07.320 --> 0:09:10.820 from the late 80s, thanks to an institution called the 0:09:10.840 --> 0:09:13.940 Financial Action Task Force with a kind of global approach 0:09:13.960 --> 0:09:19.290 to tackling money laundering, which has become incredibly intrusive, incredibly expensive. 0:09:19.710 --> 0:09:24.520 The estimates from LexisNexis is that global compliance with AML legislation, 0:09:25.240 --> 0:09:28.920 it costs something like $ 200 billion a year, which is 0:09:28.940 --> 0:09:30.280 a lot of money. I mean, if you look at 0:09:30.640 --> 0:09:32.120 what you could do with that money if you weren't 0:09:32.210 --> 0:09:34.390 using it for this, that would be enough to solve 0:09:34.429 --> 0:09:37.030 world hunger and to provide clean water and sanitation to 0:09:37.090 --> 0:09:40.209 everyone on Earth with about $ 50 billion left over. So 0:09:40.530 --> 0:09:42.650 it's a huge amount of money which is being spent 0:09:42.830 --> 0:09:45.490 on this issue. And a lot of that money is 0:09:45.550 --> 0:09:48.930 being spent by banks who are expected to check transactions 0:09:49.150 --> 0:09:54.050 to use ever more elaborate AI-powered compliance software, which they 0:09:54.220 --> 0:09:57.360 are doing. They are attempting to do the job being 0:09:57.440 --> 0:09:59.670 asked of them. They face very large fines if they 0:09:59.690 --> 0:10:02.170 don't do that job. So it's fairly easy to see 0:10:02.210 --> 0:10:04.620 why they're doing it, but it's not working. The system 0:10:04.630 --> 0:10:08.780 that we have is incredibly laborious, very bureaucratic. It generates, 0:10:08.820 --> 0:10:12.339 as you say, millions upon millions of suspicious activity reports 0:10:12.400 --> 0:10:15.340 every year, but it is signally failing to stop the 0:10:15.360 --> 0:10:17.800 money launderers who are always at least one step ahead. 0:10:18.290 --> 0:10:20.810 So obviously, we really want to get into the details 0:10:20.870 --> 0:10:24.190 of the creative ways that criminals and so forth move 0:10:24.250 --> 0:10:27.010 money across borders. But just to sort of set the 0:10:27.110 --> 0:10:31.140 scene a little bit, we started this conversation by talking 0:10:31.160 --> 0:10:33.619 about how much cash there is in circulation and the 0:10:33.679 --> 0:10:37.120 prevalence of high denomination bills. We're also talking about all 0:10:37.140 --> 0:10:41.760 the suspicious sort of incident reports that banks file. Big picture, 0:10:41.820 --> 0:10:44.680 I sort of have two questions. One is, what is 0:10:44.780 --> 0:10:47.740 the general sense of the distribution? How much is this 0:10:47.780 --> 0:10:53.390 happening via cash and bearer instruments that are hard to track? 0:10:53.690 --> 0:10:55.850 And how much, you know, we see the headlines from 0:10:55.910 --> 0:10:58.069 time to time, a bank will get into really big trouble. 0:10:58.510 --> 0:11:01.330 HSBC got into trouble years ago. How much do we 0:11:01.370 --> 0:11:06.530 think is happening sort of inside regulated financial institutions that 0:11:06.570 --> 0:11:09.150 didn't identify the illegal movement of money? 0:11:10.840 --> 0:11:14.340 Obviously, it is happening via regulated financial institutions. We know 0:11:14.360 --> 0:11:18.520 this because occasionally they get caught, whether that's Danske Bank 0:11:18.559 --> 0:11:21.940 or Deutsche Bank, HSBC, whoever. But if you look at 0:11:22.100 --> 0:11:26.420 the scale of global cash smuggling, and you compare that 0:11:26.460 --> 0:11:29.900 to the amounts that are even in these gigantic money 0:11:29.920 --> 0:11:34.330 laundering scams, which are accused of going through regulated financial institutions, 0:11:34.390 --> 0:11:37.990 it's just an absolutely different league. Danske Bank was accused 0:11:38.030 --> 0:11:41.500 of moving, if I remember rightly, about 130 billion over 0:11:41.540 --> 0:11:45.479 several years for suspicious Russian clients. Global cash smuggling is 0:11:45.500 --> 0:11:49.270 certainly in the hundreds of billions annually. Cash is a 0:11:49.390 --> 0:11:53.570 hugely significant tool for moving illicit wealth around the world. 