HOW CRIMINALS FRONT A LEGITIMATE IMAGE WITH DIRTY MONEY

Canada's stock markets are not immune from money laundering.

"It is widely accepted that securities markets, and stock exchanges in
particular, are rife with money laundering," says RCMP Insp. George
Pemberton of the integrated proceeds of crime section.

The magnitude of the transactions and the ease of moving funds make
the market an obvious target for dirty money, he says.

"There is simply too much money changing hands for a certain portion
of it not to be dirty. Where there is money, there will be money
laundering."

Securities industry regulators are often blind to the problem because
there is little to differentiate a routine transaction from one
intended to launder money, he adds.

Industry regulators need specific training to recognize and
investigate money laundering, he suggests.

Typically, money laundering in the securities industry is seen as a
police responsibility.

"Regulators need to recognize that money laundering poses a
significant threat to the integrity of the securities markets, and
that criminal authorities lack the expertise and resources to deal
with the problem," Pemberton says.

Still, law enforcement agencies also have to pay closer attention to
the securities markets, he adds. Police have historically neglected
large-scale money laundering in securities markets for two reasons: It
is time-consuming work and difficult to prove.

For that reason, police need specialized training and need to work
together with securities regulators, accountants, lawyers, tax
authorities and customs agents to attack the problem.

"Money laundering investigators are conversant in the practises and
jargon of the illicit drug trade," Pemberton says. "They must become
equally conversant in the world of finance."

He says money laundering occurs in three stages:

* Placement. This involves the initial conversion of ill-gotten gains
into a non-cash instrument. It is the most obvious and vulnerable
stage of money laundering -- and where the majority of the law
enforcement resources are dedicated. But in reality, the placement
stage mainly involves "smurfs" --low-level couriers walking into banks
with bags of cash because criminals don't like to dirty their own
hands. And besides, there is little opportunity for dirty cash to be
placed through securities markets.

* Layering. This is the conversion and movement of monetary
instruments to conceal the source of the funds, typically by
transferring money to tax havens such as the Cayman Islands, which
police find difficult to trace.

* Integration is the return of illicit money to criminals in a form
that gives them an air of legitimacy, while not attracting the
attention of police.

Brokerage accounts are ideal for layering dirty money, says Pemberton,
citing the case of an account opened in Canada in the name of a
non-existent person who transferred share certificates to the account
from Bolivia in the name of a Bolivian lawyer.

There were also cash wire transfers from third parties in the Bahamas
and Florida that were always less than $10,000 -- to avoid reporting
limits, which would have triggered the attention of securities
regulators and tax authorities.

While there was minimal trading done in the brokerage account, the
non-existent customer would fax instructions for third-party
transactions to U.S. bank accounts, including three on one day at
three different banks.

The transactions seemed so routine that the broker, despite obvious
red flags, never realized he was facilitating money laundering,
Pemberton says.

Criminals also use the stock markets to repatriate money from offshore
accounts and use it to finance an extravagant lifestyle without
attracting attention and avoiding having to pay tax on the money, he
adds.

This kind of "misappropriation" usually starts by criminals taking
control of a publicly traded "shell" company, which can be bought for
as little as $500,000, Pemberton says.

The purchasers thereby have a controlling interest in the company and
create a list of minority shareholders, who formulate an illusory
business plan to justify the company's existence. Shares are then
issued to anonymous offshore companies in return for the criminals'
dirty cash.

The company, which may not even carry out any legitimate business,
Pemberton says, uses the new funding to pay its officers and directors
outlandish salaries and benefits, including luxury cars, expensive
business entertainment and exotic travel.

It also gives criminals the legitimacy of being officers of public
companies, he adds.

Another method: stock-market manipulation, which Pemberton describes
as "a fine art unto itself -- one which many people have unfortunately
mastered."

Manipulators and money launderers work hand-in-hand for their mutual
benefit, he says. Often criminals are issued worthless stocks for free
in return for "consulting services."

The criminal then sets up a brokerage account in the name of a nominee
corporation in a secrecy haven, where shares are sold by the criminal
to the offshore corporation at prices set by the criminal. The shares
trade back and forth at increasingly higher prices until the shares
are worth hundreds of times more than their original value.

Unfortunately, for unaware investors who get caught up in the buying
spree as the stock prices peak, often the share prices collapse but
not before the criminal has cashed in and reported his stock market
windfall to tax authorities as a capital gain, making it "clean" money.

Pemberton cites the case of a Vancouver-based stock that was
ostensibly in the mining business but never did any legitimate
business -- he calls it Salt-Job Mines. Its stock went from pennies a
share to $25 in a matter of weeks.

"The primary beneficiary of the price rise was a group led by two
well-known and extremely violent career criminals," he points out,
adding that the group had delivered $3 million cash in a suitcase for
deposit at a nominee account at a Caribbean brokerage firm.

Pemberton says the criminals sold their shares through their personal
accounts at Vancouver brokerage firms.

Despite the stock price topping $25, it might have gone higher if a
member of the criminal group -- an outlaw motorcycle gang member and a
close friend of the stock promoter -- had not been found murdered the
week the stock reached its peak.

HOW TO LAUNDER $1 MILLION

Stock manipulation is one way money launderers and their enablers
cleanse drug money

1. THE SHELL COMPANY

The enabler acquires control of a publicly traded shell company and
issues near-worthless shares to the criminal for pennies a share.

2. OFFSHORE HAVEN

The criminal establishes a brokerage account and a bank account in an
offshore haven, into which $1 million of dirty money is deposited.

3. PUMPING THE PRICE

The criminal sells his shares in the shell company to his offshore
brokerage account. The shares are "traded" back and forth at
progressively higher prices.

4. CASHING IN

The criminal "sells" the shares for $1 million, hundreds of times the
original cost.

5. TAXES PAID

A huge stock market windfall of $1 million (which is in fact drug
money) is reported to Revenue Canada as a capital gain.

6. TIDY PROFIT

The criminal is left with roughly $750,000 of clean money after paying
the capital gains tax.

7. OTHER VICTIMS

The enabler in many cases will have issued phoney press releases or
used boiler room tactics to lure other investors during the run-up of
the stock price. These investors will lose everything when the
criminal cashes out and the share price in the shell company collapses.