OLD FIRM: Dummy’s Guide to Money Laundering (or why Guptas are toast)

LONDON — The noose around the necks of the crony capitalist Guptas is closing rapidly as regulators start to work through the corrupting family's financial transfers. In this episode of the Old Firm, market veteran David Shapiro unpacks how money laundering works. He explains that if they are shown where to look, law enforcement organisations like the FBI will quickly join the dots – and be able to prove the source and destination of illegal money flows. Shapiro also shares with us how Trillian's CEO Eric Wood insider traded his way to the veritable fortunes by using his Gupta-acquired knowledge of cabinet reshuffles. Insider trading is a criminal offence. So too is money laundering. Arrests by Xmas? Shapiro tells us why that's on the cards. – Alec Hogg.David Shapiro is preparing for a special treat for his 70th birthday. That would mean, for most of us, going to a restaurant, seeing lots of friends, maybe taking a trip somewhere but for you, David, it means running a marathon..___STEADY_PAYWALL___.Yes, Alec. In my heyday I was a fairly good marathon runner, I loved running marathons but I'm talking about 30- 35 years ago. A year ago, when I was in Australia for the birth of my grandson I decided it would be a good idea to run a marathon for my 70th because it's in New York. The New York Marathon is a week before my birthday and I decided to bring the family here to New York, and we'd all run. Surprisingly, everybody stuck to their goal and I'm running the marathon with my daughter and two boys. Not that we're all marathon fit but we're going to try it. I just want to get across the line – I've got no aspirations of breaking any records. In the meantime, we've all got our aches and pains, and everybody is making excuses but I think once you get to the start line with 50-thousand other people I think adrenalin takes over but it's fun, and New York is preparing for it. I'm not even sure, I know there was a terrorist attack yesterday and it probably comes at a time when everybody is gathering for the marathon so I'm sure there's going to be increased security arrangements for that because the town – there's 50-thousand people running through the boroughs and through New York so, I suppose there's going to be a lot of options for an attack. You can't cover the whole of Manhattan..Are you nervous?.Yes, I am, I have to say so. I'm not nervous for terrorist attacks. I'm nervous for my body, that's what I'm nervous for. Alec, last night, and I must tell you something. I didn't even know about this terrorist attack. I'd heard a little bit about it, it was Halloween last night and the whole of the city comes out. The kids come out and they trick and treat and you just see the difference, and I'm saying living in SA, where there's no security here, and the kids just walk in the street. Then on 69th Street, on the westside, is always turned for some reason and I don't know the background to it but all the houses in that area decorate their fronts. It's closed off by the police and people walk up and down. Even there, there was absolutely no fear of any danger at all. Those are New Yorkers – I think they're hardcore, they just take it in their stride. But it was fun. It was such a beautiful evening to see these kids dress up and enjoy themselves..I discovered, because they also have quite a Halloween tradition in the UK obviously, brought in from the US. That you have to make a presentation outside your house otherwise the kids respect that you don't want to trick or treat and they don't bother you. So, we went and bought all the sweets and we had everything ready for the kids and we didn't have a pumpkin outside the house so, no one knocked on the door. We discovered that this morning, talking to the locals but anyway, we know for next year, I guess..Yes well, in the apartment buildings you put a little sign on your door, 'trick or treat,' which is like a 'do not disturb' thing. This one you put trick and treat, and they know to come to you otherwise they do leave you alone but everybody decorates their houses. You get all the characters out and it's looked forward too, schools participate and everybody. It's a fun night and there's no drunkenness, it's all sweets. There's no pizzas or anything like that. It's just kids walking up and down trick or treating and that so, very well organised, and lovely to see the different costumes. Adults as well, it's not only kids. A lot of adults have parties as well so, it's a big night.