0:11:53.630 --> 0:11:57.559 And even that is dwarfed by what we refer to 0:11:57.620 --> 0:12:00.900 as trade-based money laundering. It is essentially a way of 0:12:00.960 --> 0:12:03.099 moving value around the world, not in the form of 0:12:03.440 --> 0:12:05.099 money at all, but in the form of stuff. If 0:12:05.160 --> 0:12:08.410 you are moving value out of China, it's far easier 0:12:08.450 --> 0:12:11.030 to do it in the form of essentially misinvoicing a 0:12:11.090 --> 0:12:14.910 shipment of manufactured goods or knock off designer clothes or 0:12:14.950 --> 0:12:16.689 whatever than it is to move it in the form 0:12:16.710 --> 0:12:19.630 of money at all. So there is a focus on 0:12:19.750 --> 0:12:23.819 the regulated sector, banks in particular, when we talk about 0:12:23.860 --> 0:12:26.700 money laundering for obvious reasons, because it's sort of easy 0:12:26.720 --> 0:12:29.000 to look in a spreadsheet and see value moving around. 0:12:29.040 --> 0:12:31.739 But actually, it's a far bigger deal if you look 0:12:31.760 --> 0:12:34.040 at how money is moved in the form of cash 0:12:34.160 --> 0:12:36.840 and how money is moved in the form of stuff. 0:12:37.300 --> 0:12:41.410 And that form of money laundering, trade-based money laundering, is 0:12:41.490 --> 0:12:45.290 almost impossible to estimate. I mean, there is an institution 0:12:45.429 --> 0:12:49.189 in Washington, Global Financial Integrity, that estimates that that's about 0:12:49.210 --> 0:12:51.980 a trillion dollars a year is moved via trade-based money laundering. 0:12:52.220 --> 0:12:54.760 You know, we're talking about amounts of money being laundered 0:12:54.940 --> 0:12:58.740 outside the financial system that completely dwarfs what's happening within 0:12:58.800 --> 0:12:59.620 the financial system. 0:13:00.220 --> 0:13:01.800 Yeah, so one thing I learned from your book is 0:13:01.840 --> 0:13:04.819 there's a connection between drug money and I guess John 0:13:04.860 --> 0:13:08.760 Deere tractors and other equipment with the Mexican cartels, like 0:13:09.100 --> 0:13:12.610 essentially trading fentanyl for farming equipment. Can you walk us 0:13:12.640 --> 0:13:15.770 through that particular example? How does this actually work? 0:13:17.309 --> 0:13:20.250 Well, you can see this. It's just logical that if 0:13:20.309 --> 0:13:25.750 there is, let's say, $ 50 billion worth of cocaine arriving 0:13:25.790 --> 0:13:28.050 in the United States every year, I've just invented that number, 0:13:28.090 --> 0:13:29.790 but it's a nice round number. So let's say it 0:13:29.840 --> 0:13:32.870 is that. then there must be $ 50 billion of something 0:13:32.920 --> 0:13:34.790 else flowing in the opposite direction for the books of 0:13:34.809 --> 0:13:37.910 the cartels to balance. They're not in this for charitable reasons. 0:13:37.950 --> 0:13:39.850 They like to make a living out of moving drugs, 0:13:39.890 --> 0:13:43.190 so that follows. Now, obviously, a significant amount of that 0:13:43.250 --> 0:13:46.340 is in the form of money. By best estimates, something 0:13:46.360 --> 0:13:49.700 like $ 25 billion worth of cash is smuggled into Mexico 0:13:49.740 --> 0:13:52.200 every year. But there's still a significant hole in the 0:13:52.240 --> 0:13:54.520 books that needs to be filled with something. And it 0:13:54.580 --> 0:13:58.160 has been a traditional practice that essentially a way of 0:13:58.520 --> 0:14:01.380 meeting that hole in the books is just by exporting stuff. 