I would invite readers to have a read of Chris Skinner’s post over at Finextra today. As I am not a beta tester over there, I cannot comment directly, but the basic premise of the post is that most money-launderers use cash at some stage of the laundering process, so the solution to money laundering is to do away with cash entirely.
Personally, I find this a bit extreme a solution. Cash is useful to me for several reasons beyond the illegal (not, of course, that I would do illegal stuff with it). It is handy for small payments and for buying things like lunch it is a lot quicker. Paying for things I buy off mates is easier in cash as I do not always have a web browser with me to make a direct payment into their bank account (although my new toy, a Nokia N95, comes close) and it saves me having to note everything down to transfer the funds later.
It also makes it easier to hide purchases (like birthday presents) where I do not want my wife to know how much I spent.
What do readers think? Is the proposed solution worse than the proposed cure?
11 comments
11 July, 2007 at 17:49
Wisdom Teeth
How about replacing cash with smart cards, like the Octopus card in HK and the Oyster card in London?
11 July, 2007 at 19:38
Andrew
We are now using smart cards for buses in WA – this is a simple stored value model. Problem as I see them are:
* How do I pay someone who does not have a card reader?
* I also bank with several banks – do I get a card from each of them, as per credit / debit cards now and, if so, do I choose which at the time of purchase? * What happens if they both get within the ‘field’ of the reader?
* Each of these possibilities are going to cost to put the infrastructure in place and a (small) marginal cost per transaction. Are they worth it over cash?
I do not see any of these as killers, but I just want to see how they would work in practice?
13 July, 2007 at 11:07
Matt Canavan
There is an obvious demand for cash for the reasons you’ve sited (ease of use, anonimity). If the government bans it, and given this demand, won’t a substitute simply emerge. For example, unless governments coordinate there presumably will still be foreign currencies available, promissory notes or traveller’s cheques still available. And, Australians have an ingenious history of innovating in the face of currency shortages: we could always go back to rum!
13 July, 2007 at 15:27
Saso Virag
From what I’ve seen, Chris’ posts tend to be a bit tongue-in-cheek and a good deal debate and thought provoking.
I think the major challenge to any alternative payment model is going to be the cost of supporting infrastructure. Any alternative to cash will need an on-line authorisation of the funds transfer – trusting the information on the smart card itself would be an invitation to subvert any security measures on the card.
The cost of supporting infrastructure means that it won’t be widely accepted by merchants. Which in turn means that it won’t be widely accepted by customers. If it is to be a cash replacement, it needs to have at least some of the benefits that cash has over credit cards – no transaction costs to customers, ubiquitous, anonymous, and fast. It also needs to add the protection that people are used to from credit cards – protection from theft, easy “recharging” of the card, small footprint in the wallet or in the pocket.
And we’re back to anonymous.
13 July, 2007 at 16:47
Andrew
Saso,
That is why I like his posts.
I would agree on the authentication and the anonymity. The other problem as I see it is the ability to settle debts on the spot – I do not want to have to carry around a reader of some description to allow for value transfers where ever I am, even with wireless access this would be a pain. Given current technology, anything that deals with the authentication problem will give rise to the anonymity one and vice versa. There may be a solution in the future – but I cannot see it.
Nice blog BTW – I will add it to my blogroll.
19 July, 2007 at 04:09
Martin Davies
Andrew wrote:> The basic premise of the post is that most money-launderers use cash at some stage of the laundering process.
Response:>But convertibility of currency between financial products resolves that issue and many money launders don’t liquefy the value of their assets to achieve their ends so sadly doing away with cash would probably not solve the money laundering problem, it would move all illicit purchasing into other mediums that were deemed safe and that could exacerbate untangling the layering process for launders. From studies carried out on SAR’s (suspicious activity reports) much of the reporting occurs in brokerage and electronic channels where cash doesn’t really feature. Another huge laundering medium is plastic, particularly for tax evasion, specifically where a user will charge a card using multiple sporadic $4.7k payments that fall below the 5k compliance reporting threshold and the card is available for use over a long period of time.
From some studies that have been carried out laundering has become that complex that parties could actually debt finance their activities through convertible collateral to reach their ends.
