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When a club is bought, spends big, and then collapses… How money laundering in football works.

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By Anne.

Part one of this article is available here.

______________________________

Money laundering through the transfer market is slightly more complicated than the activities described in the first article. According to the FATF, one of the main ways that money laundering occurs in the transfer market is through the “over-evaluation of a player.”

Or, in other words, by transferring a player for more money than the player is actually worth. As the FATF puts it:

“The over-evaluation of a player corresponds to a money laundering technique similar to the over-invoicing of goods and services seen in trade-based money laundering. The key element of this technique is the misrepresentation of the price of the good or service in order to transfer additional value.”

The following hypothetical scenario provides just one example of the many ways in which this could occur, and is based on a similar hypothetical scenario that appeared in the FATF report:

Mr. Kingpin is a high profile global “entrepreneur” who has $1 million worth of dirty money to launder. He decides to launder this money through a football club.

To accomplish this, Mr. Kingpin first needs to acquire some type of ownership interest in a football club. He thus uses $500,000 of his dirty money (half of the $1,000,000 total) to purchase a large number of shares in football club “Unfortunate FC” on the stock market. This makes Mr. Kingpin the majority shareholder in Unfortunate FC.

Mr. Kingpin’s purchase is accompanied by much media fanfare about how Mr. Kingpin plans to act as a “sugar daddy,” and pour loads of money into the “highly fortunate” Unfortunate FC. Accordingly, the first thing Mr. Kingpin does is dump the other $500,000 of his dirty money into Unfortunate FC. However, he does this in the form of a loan to the Club, not a “gift.”

At this point, Step 1 of the money laundering process is complete. Mr. Kingpin’s $1 million of dirty money has been fully invested in Unfortunate FC. However, unfortunately for the Club, Mr. Kingpin has every intention of getting his $1 million back, nice and clean.

Mr. Kingpin’s first step in getting his money back is to make sure that Unfortunate FC earns some money of its own. He does this by arranging for a bunch of new shares in the Club’s stock to be released for sale onto the stock market. Because of Mr. Kingpin’s involvement in the club, and the accompanying media hype, the value of the Club’s stock goes way up. There is high demand for the new shares that have been issued, and Unfortunate FC earns a lot of money from people buying the new shares.

Mr. Kingpin then uses $500,000 of the Club’s newly-earned money to repay the $500,000 loan that he initially made to the Club, thus getting half of his dirty money back.

To get the other half back, Mr. Kingpin jumps into the transfer market and, as promised, starts to “splash big cash” by buying players for hugely exorbitant fees. However, it is important to note here that the fees for these transfers are paid with Unfortunate FC’s new money, and not Mr. Kingpin’s.

Also, Mr. Kingpin is actually using some shady dealings and accomplices to make sure that a huge portion of the money that the Club is spending on players is actually coming straight back to him.

Specifically, Mr. Kingpin arranges for the Club to negotiate these player transfers through an “agent.” However, this “agent” is actually nothing more than an offshore company that is working as Mr. Kingpin’s accomplice. Mr. Kingpin’s other accomplice is the selling club, which, as part of the transfer deal, agrees to pay a secret “commission” to Unfortunate FC’s “agent.”  This “commission” is built into the exorbitant transfer fees that the Unfortunate FC is already paying in the first place.

This is how it works. Say that Unfortunate FC, at Mr. Kingpin’s direction, agrees to buy a player for $50,000. But as part of the deal, Unfortunate FC’s “agent” (Mr. Kingpin’s accomplice) is secretly earning a $25,000 “commission.” The selling club will pay this “commission” out of the $50,000 that it receives for the transfer.

What this means is that, in effect, Unfortunate FC is paying only $25,000 for the player, and an additional $25,000  to its “agent,” which then transfers the $25,000 into an offshore account controlled by Mr. Kingpin. In the end, the Club has paid $25,000 for the player, and $25,000 to Mr. Kingpin.