0:14:01.700 --> 0:14:04.940 What does America make particularly well? Well, I mean, Caterpillar tractors, 0:14:04.960 --> 0:14:07.540 John Deere tractors, that's useful. Everyone wants those. You can 0:14:07.580 --> 0:14:11.100 send them south. You can send all kinds of wonderful 0:14:11.200 --> 0:14:14.040 American financial products. We see this in Europe to a 0:14:14.059 --> 0:14:16.599 greater degree with luxury goods. There is a huge demand 0:14:17.100 --> 0:14:20.760 in China for European luxury goods, whether that's Gucci handbags 0:14:20.820 --> 0:14:23.220 or Burberry anorex or whatever. And so there is a 0:14:23.420 --> 0:14:26.020 giant off the books, a sort of grey market, of 0:14:26.370 --> 0:14:29.050 designer goods which flow out of Europe into China. And 0:14:29.090 --> 0:14:32.390 in return, we receive criminal goods or drugs in return. 0:14:32.790 --> 0:14:36.570 So essentially anything that is being made well in one place, 0:14:36.710 --> 0:14:39.970 whether that's Caterpillar tractors or Gucci handbags, can just be 0:14:40.010 --> 0:14:43.010 as useful a form of money as anything else. I mean, 0:14:43.030 --> 0:14:46.810 you need to just think about criminals as being endlessly 0:14:46.850 --> 0:14:49.880 looking for ways of finding concentrated value in a way 0:14:49.890 --> 0:14:51.250 that isn't going to be checked so they can move 0:14:51.290 --> 0:14:54.570 it around. Obviously, the most Useful example of that at 0:14:54.730 --> 0:14:57.590 all would be an expensive watch. If you buy a 0:14:57.850 --> 0:15:00.750 million dollar watch, you can fly in from one country 0:15:00.790 --> 0:15:02.190 to another and sell it at the other end. No 0:15:02.230 --> 0:15:05.140 one's going to check it when you fly across the world, 0:15:05.160 --> 0:15:06.380 sell it at the other end, and you've just moved 0:15:06.420 --> 0:15:08.340 a million dollars without having to move a million dollars. 0:15:08.740 --> 0:15:11.060 It's as simple as that. And it happens all the time, 0:15:11.260 --> 0:15:12.020 absolutely everywhere. 0:15:12.500 --> 0:15:14.350 It is kind of crazy that you have to declare 0:15:14.430 --> 0:15:17.950 like more than $ 10, 000 in cash at the airport, but 0:15:17.990 --> 0:15:20.890 you could easily have a $ 1 million watch on your wrist. 0:15:20.970 --> 0:15:24.750 No one would think anything of that. Talk to us 0:15:24.770 --> 0:15:27.970 a little bit more about, all right, so Tracy asked 0:15:28.050 --> 0:15:32.690 about the Mexican trade of cocaine for tractors, which sounds 0:15:33.100 --> 0:15:36.530 reasonable enough. Talk to us about how money is moved 0:15:36.750 --> 0:15:40.310 out of China, the popular ways to move money out 0:15:40.350 --> 0:15:44.080 of China at scale. You mentioned sort of watch and handbags, 0:15:44.120 --> 0:15:46.220 but what is the shape of this trade? 0:15:46.940 --> 0:15:49.580 The basis of the trade is that there is a 0:15:49.640 --> 0:15:53.680 restriction on moving money out of China of $ 50, 000 per 0:15:53.740 --> 0:15:57.350 person per year. Now, $ 50, 000 might sound like quite a 0:15:57.390 --> 0:16:00.109 lot to the average Chinese person, but to a wealthy 0:16:00.130 --> 0:16:02.930 Chinese person, that's not nearly enough. So there is a 0:16:03.030 --> 0:16:06.740 constant demand from wealthy Chinese people outside China for money 0:16:06.790 --> 0:16:09.380 that they can't move in a formal way. And so 0:16:09.400 --> 0:16:12.320 there is a huge appetite, a huge demand for cash, 0:16:12.360 --> 0:16:15.840 for some form of money. And now what they really 0:16:15.860 --> 0:16:17.820 need is a supply of money, which they can meet 0:16:18.080 --> 0:16:20.520 in coming in the opposite direction. And then brokers can 0:16:20.540 --> 0:16:23.050 put those two together. And fortunately, in the West, we 0:16:23.070 --> 0:16:25.810 have created that supply of money by making drugs illegal. 