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STEVE INSKEEP, host:

It's a guilty pleasure, but I confess that I never enjoyed politics quite so much as the four years that I lived in Hoboken, New Jersey. It was an old port city on the Hudson River. One week you'd open the local paper to find the school system had nearly as many employees as it did students. The next week you might see a photograph of the mayor punching a political opponent in the face.

Then you'd get a special screening of "On the Waterfront," the classic movie whose glimpses of corruption on the old Hoboken docks was out of date but still caught the spirit.

So, we take special note this morning that Hoboken's newly-elected mayor is expected to resign. He was one of 44 prominent residents of New Jersey accused of corruption and money laundering.

LINDA WERTHEIMER, host:

Five rabbis are accused of running a criminal ring that involved millions of dollars. This morning, we'll look at how money laundering works. Here's NPR's Robert Smith.

ROBERT SMITH: The cash was passed across the counters of grocery stores and bakeries in Brooklyn. Wads of bills were stuffed into cereal boxes - Apple Jacks and Cinnabon Crunch. One money launderer in Jersey was operating in an office above an actual Laundromat - all this dirty money allegedly brokered by rabbis and funneled through Jewish charities.

To figure out how it all worked, I brought in former CIA and Treasury agent John Cassara(ph) to help me theoretically launder some money.

Mr. JOHN CASSARA (Former CIA and Treasury Agent): I'm here.

SMITH: All right. Let's go ahead and do some crime. In the Jersey case, the illegal money supposedly came from counterfeit handbags - Prada, Gucci, that kind of stuff. So, I headed out to the streets too.

I got bootleg CDs here, bootleg NPR CDs. I got MORNING EDITION, I got ALL THINGS CONSIDERED - $5. Come on, man, bootleg CDs.

Okay. Not exactly a hot seller, but let's pretend I raked in a million dollars in cash.

Mr. CASSARA: All right.

SMITH: Now, if I just want to hold on to that cash and spend it slowly, I don't really need to launder money.

Mr. CASSARA: If you are comfortable sleeping on a lumpy mattress filled with dirty money, there's nothing wrong with that.

SMITH: But if I try and use my cash to buy something major, like a car or a house, I will be reported to the federal government, who will want to know where all those wadded-up $5 bills came from. I need to sneak this cash into the banking system somehow.

Mr. CASSARA: Well, the three stages of money laundering are placement, layering and integration.

SMITH: Okay. Let's break it down then. The first one…

Mr. CASSARA: Placement.

SMITH: …is getting the money into some sort of electronic form. I can't just deposit it. The banks have to report anything over $10,000. In the old days I could've gotten around that by making large numbers of slightly smaller transactions.

Hi, I'd like to deposit $9,999… I have $4,000 to deposit… $3,300… I'd like to deposit $500.

Mr. CASSARA: Exactly.

SMITH: And this has a name.

Mr. CASSARA: It's smurfing, after the old cartoons of many, many years ago.

SMITH: The little blue guys.

Mr. CASSARA: Those little cartoon characters.

SMITH: Criminals used to hire busloads of workers, smurfs they were called, to put small sums of money into multiple banks. John Cassara says that the new banking software is getting better at figuring out this particular trick. So, he says a criminal like me, with my million in ill-gotten gains, could get a front business.

Mr. CASSARA: The pizza parlor, the fast food restaurants…

SMITH: Or strip clubs, car washes…

Mr. CASSARA: …Laundromats. Anything that is kind of a cash-intensive business.

SMITH: And you just slip a little of that dirty cash in with the clean stuff. In the New Jersey scheme, prosecutors claim that it was Jewish charities with all the donations going in and out that were used to get illegal money into the system, which brings us to Step Two.

Mr. CASSARA: Layering.

SMITH: And he's not referring to the three cheese layers I'm using at my brand-new pizza parlor, Famous Original Bob's. As I tuck my million dollars into the pepperoni profits, it might start to look a little obvious. Layering means moving the money around.

Mr. CASSARA: You may transfer it to the Caymans, you may transfer it to Switzerland and come back again.

SMITH: In the New Jersey case, one of the rabbis brags in the court documents that he sends money, quote, to every country imaginable - Australia to Uganda. So, now my bootleg money has been smurfed, covered in pizza sauce and sent on a round-the-world trip.

Mr. CASSARA: Congratulations, that sounds like quite a money-laundering scheme.

SMITH: Yeah, but I have a problem now, which is my money is everywhere around the world - it's in gold, it's in diamonds, it's in these accounts. How do I get the money back?

Mr. CASSARA: It's not that hard once you have the money into a financial institution.

SMITH: Some overseas banks will basically give you a debit card, or they can call it a loan to cover your tracks. This is the final stage.

Mr. CASSARA: Integration.

SMITH: Spending my newly-clean money - if I get away with it. If not, like the rabbis in the New Jersey case, I might face one more stage of money laundering - incarceration.

Robert Smith, NPR News, New York.

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