Eventually, Mr. Kingpin earns $500,000 from these player transfers, which means that he now has back the $500,000 that he used to purchase his shares in Unfortunate FC in the first place. At this point, the money laundering cycle is complete, and the $1,000,000 of dirty money is now back in Mr. Kingpin’s control.

(You may notice that, in the process, Mr. Kingpin, far from being a “sugar daddy,” is actually robbing Unfortunate FC blind).

On top of that, Mr. Kingpin now owns a bunch of stock in the Club at no cost to himself, and has earned a profit because his shares went up in value. Furthermore, he can continue to use the transfer market to launder his dirty money until it is no longer profitable for him (in this case, that would likely occur at the point when “Unfortunate FC” turns into “Bankrupt FC.”)

The above is just one hypothetical example provided by the FATF of how money laundering in the transfer market could occur through the over-evaluation of a player.

Now that we have the basics covered, in the next article in this series we will examine the topic in much greater detail.

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48 comments to When a club is bought, spends big, and then collapses… How money laundering in football works.

  • WalterBroeckx

    Very, very very Untold!!!!!!
    Tell me more, tell me more, Anne… 😉
    Very interesting

  • Philf

    Are you two on the Arsenal FC payroll?

  • Mandy dodd

    Nicely explained. A few clubs spring to mind!

  • Shard

    @Philf

    I haven’t even read the article yet, but congratulations on trying to discredit someone’s work without making any sort of argument yourself. Who’s payroll are you on would be a more interesting question I think. Or are you just a jerk?

  • Arvind

    Awesome stuff Anne. I think I read each and every word this time :). This series certainly has to be among your best work yet at Untold.

    And I noticed that you had people Emailing you yesterday (your comment on yesterday’s article) saying it was too simple. I wonder why anyone would say that. The vast vast majority of people (me included) have no clue about this stuff and will definitely appreciate this keen insight.

    So my response to those who think its too simple, thank you for your opinion but I think its a very complex subject that has been beautifully simplified here. As the saying goes…’Everyone thinks its simple when they see the finished product….’.

    Keep up the great work.

  • Kentetsu

    Great work in collating the different processes mention in the FATF report into one clear example. Also much easier to read than the dry material of the report.

  • chris from Cambridge

    She (or He) quite possibly works in a major firm of accountants or lawyers etc which has such clients. More possibly the firm has worked out how their clients should best do it. If so it is a case of an unscrupulous firm with unscrupulous clients.

  • WalterBroeckx

    Philf,
    If the two is referring to the picture next to my name, I must admit one is on the payroll of Arsenal FC. But unfortunately it is not me who is on the payroll. LOL… sigh…

  • Anne

    @Walter:

    Don’t worry. I’ll tell you more 🙂

  • Anne

    @Philf:

    What about this article makes you think that the author (and/or associated parties) might be on the Arsenal FC payroll? Is Arsenal FC somehow trying to combat money laundering in football?

  • Anne

    @Mandy:

    Yes… A few… 🙂

  • Anne

    @Shard:

    I think that you can still be a “jerk,” regardless of whose payroll you may or may not be on.

  • Anne

    @Arvind:

    Thank you very much for your kind compliments about this article and this series. Hope you continue to follow it! 🙂

  • Shard

    @Anne

    Thanks for calling me a jerk 🙂

  • Anne

    @Kentetsu:

    As I said before, please don’t hesitate to email me if you want to ask any questions about that FATF report. Truth be told, it reads in a way that I think you would need a cypher to to fully interpret it. If you’ve looked at it as well, I would be very interested in comparing notes with regard to what they’re actually trying to say.

  • Anne

    @Shard:

    Lol. You know I didn’t mean it that way 🙂

  • Anne

    @chris from Cambridge:

    I’m sorry, but what the f exactly are you talking about?

  • Shard

    I would hope so 🙂 And regarding the article.. I’m with Walter.. I want more. I really liked it. I still have some questions but I think I’ll hold them for later. Maybe by that point I’ll have a better understanding anyway. On the whole, money laundering would explain why so many rich people are seemingly willing to put their money into football when clubs seem to always run into losses.

