Digital Cash: A Boon for The Mafia?

The wired world has opened a window for cyberlaunderers, and the government fears it will be unable to close it again

Not since the advent of untouchable off-shore banks have money-launderers had it so good.

New technologies -- especially the Internet and smart cards -- enable money to be moved anywhere at anytime in record speed, without any trace. What is supposed to make financial transactions easier for customers and businesses has also paved the way for a new industry: cyberlaundering.

The issue is in its infancy, and a frightened U.S. government is just starting to identify the possibilities and the players. Congress scratched the surface this week in the first of a series of hearings on electronic money held by the House Subcommittee on Domestic and International Monetary Policy. But so far, the potential solutions are few -- and the challenges that loom are great.

Drug traffickers, tax evaders and others who have a reason to conceal money could move and hide their caches among the other legitimate users of the Internet. They could, anonymously, add and subtract fortunes on smart cards, which store money on a magnetic stripe or microchip. In other words, it could be simple to make dirty E-cash clean and leave no electronic money trail.

Behind the scenes, the government group leading the exploration is the Financial Crimes Enforcement Network, Vienna, Va., a little-known arm of the Treasury Department. Fincen plans to learn everything it can in the next few months about cybercurrency and then hold a colloquium in the fall to lay out the problems and form task forces. Fincen, in conjunction with the Federal Reserve Board, will also write any regulations on the movement of electronic currency.

Created five years ago, Fincen maintains an extensive database that tracks financial crime by linking people and companies to banking transactions. The agency's information has been used to help catch the World Trade Center bombers, among other criminals. This may be their biggest challenge yet.

"Color us nervous," said Stanley Morris, director of Fincen. While he said he doesn't yet know of a case of cyberlaundering, the possibility could be a reality within a year. Morris said a person could take his government-issued welfare card that would double as a smart card, load money off of it to a drug dealer, and then the dealer could wire the money to Colombia over the Internet, without ever touching a bank. As banks are the primary way to track money-laundering, this trend effectively eliminates the money trail that feds follow to find launderers. "Money-laundering would no longer be a vulnerable part of a criminal enterprise," Morris said.

Pamela Johnson, assistant director at Fincen, said the speed that makes money-laundering in cyberspace efficient and the anonymity that makes it secure, such as encryption, has the potential to attract criminals. Not to mention the fact that electronic currency is a lot less bulky than bags of paper money. "Now you have guns, drugs and money. Soon you'll have guns, drugs, money, the Internet and smart cards," Johnson said.

Some say it's already started. Kenneth Rijock, a former banking lawyer and money-launderer in Miami in the 1980s, spent two years in jail for his crimes and is now teaching law enforcement how financial criminals work and think.

"You can only presume that it's happening," Rijock said. As early as 1981, he said, people he knew who were involved in drug trafficking and money-laundering were already becoming computer experts.

Finding illegal activity in cyberspace, he said, is like looking for the proverbial needle in a haystack. "We look for red flags now," Rijock said. "On the Internet there would be no red flags."

Although exactly what can be done to stem cyberlaundering is still uncertain, a regulatory solution is likely. To spot financial criminals now, Fincen relies on rules that require banks to report suspicious activity and any transaction over $10,000.

Earlier this year, the agency mandated that banks keep closer tabs on wire transfers, which many say is the money-launderer's current venue of choice.

Another rule, expected this fall, would require banks to set up "know your customer" programs to more officially monitor people and transactions in the bank.

None of those regulations, however, would mean anything to money-launderers in cyberspace.

Johnson said Fincen has a struggle ahead in figuring out a regulatory fix. The agency doesn't want to impede technological advances, she said, but it can't just use an honor system when it comes to such an open playing field.

But first, said Robert B. Kaiman, a Federal Reserve Board economist on detail to Fincen, fundamental questions -- such as "Is electronic currency money?" -- must be answered.

"Before we do anything we need to understand this," Kaiman said.

That's not such an easy task, because the technology and the possibilities for fraud are constantly evolving. Thomas J. Firnhaber, policy advisor at Fincen, pointed out that kidnappers, who could demand ransom over the Internet, would be hard to find.

Radical militias and terrorist groups already have World Wide Web pages, added Johnson, and rebel groups in Mexico and Indonesia are using the Internet to communicate their causes.

But a worst-case scenario gives the strongest argument for regulating electronic currency. "If left unchecked, countries could lose control of their money supply and there would be no record of it," Kaiman said.

Other countries, in fact, are ahead of the U.S. in electronic commerce. The U.S. is still a check-driven society, while Russians are using smart cards.

"Due to our infrastructure, this is one of those rare moments when the U.S. is behind in technology," Kaiman said. So the U.S. may yet have some breathing room.

Now is an especially opportune time to show this country's expertise in an emerging financial area.

Treasury Undersecretary for Enforcement Ronald Noble, who oversees Fincen, is this year's chairman of the Financial Action Task Force, a coalition of 25 nations formed to combat financial crime.

It is also important to coordinate international efforts because while electronic currency can be moved anywhere in the world, there are no customs officials on the Internet. If one country was unregulated, it could become a cyberlaundering haven, the way some Caribbean countries have become hot spots for drug traffickers.

William F. Baity, deputy director of Fincen, summed up the agency's challenge at a conference earlier this year at which he called electronic currency a "revolution." "Criminals, somewhat like water, take the path of least resistance," Baity said.


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