Black Money. Interesting NYT and other accounts of connections between Bernie Madoff, Frank Avellino and Michael Bienes. More here and here.

This from the Financial Times' John Dizard a couple weeks back, on Madoff and black money investors:

... Over the holidays, in New York and Palm Beach, I've been collecting string on the investors in the funds "managed" by the Noels and Mr Madoff. An interesting pattern of income and asset distribution emerges: in the past year or so, assuming the allegations against him are borne out, Mr Madoff appears to have in effect taken money from those reluctant to pay taxes or declare wealth and given it to the overleveraged. From the black to the red, you could say. ...

However, the onshore leveraged were not the only investors in Madoff. There were also offshore investors, some of whom I know. Mr Madoff and the Noels would not have needed to know all the details of the tax filings, or lack thereof, of these investors.

Since no readers of this column would be personally familiar with the logistics of laundering money, I will need to tell you that it is not that easy. You have to shift it through a tangle of accounts from, say, an under-invoiced exporter or over-invoiced importer to a distant money centre, to a tax haven, then split it up and send it to another tax haven, and so on. They give courses on this to legitimate bankers; it's called "layering" and "structuring".

Also, as I believe some people will discover, western governments' information gathering and analysis have improved, in part because there was a mistaken belief that gathering intelligence on terrorism could best be done by tracking bank accounts. (Kinship networks are more useful.)

Anyway, it can take a long time to build up a stash of hot money. Withdrawing that money, and redeploying it, also takes time and preparation: more time than a lot of the black money holders have had over the past year.
So I understand, both through logic and through reporting, that black money investors in poorly performing funds, or frauds, will have been hit harder than the overleveraged.

What recourse would black money investors have against managers who turn out to be frauds? (Here, of course, I am speaking in general terms, not about any manager or fund marketer in particular.) What if those black money investors are from places such as Colombia, where extra-legal means of enforcement and collection are more common? A cell in a fairly safe federal prison might look attractive compared with the sanctions imposed by informal justice systems.

Would you want to be someone who had defrauded some angry kingpin? Even if you "got away" with no successful prosecution? This topic has come up repeatedly over the past few weeks with bankers and fund marketers. The speculation is rather gruesome. ...

Does not seem to be an entirely randomly offered example by the FT. Could it explain why he was able to offer 20% returns for so long?

Posted by Laura at January 18, 2009 02:16 PM