  • WalterBroeckx

    I think in a way people feel that Arsenal is a club that tries to run itself in a proper way. And so people could assume that by attacking the money launderers we are defending Arsenal and thus on Arsenal payroll.

    Well Philf, you don’t need to be on Arsenal payroll to be someone who wants things to be done in a proper way. I think the vast majority of Arsenal supporters love the club also for the proper way we run out club. I do in fact. Would hate to see it go the other way. shiver….

  • DC

    Nice progression in this episode Anne, well done!
    Tell me, are the likes of Kroenke & Usmanov free from such activities? Is Arsenal FC, and have they been in previous years, free from such practices themselves?

  • Pat

    Great articles Anne. I’ve always wanted to know how money laundering works and I am actually beginning to grasp it now. I may have to make notes!

  • Mandy dodd

    Agree with you Walter, but unfortunately there are plenty out there in AAA land who would risk this sort of thing for just one trophy

  • Arvind

    I think that I’d seriously seriously reconsider supporting Arsenal if it came out that we did shit like this too. So as Walter says…’shiver’. Just hope it never happens…

  • finsbury

    Thanks Anne.
    Thought you might like to read this.

    http://www.counterpunch.org/2012/01/17/billionaires-control-cricket-in-india/

    Note: although this is a link to counterpunch, this article was penned by a sub-editer at The Hindu, which as far as I know (which isn’t very much!) is a publication that hovers somewhere around the middle of the political spectrum. Anyway, there have allready been some predictable scandals in the IPL (the cricket league, not the upcoming football league!) involving some owners…the usual.

  • Shard

    The Hindu is a fairly balanced paper, though with clear Left leanings. Just thought I’d throw that in there 🙂

  • bjtgooner

    Excellent second article Anne. With the two articles set out so clearly reading them has been very educational. The scenarios you have illustrated show just how easy it would be for a corrupt billionaire to misuse a football club.

    The prospect of a corrupt management team including owner, coach/manager, accountant and lawyer would be quite devastating to the wellbeing of any club, even one which started off financially sound.

  • Mahdain

    execellent article anne..have to say im really loving the series of articles you are doing on this matter as they are very informative and eye opening..keep em coming

  • Gooner Gal

    @ Anne, this is an excellent and concise explaination of part of what is going on. This situation was brought to my attention a few years ago and is part of the reason I am in vehement opposition to jabba the hun and really back Stan Kroenke as owner of Arsenal FC. I don’t believe he is an angel, but he is a reasonable businessman that understands the value in building something with patience instead making a fast buck and/or bleeding the club dry until it’s very existance is put in jeopardy.

    The money swirling around in football and the premiership in particular is really astounding. The level of corruption and dodgy dealing that has been allowed in the game at present has reached ridiculous levels. Strangely it seems like it is only HMRC and not the footballing authorities who are interested in getting to the bottom of what is going on. Even then because some clubs are not listed publicly, HMRC will struggle to uncover the truth as they are not legally obliged to be as transparent.

    Moving on to an entirely unrelated point…hmmm…I have found the timing of the hasty delisting of the Spuds yesterday interesting and was speculating with a friend about the kind of large investment they are about to get and the people/fund who are about to finance their large project.

    Whilst I am looking for improvements on and off the pitch, on the whole I still love the way Arsenal is run and I hope that this does not change even though football in general is becoming more and more debased.

