As noted in Part 2, (Part 1, here) publicly traded equities can be used to launder illegally obtained money. The practice is harder now with modern laws and modern technology. However, before computers, new rules, regulations and laws, (pre-70s and 80s) it would have been much easier.
There are a few ways a criminal can launder money with publicly traded shares. (equity, stock, common stock, common equity are all used synchronously in these posts.)
Over the Counter (OTC) or Pink Sheet Stocks as a Money Laundering Tool
An OTC stock is a share than can be traded publicly that is not listed on a stock exchange. These are also known as Pink Sheet securities (prices used to printed on pink paper) and sometime “penny stocks” (pink stocks are often penny stocks, but do not have to be.) When we say “can be traded publicly” we mean the shares have been registered by the SEC under the Securities and Exchange Commission Act of 1933. When we say “not listed on exchange”, we mean you can not call a Stock Exchange to buy or sell a Pink Sheet stock because it does not meet the requirements of the exchange to be traded there.)
Most of the mechanisms or “loopholes” described below have been closed, via new rules, laws, and monitoring capability. Nevertheless, they would have been available to criminals to launder large sums of money in the 1950’s and 1960's.
Physical Bearer Securities
Typically, physical stock certificates have the name of the owner (ie. John Smith, owner of 50 shares of Coca Coal Company.) If John Smith sells the shares to Larry Brown, the new name is recorded by the Transfer Agent. (The Transfer Agent keeps track of where Coke sends its dividends. Since Larry is now the owner, the he will receive the dividends, proxy statements, other notifications, and not John.) Bearer certificates do not have a name attached. “Criminal A” can give “Person B” the Bearer shares and receive cash. Simplified mechanics are shown below.
Shell Companies
The Criminal (syndicate, cabal, conspirators) has to have actual shares to give to the broker or person to receive money. The SEC registered shares of a “Shell Company” are often used. A Shell Company is often an existing company that no longer has any value. The basic actions are described below (ML = Money Laundering.)
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| Source: OTC "Pink Sheet" Securities and the Threat they Pose as a Money Laundering Vehicle to Broker-Dealers |
San Toy Mining, Apollo Steel, American Nut and Bolt Fastener, Checking the Reverse Acquisition Boxes
San Toy Mining and Apollo Steel both “check the boxes” as ideal Shell companies that can both be used to launder money. They were once actively publicly traded companies, that by the 1950’s were operationally dormant and in the San Toy case, “with a former list of shareholders difficult to locate”, if not Apollo Steel as well.
The “list of shareholders difficult to locate” arises from the relative age of Apollo Steel and San Toy (both were formed in the early 1900s) and likely changes in State laws.
At a very basic level, the owners of San Toy Mining could have been in a position to exchange worthless San Toy Mining Shares for real cash or other consideration. The mechanics are actually more complex, and not entirely known, nevertheless, we do not know who the owners of San Toy were, which would have been the intent all along, in order to effect a successful money laundering scheme.
The graph below shows the basic money laundering mechanics using a publicly traded shell company. Step 2 shows the "Pump & Dump" competent, which is how the price of a worthless share can be inflated via stock/brokers, promoters, the rumor mill. Shear momentum will often drive the price of a share higher and the interim players do not necessarily need to be in on the "scam."
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