Law officials fear that electronic cash may increase money laundering

By Lucy Komisar
Earth Times News Service, Oct 31, 1999

The dangers of international money laundering are massively magnified by electronic transfers and the new electronic cash. The really big challenge that’s coming, that’s arrived, is electronic cash, said Thomas Roche, Deputy General Counsel of the Federal Reserve Bank of New York. That’s going to present really daunting challenges. There’s always been an audit trail in credit cards and checks.

In most electronic cash, stored-value cards, there’s no audit trail. In the old days, he said, a drug dealer had to get people to go with shopping bags into the bank. CTR [currency transaction report] requirements drove criminals out of banks. Then they took the cash and tried to convert it to multiple checks or structured deposits. Then there was an unholy alliance of business people exchanging cash for checks. Now, people who have to enforce the laws are playing catch-up, because there’s new technology. Cash is dying, checks are down.

He continued: Imagine the ability of a drug dealer to sell to a drug customer who pays with a stored-value card. They even have docking stations. You can take your card, put it in a docking station, and transfer the value to another card. I can plug a cellular phone into a modem in a docking station and transfer that value to any financial institution overseas. Assume your bank is in the Cayman Islands. You can be sitting in New York or Cambridge, the value from the drug dealer goes into your docking station, and you transfer it. The technology exists to do that, but it is not yet in use. There are also enormous legal and jurisdictional issues. If there’s a wire transfer from New York to Hong Kong to Sidney to the Isle of Man, who has jurisdiction?

Regulators are already seeing the impact of electronic fraud. Philip Rutledge, Deputy Chief Counsel of the Pennsylvania Securities Commission, said, Global fraud is steadily increasing. Now we have an added kicker, the Internet. In the last four to five years, we have seen our caseload of securities fraud with an Internet-related component increase from zero to 20 or 25 percent. He said that in the future, the Internet could combine with stored-value cards to allow people to avoid banks. You might be able to get stored value like a floppy, upload it to a computer and send it as an attachment on e-mail. That might lessen the need for people to go through banks.

Even before electronic cash comes, electronic transfers pose a problem. John Mahr, a member of the Pennsylvania Securities Commission, said electronic movement of money would increase the growing black hole in public finances caused by massive tax evasion. Electronic payments, he said, will make more difficult the task of the state in collecting revenues and bringing to justice those who seek to evade fiscal responsibilities.

In this new world, with massive trans-border financial transactions and the rules of bank secrecy, the protectors of the international financial system lack the tools to do their jobs, said Jonathan Winer, the US Deputy Secretary of State for International Narcotics and Law Enforcement.

In a wired world, Winer said, where everyone is on the Internet, potentially someone can structure all their transactions to take advantage of jurisdictions”credit cards, bank accounts”put everything through Antigua and Nauru. I can prevent my wife and children from receiving child support and defraud all my creditors. He said, The Benex [Russian-Bank of New York money laundering] case raised a fundamental question about the steps needed to allow financial supervisors to protect against abuse of electronic money, which is now the dominant form. He said the in the US and elsewhere, old anti-money-laundering provisions based on tracking currency were expected to protect against the newer kind of money generated and moved electronically. Instead, he said, know your customer rules should be applied to electronic transactions.

That could work for wire transfers. There’s no way to know a customer when people transfer value from cybercash cards, with no records of where it is going.

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