  • Mandy dodd

    Agree Gooner gal, there are things that worry me a bit about stan and the team, maybe because we do not know the full picture and there is a lot of rumour out there. The American owners do not seem to be behaving like city or Chelsea owners, maybe to their credit. I am not sure stan is one to splash the cash, there may or may not be prohibitive wage caps, there may or may not be negotiation tactics that are not appreciated in continental Europe which may or may not have cost us players, from wengers hints, i am not convinced he is a hundred percent with the board at times,but a dodgy money launderer stan is clearly not. Sustainability and self sufficiency are not sexy concepts in the world of football fans. I am not even sure they are even workable in the long term for an elite club, you can only keep elite players for so long on lesser wages than some pay, especially if there is no silverware. Arsenal face testing times, but fans need to know what they are up against, if they choose to know and are not blinded by a manic desire for bragging rights.
    Whatever stan is or is not, have a feeling arsenal fans are going to need to show a bit more patience, a dirty word after what some would regard as seven years of pain, but cannot see us under current ownership falling into the traps that are clearly out there. Other, celebrating and bragging now may well fall into these very traps. Portsmouth have more silverware than us in recent years, some would say a damning indictment for our club, but at what cost to the Pompey?

  • Gooner Gal

    @ Mandy Dodd,

    For some people (not me), the idea that Stan is a businessman first and not a philanthropist, does not sit well. I can imagine him being able to take a huge dividend in about 5 years time, once he has seen off jabba, which will be his right. In terms of splashing the cash, I believe Arsenal are prepared to do this for the right player. In terms of wages ours are competitive, but the simple fact is, the majority of our players are targets for other rich clubs. It’s like a quality hallmark and a big deal to prize a player away from us.

    I don’t agree with the idea that we should be blackmailed into paying players unreasonable amounts in wages and the Wayne Rooney saga springs to mind. The knock on effect of giving him around £250,000 a week is that this now a bench mark for others to demand parity or something close to it. Danny Welbeck has a valid point about wanting more money, since the going rate has been established.

    This year I hope for the best, whilst preparing for the worst. We could be shafted and not finish in the top four come the end of the season, but that is life. We have a shocking number of long term injuries and had a disasterous start to the season so I am prepared for this. What I want to see is us fight in every game, focus and not relax. We are the underdogs this season and the players need to keep their heads down and keep plugging away. Unless we get reinforcements this window, we cannot afford to really fight for the FA cup, the Premiership and the CL. We will have to prioritise soon.

    I believe in the self sustaining model for Arsenal FC and I think it should be the prefered option for any type of business really. As other models which are dependant of the sovereign state of another nation or a benefactor who makes money from under the table dealings, will only end in tears. I work off the simple adage, if it seems to good too be true, it probably is…

  • Gooner Gal

    In terms of keeping Arsenal players in future, I hope that we are writing in all sorts of clauses in the development agreements and professional contracts so that if a player chooses to walk away after our considerable investment and absolutely won’t resign, we are able to charge a training and development fee on exit which will be relative to the current market valuation. Arsenal make these players elite and it would be a way of making some think twice about trying to do the dirty on us. So for example if a player is valued at £30m, we would ask for an additional 15m for training and development costs which either the other club would have to pay or the player themselves. Maybe charge more if the player hands in a transfer notice. Though I am not sure about the legality of this idea, I am just thinking of ways to put more guards in places against those clubs operating with at blank cheque book at the moment.

  • Brickfields Gunners

    Thanks again Anne for another fine article in this series .Will keep a look for the next one .
    @Gooner Gal – I do share your fears for the Arsenal this season
    but do hope we do well in the cups and get into the top 4 so as to tide over till things improve .
    I do beleive that we are on the right track but there are many uncomfortable bumps on the way.

  • Brickfields Gunners

    Sorry ..”look out for”..

  • Anne

    @All:

    Thank you for taking the time to comment on this article. Am having some technical difficulties with my computer right now, but as soon as I take care of it, I will get back to everyone (however late I might be 🙂 ) Thanks again.