[.A lovely tradition but as far as America is concerned right now, as you mentioned, the terrorist attack last night. From an SA angle the FBI getting involved with the Guptas and money laundering, and Eric Wood being fingered in parliament yesterday but maybe to take it one step at a time. David, just unpack money laundering. How does this work? What is it?.In a simple description money laundering is legitimising dirty money. In other words, it could be drug money, it could be the sale of illegal goods or anything like that, you legitimise it and you filter it through various banks or organisations in order to disguise its origins..Or clean it, to wash it and that's why they call it laundering..To wash it, yes..What would the Guptas have needed to wash money for?.Well, you don't know the sources or origins. Alec, just to keep everybody in touch. It's becoming more and more difficult now to open foreign accounts, to open a banking account. People want to know the origins of that money. If I open an account, let me say at a Swiss bank for a client of mine it's no good saying, 'this was an inheritance.' They'll say, 'if you inherited the money where did it come from or who did you inherit it from?' Okay so, you inherited it from your dad. Well, what did your dad to? You say, he was a doctor. They'd ask, 'what kind of a doctor – where did he practice?' So, those are the kind of questions now being asked by banks, if you want to open an account. So, I'm giving you an idea of the depth to which the banks now go to understand where you made the money..The other thing they want to know, and I should have brought this in, in the description – 'did you pay tax on those monies?' In other words, were they legitimate, were they declared? Now, if you open up an account you also have to get your tax people to give you a clean bill of health to say, 'yes, these monies were declared,' or 'they are after tax.' So, they go into great depths so, that also comes into the view of money laundering. Probably in the Guptas case, this is more the situation now. Those monies that we have deposited in A, B, C, was it clean in the sense that they were earned legitimately and declared legitimately, and did you pay tax on them so, they are completely clean? It might not only be from drug money or other kinds of money like that but also, not hidden from the tax authorities..So, it's very difficult then to earn money or to acquire money in a geography like SA and then spirit away but the Guptas appear to have done that. They bought a R500m house in Dubai so now these questions being asked in the UK Parliament, by Peter Hain. What would happen next? What would the FBI do? What would the UK monetary authorities be doing to physically find whether there has been malfeasance?.Exactly so, what they would say is that where did those monies come from? In other words, what's the source of those monies? Now, this is where you get the laundering because they could have sent it through to India, and then it would have gone through some other place, and so on. It could have had a journey before it got to Dubai so, you've got to find where those monies went to. This is where the banks come into question is that they also now have to be clean and they also have to understand the source of those funds. I think in the Guptas case there's going to questions about bribery because bribery, you don't declare bribes. You don't put those in your tax returns. That's dirty money that finds its way into your account..Alec, what Peter Hain is doing is asking the Dubai authorities or the FBI, or whichever agency it is, to investigate the legitimacy of those funds. Where did they stem from? Where do they come from? What was the original source of that money and if it was transferred from some other jurisdiction, was it declared in that jurisdiction? Was tax paid and how was it earned? If ever you receive a bribe you're not going to put it in your tax return. Under what, an income received bribed? It's unlikely that you would have paid tax on it so, you've got to understand the source of money. It's becoming more and more difficult for businesses today to understand that and to go into that..I think we had a discussion about that some time ago as well, about transfer pricing, which does come from a legitimate source but also, sometimes it's a transfer to areas where there's a lower tax rate, etc. So, it might be earned in country-A, and then transferred to country-B as income so that you pay lower taxes. All these areas are now being investigated in an effort to level the fields and, also to weed out illegitimate earnings. So, it's tough today, very tough and you had better make sure that the money you have is declared and, also from a legitimate source..David, the other, along the same line, your near-neighbour there in Melrose Arch, Eric Wood from Trillian was named in parliament yesterday as having advanced warning of Nenegate, and having made 100's of millions of Rands by taking possession of the Rand before it fell out of bed. This was disclosed to parliament by the Trillian whistleblower, someone who was in a very senior position there. This just kind of beggars' belief, doesn't it? That the country is going down the tubes and Eric Wood, who works for the Guptas, is cashing in..Well, I don't think it's very difficult to prove that. You deal through legitimate markets, you deal thorough regulated markets so, it's easy to kind of see the deals that were done and then to assign them or associate them with the news that came out. This is just simple insider trading, and I don't think it's difficult to prove so, you can go back to all the records that took place at that stage and be able to define who bought them and why did they buy them? You can also see the kind of quantity. This is nothing new in the world markets and nor