For example, say you're a drug dealer with $100,000 in cocaine-flecked 20's. You might enter a casino and buy $100,000 in chips, gamble modestly, then cash in your chips for a cashier's check. Because any bank transaction over $10,000 has to be reported, you can now hand over the casino check for deposit at a bank and, without too much suspicion, call it ''winnings.'' Another money-laundering method involves taking your drug profits and buying up cashier's checks with a value under $10,000. (Drug dealers typically employ squads of what law-enforcement officials call ''smurfs'' to perform this service.) This money can be deposited without fanfare and later wire-transferred to an offshore bank account.

In the 80's, the problem of money laundering at last began to be taken seriously. The first bill passed by Congress with the words ''money laundering'' in the title was in 1986. International organizations, like the Group of 7, began cracking down as well. As a result, some nations cleaned up their acts. Switzerland, for one, will no longer fully protect the identities of those old ''numbered accounts.'' But by going straight, the Swiss simply created fresh demand for their old service. And they did it on the eve of the digital revolution, permitting any sovereign nation with a phone line to get into the game. Scores of little countries like Nauru have seized this opportunity.

Nauru specializes in something called a shell bank, which exists only on paper. There are no teller windows, no A.T.M.'s. Indeed, much of a shell bank's activity takes place not on Nauru (or even in the shack) but in ''correspondent accounts'' in other countries. A correspondent account is just like a checking account -- except it's for an entire bank.

Since most banks are required by the country they are registered in to keep a record of every major transaction that goes in and out of such accounts, money can be traced. (Most banks are also required to report suspicious patterns of activity and to know the identity of their customers.) But Nauru permits its shell banks to operate without such encumbrances. While specific clumps of money may enter a Nauruan correspondent account at a real brick-and-mortar bank, the person charged with managing those transactions sees only an unidentified flow of funds passing through. And once the funds have passed on through, they become untraceable.

The recent Bank of New York scandal revealed not only the latest techniques in money laundering but also the critical role a tiny nation like Nauru can play. The scheme was designed by Russian bankers but was run by a married couple in New York -- Peter Berlin and Lucy Edwards, a vice president of the Bank of New York. (Edwards was born Ludmilla Pritsker in Leningrad.) Beginning in Moscow, two established banks, Sobinbank and MDM, opened two separate banks -- Depozitarno-Kliringovy Bank, or DKB, and Flamingo Bank -- to serve as the conduits for fleeing funds.

Funds from Flamingo and DKB were then funneled to a shell bank registered in Nauru called Sinex. (Yes, these names are real.) Sinex was founded in the early 90's by several Russians -- one of whom, Aleksey Volkov, eventually worked directly with Berlin and Edwards out of their New York office. Sinex opened a correspondent account with the Commercial Bank of San Francisco, which permitted it to operate in the United States. Payments from Sinex were generally made to a number of shell firms -- companies that did no business other than to receive these funds -- with running accounts at the Bank of New York. To avoid suspicion, Berlin and Edwards continuously created new names for these shell firms: Benex International, General Forex, Torfinex, Lowland Inc., Becs International. From there, money was dispatched to numerous offshore locations, where it rested as clean corporate funds, easily accessible.

One Russian suspected in participating in this scheme is Semyon Mogilevich, the notorious mafia head known as the Red Don. Not to put too fine a point on the quality of the clientele, but when Edwards pleaded guilty in New York to money-laundering charges earlier this year, she admitted, ''I was aware that personnel from DKB were on occasion . . . afraid to leave the bank because they said customers with machine guns were waiting for them.''