0:16:26.190 --> 0:16:28.950 So there is a gigantic supply of cash, which is 0:16:28.970 --> 0:16:32.180 being generated in an illegal way. And the Chinese money 0:16:32.200 --> 0:16:35.790 laundering networks, which have become incredibly sophisticated in the last, 0:16:35.910 --> 0:16:38.670 particularly the last 15 years, last 10 years, all over 0:16:38.710 --> 0:16:42.070 the world, essentially have created a business model of putting 0:16:42.110 --> 0:16:45.750 together this demand for cash that comes from wealthy Chinese 0:16:45.770 --> 0:16:47.830 people outside China and the supply of cash that comes 0:16:47.870 --> 0:16:50.780 from the cartels or other drugs gangs in Europe. It's 0:16:50.820 --> 0:16:53.560 often the Albanians or the Andrangheta in Italy and in 0:16:53.910 --> 0:16:55.790 In the US, obviously, it'd be more than the Mexicans 0:16:55.830 --> 0:16:58.010 or the Colombians. And they put these two together, the 0:16:58.050 --> 0:17:00.890 Chinese demand and the cartel supply. This is often called 0:17:00.910 --> 0:17:04.230 the Vancouver model, slightly unfairly, because it doesn't only happen 0:17:04.270 --> 0:17:07.150 in Vancouver. But it was first identified in Vancouver, where 0:17:07.570 --> 0:17:11.550 you would get this totally baffled police officers watching this 0:17:11.609 --> 0:17:15.610 phenomenon of wealthy Chinese people being given carrier bags full 0:17:15.630 --> 0:17:18.949 of banknotes outside casinos, going into the casinos, and then 0:17:18.990 --> 0:17:22.080 just losing all the money. Because laundering money via casinos 0:17:22.150 --> 0:17:24.000 is something that's been happening ever since the mob took 0:17:24.080 --> 0:17:27.180 over Las Vegas. It's a super easy way of laundering money. 0:17:27.500 --> 0:17:29.080 You bet a little bit, you cash in your chips, 0:17:29.300 --> 0:17:31.340 then you sell the chips and you just have clean money. 0:17:31.640 --> 0:17:33.960 And so that's very tightly controlled, but they couldn't really 0:17:33.980 --> 0:17:35.840 understand what was happening because that wasn't what was happening 0:17:35.859 --> 0:17:37.980 in Vancouver. They were just taking in money and then 0:17:38.040 --> 0:17:40.810 losing it. But if you zoomed out, you would see 0:17:40.850 --> 0:17:43.969 that this one transaction of handing over the cash to 0:17:44.109 --> 0:17:46.570 a Chinese gambler was just a small fraction of what 0:17:46.609 --> 0:17:49.050 was really happening in that you had a debt being 0:17:49.109 --> 0:17:52.490 created essentially. from the Chinese gambler to the drugs gang, 0:17:52.770 --> 0:17:56.080 which would be being repaid by supplying drugs to the 0:17:56.100 --> 0:17:58.020 drugs gang that they were able to sell to generate 0:17:58.040 --> 0:18:00.320 more cash, to hand it over to generate more gambling. 