in SA but we know what happened at that stage. We know what happened – the Rand went all the way up to R16 against the Dollar, during that 15th December period. I don't think it's going to be difficult to prove that but it just shows you the quality of the people that are involved, and in a country, that you would stoop to those kinds of levels to make money. What are you going to do with it all?.Explain what you mean or just unpack for us, how do you prove it? How is foreign exchange traded? How would you take a position like that?.Well, I think in this case he would have…All the Forex trades are documented because you can only deal through a legitimate agent, Sasfin Bank for example. We have a foreign exchange license so, you can only buy foreign exchange through us or through Standard Bank, or FirstRand so, they know all their deals. Every one of those deals is documented and balanced. They know the source of the deal. They know their client and so on so, you will trace that order and you will see what kind of orders took place. Of course, one will talk about volatility or increased liquidity around that. In other words, the amounts of deals that took place ahead of it so you can see who took a position on certain days. It's easy to go back and trace some of those deals and then we've got the bond markets, which would have been affected..Eric came from a background of dealing in the bond market so, he knows it pretty well. I think he learnt his trade at Investec, and I'm not pinning it there because it's got nothing to do with Investec but he was on their desk for many years. So, he knows that market as well so, he'll be able to see deals that were done. What it does is it will highlight suspicious deals and then you have to go into the background and find out who's behind it? Where did that money go? Where were the proceeds placed? It's not difficult. In fact, it's very easy to do those kinds of deals now. Remember back in those days, and I'm going back to the early 90s with Greg Branch, when the Attorney General Khan came in from the Cape and you were able to place all those deals and trace them. It was a lot more difficult because a lot of those deals, in those days, were paper deals but you could go all the way back. It took them a lot longer in those days because it wasn't computerised but of course, they'll find what they need to find. They just need the will to do it..Surely the will would be there now..Well, they've got to get some government department to do it. A national prosecutor to say, 'okay, we're going to investigate.' The stock exchange won't do it. I don't think foreign exchange is part of theirs and you've got to find where those deals were done and which banks? You've got to go in and investigate all the banks as well, around that period and a huge number of deals take place, particularly because the Rand was falling as well. You've got to also try and sift out those deals because it's such a vibrant market. Some of those might be genuine deals, where traders were covering themselves or importers and exporters covering themselves. Alec, you'll get to it you know what I mean? You can get to it. It's not outside of the authorities to find it but you've got to have the will and time to sort that out..Just think of it this way. If I am the guy working at the bank and I know Eric Woods' reputation. I know he's close to the Guptas, and the Guptas are close to the presidency, and they get inside information. So, when he places an order maybe I'll place an order with him? Maybe I'll follow him. That's also insider trading or what?.Dead right..Maybe I'll try and hide that from other people. Now, that it's coming into the open, I guess you can't anymore..Absolutely, you're dead right. People are like that. You shouldn't be like that but the chaps at trading and that, they'll find something and they'll say, 'hold on a sec, I've got this deal – what's happening?' Sometimes they might be doing it genuinely after the deal is done or after your client has executed it. You might say, 'hold on a sec I've just seen this deal – this is interesting.' Let's go investigate it so, yes that does happen and/or will happen..So, you wouldn't fancy Eric Woods' chances right now of being able to get away with this?.I wouldn't no, not at all. I wouldn't because if you're on a desk at a certain bank and you know you were dealing with Trillian the last thing you want to do is lose your job. You will own up. People will sing and they will talk. We've seen it with a lot of these trades that have taken place. There have been huge investigations into the Libor scandal where banks were manipulating interest rates and talking to each other. So, I think people are very fearful at this stage, and there are jail sentences around it. This is criminal and I think the banks will want to come clean, in a sense. I'm not sure who Eric dealt with. I'm not sure which banks he dealt with but they'll come clean and they know. Alec, you know the deals that you've done, especially around that time. These are hardened traders. Their memories just don't 'oh, I forgot.' They know exactly what happened there so, I think it will actually end up being a lot