eli5: How and why do people launder or clean money?
In: Other
You have a legit source of income, and you funnel your illegitimate money through it so that the government doesn’t see you earning mysterious money that has no explanation.
In the TV show *Breaking Bad*, for example, the main character is a drug dealer, and he also owns a car wash. He puts his drug money into the car wash business, he lies on his taxes saying his car wash earned, say, $500,000 when really it only earned $400,000 from actual car washes, and the extra $100,000 is money from his drug dealing. Now it doesn’t look like he just has an extra $100,000 for no reason, it just looks like he has a successful car wash. Nothing suspicious about that.
The reason you do this is because money is visible. If you put it in a bank account, the government’s going to want to know where you got it. And they’re going to want to tax it. As a criminal, you’ll attract less attention if you have a good explanation for where your money is coming from, and if you’re paying all your taxes on it.
To quote Office Space “money laundering is the act of concealing the source of money by channeling it through an intermediary”.
I feel like it’s best to work with a real work example here though. Lets say I’m a drug dealer who manages to make $300,000 per year by my illegal activities. I’m smart, have layers of people between myself and the customers, I’m pretty well insulated against getting caught directly selling drugs.
The problem is the money. Al Capone wasn’t brought down the FBI, he was destroyed by the IRS. Basically if you want to make any big purchases like a house or a car, you’re going to have to pay taxes on it, and that involves the IRS. I can’t buy a $500,000 house if I can’t demonstrate/pay taxes on an income that justifies that kind of house payment.
Now I could go the traditional drug dealer route, and live in a shitty house and drive a shitty car, but what’s the point of having money if you can’t spend it?
So instead I buy a car wash. It’s an all cash business, so it’s very difficult for the government to prove that I’m lying about my income. So my shitty car wash makes $30k a year, but I lie and say that it made $250,000 this year. Since it’s all cash, I just add my drug dealing money too it, keep the car wash in good working order, and the government can’t prove I’m lying.
I pay cash on the $250,000 per year, and suddenly that’s 100% legit money that I can show where it came from, and I can live like a many that makes $250k per year. Meanwhile I can blow that other $50,000 that wasn’t “cleaned” by running it through the car wash on nice close, fancy dinners, and other stuff that isn’t high value enough for the IRS to take notice. So I get the best of both worlds, a legit income, everything I want, and minimal taxes.
As for why: think about it this way. If an entity like a bank sees that you are spending large amounts of funds, they might alert the government that something seems potentially suspicious about the transaction. The IRS might get word that you purchased a $50,000 car despite claiming $10,000 in income last year. Either way, the government now knows that you have a lot of income either from illegal sources or/and that you’re trying to avoid paying taxes on, and you’re probably going to jail just for that alone.
So instead we need to come up for some excuse for where that money came from. So let’s just say we also happen to own a fairly busy landromat, a nice business where a lot of people pay in cash. Now we take a bunch of our own money and “spend” it at our own business, and then pay ourselves with that money. Sure we had to pay taxes on it, but that money now appears to have a legitimate origin.
How- By running it through a legitimate business.
Why- so that it becomes usable. It would look suspicious if your car wash only makes $2,000,000 a year profit, but you are spending $8,000,000 a year.
Money laundering is where you take money that was earned illegally and make it seem like it was earned legally.
It’s done because the government is really, REALLY good at telling when you have/when you’re spending more money than you’ve earned and they REALLY hate when they don’t get their taxes.
So when you launder money, you take this illegal money and run it through a business (usually) to make it seem like it was earned in a proper way, and then it can be taxed.
[This video](https://youtu.be/ez6xH-su2xI)from Breaking Bad actually explains it pretty well
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