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« Where will the innovation come from? | Main | Geneva convention »

More on the cash menace

By davebirch posted Sep 21 2007 at 7:05 PM
[Dave Birch] There was a story in the Wall Street Journal today (no link because registration is required) about money laundering, talking about how Columbian drug dealers employ "smurfs" to go round depositing small amounts (a few thousand here, a few thousand there) of dollars from drug sales into banks in the U.S. so that their Mr. Bigs can then withdraw cash in pesos in Columbia. By coincidence, I happened to be at a World Online Gambling Law seminar today -- along with a couple of our clients -- and learned a lot about the topic. Not from a "how to" perspective, of course, but more from a "this is why we're imposing massive costs on the payments industry" point of view. One of the things that I learned was that the money-launderers best friend, the 500 euro note, is increasing in popularity as it strives to replace the $100 bill as the criminals' store-of-value of choice. Apparently a substantial fraction of the 500 euro notes that have been printed are no longer in circulation in the eurozone, so Latin American drug barons are making substantial interest-free loans to European central banks, just as they have made interest-free loans to Uncle Sam for years. I'm sure that crime, drug dealing, corruption and terrorism have all fallen significantly since the introduction of more stringent anti-money laundering (AML) legislation, although I don't have any figures to hand...

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My favourite new acronym is PEP: not the Personal Equity Plan familiar to the British middle classes but a Politically-Exposed Person. It turns out that banks have to screen for PEPs because such PEPs (eg, members of the European parliament and deposed African strongmen) after often involved in corruption. Anyway, the money laundering regulatory framework is very complicated. As a mere technologist, they look to me more like a backdoor full employment act for lawyers rather than a rational mechanism for reducing crime, but that's a rant that doesn't belong on this blog (I'm just jealous). One of the guys there did tell me that some piece of AML (I don't remember which) cost more than $20 million for banks to implement and in it's first two years in operation froze only half a million dollars in accounts. That doesn't seem like a particularly good return.

Why do I keep going on about AML regulation? Because it raises costs. And the rate of increase shows no sign of slowing. The cost of banks has risen by almost two-thirds in the last three years. In addition to raising the cost of banking, it also raises the cost of electronic payments. If it is indeed European Commission policy to get customers to use other instruments (ie, cards) instead of cash -- as was stated in the presentation about SEPA -- then surely one obvious step toward this goal would be to lower the cost of the alternatives. You should be able to pick up a prepaid card with a maximum balance of, say, 500 euros with no form filling, passport photocopying or anything else.

As an aside, forum friend Dominic Peachey of the Financial Services Authority was at the seminar and he made a typically experienced and perceptive observation about the extent to which regulation in the pre-paid space is evidence-based. Quite. I've noted this before. There are many beneits to society that follow from increased commerce, and both physical commerce and retail e-commerce would be stimulated significantly if prepaid products were more widely available. But if the cost and complexity of prepaid products are inflated by overly broad AML, the surely the net welfare is a long way negative.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]


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AML is a huge cost, and unlikely to do any direct good. The real money launderers are smarter, faster and better funded.

Even if ML itself is uneffected, there is an interesting question as to whether it makes corruption worse. One funny story I heard was from some unnamed victim who got into a tussle with FINCEN over something that was all a bit weird ... until he was told that it could all be resolved with a small contribution to the inspector's retirement fund.

Having lived in the Caribbean, I watched a fair slice of AML in progress. The net result of the USAs campaign was to move some ML to US shores and to dig in and fortify the corrupt elements in the Caribbean. Oh, and to create work and costs for everyone else, but society wasn't consulted on that point or any other.

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