easier. You'll sift through a lot of the stuff a lot quicker by simply getting the chaps on the desk and say, 'okay.' Put them in a room and start asking questions. They'll give you the background..As the whistle blowing gathers momentum because clearly, the crooks are now looking at each other thinking, (the prisoner's dilemma) 'let me go and own up first so, I can cut a deal before somebody shops me.' Let's just say that the authorities got hold of all the transactions that the Guptas have made, all of the ways that they've taken their money out of the country, how would they then reconcile those transactions? This is not insider trading but this is money laundering. How do you reconcile that? Let's say the Bank of Baroda made a transfer to HSBC in London, and they made a transfer to HSBC in Dubai. How do you get all of that information?.It's all connected today so, I don't think anybody now, will hide information because you just have to go to the top because top heads could roll. If you're in an office or if you're the CEO of a major bank and the FBI move in or some authority moves in and says, 'we're investigating this area.' The cooperation comes within an hour because the top people don't want to lose their heads and they want to make sure that they're on top of these things and, also that their bank adhere to all the rules and regulations. Everything today is connected so, there are no banks that can get away with the kind of stuff that they used to do in the past. We've seen that. We've seen that in the Libor scandals, where interest rates were fixed or there was cooperation on fixing interest rates. Mates helped out mates, and Alec, the point I want to make is, I've been in the market a long time and I remember deals many-many years ago. I'm not saying they're bad deals but I remember deals when this happened and so on. You have a vast memory of those kind of exceptional deals. .If an Eric Wood had to phone me to do a deal, at that stage, I would have remembered that very carefully. I would have alerted people around that, particularly knowing that a few days, when somebody phones you up now – even some clients of mine would phone up and say, I want to buy X, Y, or Z shares,' and it's unusual and outside of their normal trading. I'd say, 'are you sure?' Do you know something that the rest of the market doesn't because if you do, A, B, C, D, or E – you could lose your job, you'll be gone, etc. So, we know these things. We have an instinct of what's coming up and why they're doing that kind of deal so, I'm sure that if Eric Wood had positioned himself well ahead of Nenegate, those people who did the deal for him were pretty familiar about the deal and, also what he would have made. Those chaps who sit at the desk are streetwise, smart, and have an instinct for when things are going down or going to happen so, you'll be able to sort it out in no time..There're a lot of people then who aren't sleeping quite as easily as they would have liked to have been but maybe, David, just to end off this discussion today with what Paul O'Sullivan said. From the way you've explained it there is easy ways, in this day and age, with the technology and everything being linked, to prove when there has been manipulation of financial markets or people who are operating on insider trading, or people who are laundering money – as long as you know where to look. Paul O'Sullivan maintains there will be arrests by Christmas. Now, we've got the FBI on the case. We've got Peter Hain in fact, in Parliament in London today talking about money laundering so, the British are on the case as well. We're hear from the Hawks, finally that they are working with the FBI. The banks in SA now have been given a steer from parliament, from the whistleblower, exactly what was going on. Surely, to goodness Paul O'Sullivan, either he had inside knowledge or his prediction is going to be fulfilled that we will have arrests pretty soon..I'm sure. I don't think it's difficult. In fact, they probably know the deals already. All they're doing now is putting the case together so, that it can stand up in court. They don't want any kind of gaps in arrests or in putting their case forward. That side of the law is a lot more difficult than actually knowing someone committed the act, is to make sure that it stands up in court. I promise you, every bank that dealt with the Guptas and that dealt with Eric Wood know exactly what they're doing. They know those deals and they probably have already documented them, etc. I'm surprised that banks, I suppose the Forex traders and the bond traders don't really own up to these deals and highlight anything that might have been a little different but just, I think, a bit of questioning and you'll get that information out so, good luck. We've got to make a prosecution. We've got to make an example. It has to happen, Alec, and just for legitimacy, and the numbers involved are so stupendous and so high, especially in SA – a country, which is so short of money. That people making that kind of money is just obscene.

OLD FIRM: Dummy’s Guide to Money Laundering (or why Guptas are toast)

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