1994-04-17 - Re: Laundering money through commodity futures

Header Data

From: Peter Wayner <pcw@access.digex.net>
To: hughes@ah.com
Message Hash: 07392c611f65879010f9ab2f570af5ff42711caa2709b2e1d05ef4038459c007
Message ID: <199404172035.AA04142@access3.digex.net>
Reply To: N/A
UTC Datetime: 1994-04-17 20:35:24 UTC
Raw Date: Sun, 17 Apr 94 13:35:24 PDT

Raw message

From: Peter Wayner <pcw@access.digex.net>
Date: Sun, 17 Apr 94 13:35:24 PDT
To: hughes@ah.com
Subject: Re:  Laundering money through commodity futures
Message-ID: <199404172035.AA04142@access3.digex.net>
MIME-Version: 1.0
Content-Type: text/plain

>>[then is described the double-up strategy]
>>Ideally, you play this game with two players with relatively deep
>>pockets. This means that A can cover the short term loses.
>Here's the flaw, in full glory.  This scheme is the classic
>double-or-nothing martingale.  It doesn't work.  The "relatively deep
>pockets" of A have to be infinite, because that's the expected value
>of the amount of A's intermediate loss in the random walk to the
>completion of the transaction.
>The example is ludicrous, but the conclusion is valid.  More
>transactions means more interactions between them and more possibility
>to hide something inside the ever-increasing flux.

There is a major difference between playing this game with commodities
and trying to win with a double or nothing Martingale scheme in a
casino.  The casino always takes their cut.  The transaction costs in
the futures market are often much smaller if you're dealing with
significant amounts of money. Many of the people who experiment with
these schemes have very large pools of money to move. 

You must realize that laundering money was usually done through much more
inefficient ways. Some typical techniques involve double billing and
inflated construction costs. If Entity A wants to move money to Entity
B then, Entity A contracts with B for a big new building. B charges too
much for the building and A pays up. This can be done with supplies
or other commodities. The problem is that you've got a brand new building
that you've got to sell/lease or whatever. 

So, are there problems? Yes. But it can be much more efficient and much 
more transparent than almost other scheme. Remember that the flux between
the two entities in the commodities market is not immediately apparent. 
You don't need to use the same broker. One could use a broker in Hong Kong
and the other could use one in Chicago. 

You don't even need to trade the same contracts. One side of the deal
could buy gold futures market marked in pounds sold in London and the other
side could sell gold futures marked in dollars in Chicago. The thousands
of arbitrageurs out there will make sure that the markets move together.
(You can also hedge your deal against the currency risk.) Who is going 
to piece these two together?