I called Angel and Patience and asked them to meet me in my office so we could go over the case together. Three heads are better than one, especially since I felt like I wasn't thinking very clearly. I gave them the background on the case and tried to focus the discussion on what D.J. had actually hired us to do. Oxenstein's murderer was really the DCPD's business. Our business was to show that those bags of money that The Ox Man had stashed away were legally his and hence legally D.J.'s. I assumed that the money had been illegally obtained so the real question was whether or not it had been laundered.
"What exactly is money laundering?" asked Angel.
"Yeah," agreed Patience. "How does it work and why would anybody do it?"
"Let me take the second half of your question first," I began. "Why would anybody do it?"
"Let's say that I am involved in some illegal activity that produces a lot of cash - drugs, numbers, prostitution, extortion - any of these, as well as many others, would work. I accumulate large amounts of cash but can't do anything with it. Because these illegal activities usually generate large amounts of cash, the Feds are always on the lookout for large cash transactions. If I want to remain unnoticed, I cannot make any large cash transactions. I can't buy a house or a car for cash. I can't make large deposits into a bank account. I can't buy stocks. All I can do with the cash is collect it in mailbags, pay my operatives in cash, and purchase small items. Once I have all the clothes, liquor and CD's I could possibly use, the excess cash is essentially useless."
"Why don't you just take a suitcase of money to Las Vegas, gamble for a while and declare it as winnings from gambling?" Patience asked.
"There are several reasons," I continued. "First, if I get stopped at the airport with a suitcase full of cash, it can be confiscated unless I can show a legitimate reason for having that large amount of cash. Showing a legitimate reason would be nearly impossible so not only would I loose the cash, I would have drawn attention to myself. Second, hardly anyone ever buys an airplane ticket for cash on the day of the flight. Most people buy tickets on their credit cards and book in advance to get better deals. If I buy the ticket for cash, I draw attention to myself. If I use a credit card I leave an electronic trail that can be followed later. In fact, a lot of the work I have done for Intercontinental has been tracing those electronic trails to find money launders. If I just make one trip, it wouldn't show up anywhere. But one trip isn't enough to convert large amounts of cash. Third, if I go to a casino and buy chips with a large amount of cash, the casino is required to report the transaction. Since the casinos only use chips, I can't claim that I won money unless I have a receipt showing that I converted the chips back into cash. So the bottom line is that illegally obtained money is very difficult to convert into legal money."
"Well, there is certainly lots of drug money around," observed Angel. "Organized crime manages to get the money into circulation somehow."
"That's true," I agreed. "There are two main mechanisms that they use. First, if you can deposit funds into a bank that is not controlled by the U.S. Treasury, then you can transfer those funds into a U.S. account. Once it is in a U.S. Bank you can do what you want with it. The trick is to get the funds into a foreign bank somehow. You can fly to the Bahamas with a suitcase full of money and face the same risks you would face flying to Las Vegas. Or you could payoff a high-level bank executive in this country to let you funnel cash through his bank without reporting it. The later is by far the most common but there is a problem with it. You have to set up dummy corporations and payoff a lot of people. So the overhead on these transactions is very high. You're lucky if you can yield fifty cents on the dollar. The second way is to set up legitimate cash businesses and then over report earnings. Let's say you have a sandwich shop that operates strictly on cash with a daily intake of a thousand dollars. By juggling the books just a little, you can report a daily intake of three thousand dollars and feed two grand of dirty money into the store's account. Once the money is in the store's account, it becomes legitimate. The problem is that you have to pay taxes on the money and you have to have a marginally profitable business to use as the funnel. If the business is highly profitable, you can't pump up the earnings that much. You pay a lot of overhead on the marginal business so you can funnel money through it. Again, if you can get fifty cents on a dirty dollar you are doing well."
"So if you found a mail bag of money on the side of the road," Patience hypothesized, "it really wouldn't do you that much good. You couldn't spend it on much more than some clothes and better lunches."
"That's right. The trick is to get it into a bank somehow so you can use the money legitimately. But banks report all cash deposits of over five thousand dollars so getting it into a bank isn't easy. If you deposit a thousand a week to keep from being reported, it would take you twenty years to deposit a million dollars. And you would be leaving an electronic trail that a guy like me could pick up on in a heart beat."
"How so?" asked Angel.
"Let's say that you earn $50,000 per year. Conscientious savers will save 7 percent of that or $3,500. A scrooge might save $5,000. If you deposited $50,000 in the bank when the norm is $3,000 to $5,000 you would stick out like a bare ass at a prayer meeting."
I shifted in my chair a little. I didn't mean to get that emphatic. However, these two were used to me and didn't seem to even notice.
"I know the way you mind works," Patience began. "You must have thought up a few creative ways to launder money."
"Of course, I have." I agreed. "In fact I went over a few of them with Oxenstein when he came by..." I stopped. I didn't mean to get into this, but it was out of the bag now. I told them the story about Oxenstein visiting me a while ago and pumping me on this exact topic. I went over a few of my ideas.