Its a hopeless chase.
19 July, 2007 at 11:30
Andrew
Martin,
As Saso noted, Chris’ posts tend to be more on the thought-provoking side and not all of them should be taken seriously. I would agree with you, though – trying to do away with one laundering channel will merely cause another to open. I do not think we will ever do away with laundering entirely, though – the idea has to be just to make it as expensive and difficult as possible.
19 July, 2007 at 12:11
Martin Davies
I assumed as much as Chris’ post was a quip remark with a very sarcastic tone and one likens it to a cure for malaria by eradicating humans.
Interesting comment you made on ‘the idea has to be just to make it as expensive and difficult as possible.’ and I was at a conference last year when this very senior fraud specialist said the same thing.
All very true but on the flip side for banks the viability is so low, its hard enough to keep the depositor volumes up and to flog a home loan, making the process of transaction more cumbersome turns customers away to a bank that has fast streamlined processing and low fees.
You also wrote : ‘I do not think we will ever do away with laundering entirely, though’
I couldn’t agree more, money laundering is a hopeless chase of holding back the waves at Bondi none the less for banks not to make any kind of effort would be a salient endorsement of such an activity. Money Laundering is really a pathogen for 1st world good doing policy, such as recycling plastic bottles in an effort to reduce environmental hazards when in affect the garbage trucks used to collect the bottles cause more damage to the environment.
19 July, 2007 at 19:47
Andrew
Martin,
I think it is a bit more than a do good policy – it is part of protecting a bank’s reputation. If it becomes known, or even suspected, that a bank is profiting from illegal activity, even if “only” providing a conduit for the funds, the damage to reputation would be considerable – as it should be.
A bank would be able to explain small, infrequent laundering if it ever got picked up. Large and / or regular amounts may give the appearance of complicity. This is why the banks have to keep a lid on both the actual sze of the laundering but also the appearance of laundering.
21 July, 2007 at 18:09
Martin Davies
I am not disputing any of this all I am saying is that AML is in many respects a farce of an exercise, that is my argument. Most banks follow a set of prosaic activities with innocuous outcomes, which for what its worth don’t resolve the problem. Firstly to bring banks up to speed with AML requires regulators to publish approaches but in doing so, that makes an instruction manual reading style solution for those looking to extradite themselves from the system.
Lets put it this way, the penile code for money laundering only came into effect in Australia in 2003 (it was a revamped code). Of the few years that the code has been in place there have only been ten indictments with 5 convictions (FATF/OECD Statistical Reporting). Now one can argue the following, 1) There simply isn’t a problem of AML in Australia period 2) The banks aren’t anywhere close to catching it 3) The legal process for prosecution is either missing, broken or corrupt. Really, to have a couple AML indictments a year is far from a serious problem or perhaps a problem that is amplified or a system that is busted.
Now if AML were to be hand-in-hand with fraud, particularly as the two are often coupled together, I would say the numbers are way down and perhaps all Australian banks are failing in their duty to report this and the regulatory, perhaps the legal system underlining all of this is falling far short.
What I fair will happen is that these banks will carry on with their prosaic activities perhaps as you put it to keep their names clear. But what is that, is that morally accepting responsibility for fighting AML or walking the line of ethical agreement without care of outcome which is only one step away of being a farce.
Please understand while I don’t agree with this, I am putting this forward for academic debate on the numbers alone. Being part of the operational risk profession, I would like to see all banks take this a lot more seriously, but the numbers just aren’t showing this.
21 July, 2007 at 21:17
Andrew
Martin,
I would agree with your comments on the old regime. A rule based system just will not cut it. One of the things I have heard going through the new regime is that, under the old one, the money launderers would not be the ones that had difficulty in meeting the standards – they will be the ones that arrive with every t crossed and i dotted.
The advantage with the new rules is that they are supposed to be risk based – i.e. they will be different for every service offered and everyone that walks through the door. In practice this will be difficult to achieve – but I believe it to be a step in the right direction – and probably what banks should have been doing anyway.
We know it will never stop; but that is not an excuse for not trying.