0:18:00.560 --> 0:18:03.200 And so you end up with essentially a circular transaction 0:18:03.220 --> 0:18:06.119 where money would change hand in China between a criminal 0:18:06.160 --> 0:18:09.020 gang and a wealthy Chinese person. Money would change hands 0:18:09.119 --> 0:18:11.780 in Canada between a drugs gang giving it to a 0:18:11.820 --> 0:18:15.139 Chinese person. And then essentially that would all net out 0:18:15.180 --> 0:18:17.609 by the movement of drugs between borders, which is how 0:18:17.850 --> 0:18:20.629 the value actually transfers. And you see this now. I mean, 0:18:20.650 --> 0:18:22.820 that's only like a bilateral trade, as it were, between 0:18:22.840 --> 0:18:26.040 Vancouver and China. But you see this now globally. So 0:18:26.380 --> 0:18:28.480 it might be the movement of luxury goods from Europe, 0:18:28.640 --> 0:18:32.080 the UK or France to China, then the movement of 0:18:32.300 --> 0:18:35.740 some kind of illicit goods or even totally normal goods 0:18:35.800 --> 0:18:38.630 from China to South America, then the movement of cocaine 0:18:38.950 --> 0:18:43.210 from South America to Europe, which would essentially complete this 0:18:43.270 --> 0:18:46.859 triangular trade. This happens globally on a truly colossal scale. 0:18:46.980 --> 0:18:49.820 And this is essentially how money is moved. You don't 0:18:49.859 --> 0:18:53.320 need to move money internationally, because that's where the checks 0:18:53.440 --> 0:18:56.730 are on transactions. You just move value internationally in the 0:18:56.770 --> 0:19:00.449 form of luxury goods, cocaine, or illicit goods of whatever kind. 0:19:00.810 --> 0:19:03.970 And so essentially, wherever you get criminality, there is a 0:19:04.050 --> 0:19:07.640 demand for money laundering, because this is how you realise... 0:19:07.630 --> 0:19:10.100 and protect your criminal profits. And this essentially is a 0:19:10.140 --> 0:19:14.280 gigantic parallel financial system. And what I find particularly pleasing 0:19:14.340 --> 0:19:16.699 about this, of looking at this, is this is pleasing 0:19:16.740 --> 0:19:18.639 is maybe not the word, but I'm kind of a nerd. 0:19:19.140 --> 0:19:20.600 Intellectually satisfying. 0:19:21.859 --> 0:19:25.189 Intellectually satisfying. This is exactly how the Medici's used to 0:19:25.230 --> 0:19:29.250 bank in the late medieval, early Renaissance Florence, is that 0:19:29.310 --> 0:19:32.450 they were moving wealth. They had an incredibly sophisticated system 0:19:32.470 --> 0:19:34.870 whereby you could deposit money at a branch of their 0:19:35.460 --> 0:19:38.200 bank in Venice or Florence, and then you could collect 0:19:38.260 --> 0:19:41.270 that same money in Bruges or in London and the 0:19:41.290 --> 0:19:43.590 other side of the Alps and the other end of Europe. Essentially, 0:19:43.630 --> 0:19:44.949 as soon as you could get there, the money was 0:19:45.010 --> 0:19:47.609 available for you to pick up. And, how did they 0:19:47.650 --> 0:19:50.350 move the money? They obviously weren't moving bullion from Italy 0:19:50.650 --> 0:19:53.490 to Belgium or Italy to the UK for the same 0:19:53.540 --> 0:19:55.139 reason that ordinary people would want to do that. It 0:19:55.200 --> 0:19:58.600 wasn't safe. So they were just moving trade. So silk 0:19:58.680 --> 0:20:01.459 going north or spices, wool coming south. And then we're 0:20:01.500 --> 0:20:03.580 just hiding the movement of cash in the paperwork. And, 0:20:03.600 --> 0:20:06.109 you know, in the years after World War II, some 0:20:06.200 --> 0:20:08.609 academics found their, what they were called their secret books 0:20:08.900 --> 0:20:11.110 in the state archive in Florence, and you could see 0:20:11.160 --> 0:20:13.909 how they were doing this. Essentially, they were providing banking 0:20:13.950 --> 0:20:18.290 services to politicians, to leading cardinals, other people in the church, 0:20:18.550 --> 0:20:20.970 in exactly the same way that banks might provide secret 0:20:20.990 --> 0:20:24.510 services now to politicians or any powerful people. And we're 0:20:24.530 --> 0:20:27.590