"For a small time guy like Oxenstein laundering through a bank is out of the question. He simply isn't big enough to set up that kind of operation. So the only thing he can do is set up a business to funnel money through. The problem with the sandwich shop is that you have receipts of supplies. You can only make a dozen subs with a dozen sub rolls. So you need to set up a business in which you cannot easily measure supplies. One idea I had was a video business. You could buy used videos at other stores, in cash, without keeping a record of the transaction. You could also buy black-market videos in cash. So your inventory would be hard to track. Then you could set up a customer list from a local mailing list. Both your inventory and customer base would be in your computer and both would be hard to dispute."
I paused for a moment to let that sink in. "Now here is the trick. When a customer rents a tape you record it on the customer record. When a customer returns a tape you record it as a rental, but do not record the customer who rented it or which tape was rented. So there is no way to match your rental data against your customer data or your inventory. You then figure out what percentage of the inventory would be out at a prosperous store and generate phony rental records for that level of activity. It would be almost impossible to dispute. An investigator couldn't call your customers to verify that they had rented certain tapes. Nor could anyone claim that a give tape was rented multiple times during the same time period. The only ways you could get caught would be if someone were staked out at your store counting customers, or if they exhaustively called all of your customers to figure out how many tapes they had rented. Neither of these approaches could possibly be justified for the amounts of money involved."
"And how much money would that be?" asked Patience.
"Well," I said slowly working out a few numbers in my head. "Assume you have five thousand tapes and the two thousand of them are out every day. Rentals are usually three dollars for a three-day rental so you can figure a dollar a day per tape. That's two thousand dollars per day or over seven hundred thousand dollars a year. If you have several stores you can multiply that number by the number of stores."
"Not bad," said Angel. "But you can't very well have a half a dozen prosperous video stores in crummy neighborhoods without attracting somebody's attention."
"That's right," I agreed. "First, you have to set up stores in different jurisdictions so that it is much harder for any one investigator to put together a pattern. Second, the video store is only one example of such a business. There are others."
"Such as?" Patience asked.
"Well, those video arcades are another good example. There is no connection between inventory and sales or between customers and sales. If a single video game is played constantly it will average fifty games per hour. At fifty cents per game, that's twenty five bucks an hour. In a typical arcade there are twenty machines so at full capacity they can take in five hundred dollars per hour. That's six thousand dollars per day or a little over two million per year."
"That's even better than the video store." Angel observed.
"In some ways yes," I agreed, "but in some ways no. You can't really run an arcade at full capacity. Further it is harder to place arcades. You have to locate the arcade in a high traffic location like a mall in order to make it believable that you have that level of traffic. On the other hand, the more traffic you really have, the less margin you have for laundering. However, you can always increase the size of the funnel by adding more stores."
"So how does this relate to the Oxenstein case? Angel asked. "I thought we were trying to protect Oxenstein's money, not prove that he laundered it."
"If he laundered it, we can claim it as legitimate. The Feds will claim that the cash found in Oxenstein's apartment and security bins was illegally obtained and try to confiscate it. They will further claim that the investments he had were acquired using illegal funds. If they can show that, they can confiscate the investments also. D.J. wants us to show that the money was obtained legally and that the investments were purchased legitimately."
"Can we do that?" Patience asked.
"Look at it this way," I began. "D.J. Calahan is our client. Until we have evidence to the contrary we have to assume that the money is legitimate. Rumors and hearsay not withstanding, we do not currently have any evidence to the contrary. If the money is not legitimate, then we have to put the burden of proof on the Feds. Even if Oxenstein was up to his ears in illegal activities, he may have also had some legal dealings. If he did we have to protect the legally acquired funds for his widow."
"So what do we do?" Patience inquired.
"I want you to go through all of those files we got off of Oxenstein's computer. Most of the files are zipped and encrypted, so I suspect there is a wealth of information that we can go through. Angel, I want you to handle the unzipping and decrypting. Patience I want you to go through any documents or spreadsheets. I want both of you to comb through any databases looking for any patterns that may occur. First, look for anything that looks like it might be a legitimate business transaction. Second, see if there are any useful patterns in the transactions. Third, see if there are any regular interactions with people who we might talk to in order to find out more information. Fourth, look for any records of bank or broker accounts. And finally, see if you can figure out why he was making those payments to McNulty."
"O.K." said Angel. "We'll get right on it. What are you going to do?"
"I'm going to pay a visit to D.J. Calahan. I have a few questions that I'd like to ask her."
Patience looked up. An expression of great concern came over her face. "Didn't Gita tell you not to go there by yourself?"
"Well.." I said, waving my hand dismissively, "in the first place I am a big boy and I can take care of myself. In the second place, she told me not to go talking to the neighbors around Oxenstein's apartment. I'm not really doing that. I'm just going to visit D.J."
"I don't think this is a good idea," said Patience. "Don't you think you should wait till Gita gets back. She'll be back this evening."
"I think she is over reacting." I stated confidently. "What could possibly happen?"
Unfortunately, I was going to find out.