Real estate is still the best vehicle for laundering money made by criminal activities, but the stock market is gaining in popularity, specialists in the underground economy warned law enforcement authorities yesterday.

Illegal drug and gambling profits can be used to make cash purchases of property or stocks. When the real estate or stock is sold later, the money received is difficult to trace back to the criminal, explained participants in a seminar on money laundering sponsored by American University and Battelle Memorial Institute.

Only 1 percent of the estimated $100 billion in illegal drug and gambling profits is ever returned to the U.S. Treasury in taxes, said Battelle's Clifford L. Karchmer, who called money laundering "a critical national and international problem."

Cash purchases of real estate are the "last untouched area of wide open activity in investments that is not reported to the Internal Revenue Service," declared Charles Kimball, a real estate economist who works with South Florida authorities in detecting organized crime. In Dade County alone, the criminal element is responsible for $200 million to $300 million of the $4 billion to $6 billion a year in real estate transactions, he estimated.

Cash transactions for real estate are recorded by county clerks, who do not report to federal or state tax authorities, and real estate taxes can also be paid in cash, according to Kimball.

In addition to being a good investment, real estate is a good way to legitimize ill-gotten gains. A person seeking to hide the source of funds pays cash for a hotel or apartment building that generates enough in rent to cover operating expenses. When the property is sold, the dirty money that went into the sale comes out clean in the form of capital gains.

According to Peter Twardowicz, a criminal investigator in the U.S. Attorney's office in Baltimore, most drug dealers first try to pass off their earnings as gambling profits. He cited one dealer who frequented the tables at Resorts International in Atlantic City. He would convert his street drug money in $10 and $20 bills into chips, gamble a bit, and then turn in the chips to the casino in exchange for a check or $100 bills wrapped with the Resorts International label.

Richard A. Nossen, a former IRS official who is now a Richmond consultant, advised officials not to overlook the booming stock market as a means of laundering money. Like banks, brokerages are not required to report cash transactions of less than $10,000 to the government, he said.