  • finsbury

    Shard
    January 17, 2012 at 8:59 pm

    Thanks! I can’t tell the diffrence between these left & right wingers…

  • DC

    @Gooner Gal,
    Your comment wrt youth-player development agreements and contracts is spot on!
    That is the only way to attempt to deter the vultures from tapping-up the young talent that has been nurtured at great cost and time by the clubs, and then benefitting from the hard-work invested in that young player which they never had anything to do with!
    Sell-on and appearance clauses are sometimes included into young player transfers but their value is farcical in the modern financial climate of the bigger clubs – the figures involved sre just too small! Furthermore, if that player never leaves his new club or only leaves many years later, the original developing club will get even less back!
    Loyalty, unfortunately with agents and parasitic third-parties present, is not a given nowadays but it has to somehow be regained in principal. Large monthly and regular fees beyond the transfer fee alone should be invoked for all internally-developed players that are subsequently sold with reluctantance as further compensation and hopefully a deterant!
    I am still very angry at the ridiculously low 30+ million transfer fee for Cesc! The cost of one season out of the Champions league!
    Selling a player whom you do not want to sell without proper compensation, the Bosman rules, no salary caps on wages, and no limit on the numbers of players that you can buy and then loan-out to other teams has destroyed the game! Football throughout the world should be praying for and hoping that Arsenal succeed with their strategy!

  • DC

    And succeed soon!!!

  • WalterBroeckx

    http://www.sportingintelligence.com/2012/01/15/revealed-the-letter-that-exposes-the-history-of-blackburn-rovers-crisis-150102/

    just have a look at that link I would say. this sentence looks rather interesting:

    “In that window, Blackburn signed Ruben Rochina for €450,000 from Barcelona in a deal where Rochina’s agent, Manuel Salamanca Ferrer, received a £1.65m fee.”

  • DC

    Walter, these goings on at Blackburn are not surprising! What this is is not corruption, per-se, but outright theft from the fans and supporters of Blackburn! I’m convinced this is happening throughout all of football and particularly within the British game!

  • bob

    DC,
    Prayer and hope won’t do it. A petition for video replay would be a reasonable start. A step too far?

  • DC

    Bob,
    A hop before the step will suffice at present but whilst the Golden-Calf Sir Alex remains at the centre of Sodom and Gomorroh, all prayers will fall on deaf ears until the true commandments are delivered from a high!

  • mark

    Good article and one I hope will get some attention from the political establishment in the UK.

    There is no clear record of where the money came from for Thaksin to purchase Man City! And he made a profit when he sold too!

  • LRV

    Very nicely put, Anne.

  • Brian Blogglesnap

    Hi Anne,

    A question, if Mr K invests £500,000 into the football club, how does he pay it?
    Cos if it is in the banking system it is already laundered, so why bother?

  • Anne

    @LRV & mark:

    Thank you.

  • Anne

    @Brian:

    That’s one of those questions that the FATF didn’t fully answer in their own report (one of many questions that they don’t answer, in fact). Which means that it’s a very good question, since you noticed it 🙂

    The above example is deliberately over-simplified by me because I was just trying to demonstrate the concept more than anything else. However, the truth is that exactly how these people are doing what they’re doing is guesswork, to a certain extent. I mean, they don’t exactly publish how-to manuals, if you get what I’m saying 🙂

    I also think that even law enforcement and analysts on the subject of money laundering are just now only beginning to address this issue. It’s not like money laundering in finance, where it’s been going on for so long that there is loads of research that has already been conducted. Based on my research so far, I’d say that money laundering in football is very much an emerging issue in organized crime research.

    However, if I had to offer my best guess in response to your question, I would say that the answer has something to do with the “layering” process. In truth (and this is what I meant when I said my example was over-simplified), you don’t launder your money through only one source.

    If you really want to disguise the origin, you have to move it through lots of different places, for example through banks, offshore accounts, the real estate market, etc. So, I wouldn’t be at all surprised to see them launder their money through the banks and then a football club too. Hope this helps.

  • Anne

    @Brian:

    Also, while this wouldn’t apply in the example I gave above, it’s also possible (and highly likely) that, to a certain extent, Mr. K, is investing dirty cash into the football club, in the sense that he’s paying some of his expenses in cash, “off the books.” That’s actually going to be the subject of my next article, and it could be done for purposes of money laundering, tax evasion, or both.

  • Anne

    @Walter:

    Great link! Have to second you on the significance of that one sentence.