In the United States and around the world, law enforcement continues to struggle with the many low-tech but highly effective ways criminals launder money and finance terrorism. Over the last several years, the INCSR Volume II has brought attention to some of these methods and has chronicled progress in developing countermeasures. Two prominent examples are bulk cash smuggling and trade-based money laundering. Unfortunately, while fighting the twin threats of money laundering and terrorist financing, we are also witnessing a plethora of new, high-tech value transfer systems that can be abused. Some of the most innovative are electronic payment products. FATF calls them “new payment methods” or NPMs. They are also sometimes called “e-money” or “digital cash.” Examples include Internet payment services, prepaid calling and credit cards, digital precious metals, electronic purses, and mobile payments or “m-payments.” Driven by a remarkable convergence of the financial and telecommunications sectors, the rapid global growth of m-payments demands particular attention. M-payments can take many forms but are commonly point of sale payments made through a mobile device such as a cellular phone, a smart phone, or a personal digital assistant (PDA).
Worldwide, there are fewer than one billion bank accounts, but approximately three billion cell phones. In developing countries and often cash based societies in South Asia, Latin America, and Africa, mobile communications proliferate, leapfrogging old landline technology. At the same time, there is a growing worldwide trend away from paper and towards electronic payments. It is only logical that the startling advances in communications are followed by innovations in m-payments. There are already indications that money launderers and those that finance terrorism will avail themselves of the new m-payment systems. Responsible jurisdictions must find a balance between the expediency of m-payments, particularly in the developing world, and the need to guard against abuse.
According to the International Monetary Fund, Africa is enjoying its best period of economic expansion since the era of independence. In efforts to sustain growth, many donor governments and nongovernmental organizations agree that promoting financial services in Africa, where only an estimated 20 percent of families have bank accounts, should be encouraged. Ethiopia, Uganda, and Tanzania have less than one bank branch per 100,000 people. As a result, millions of Africans, primarily in rural areas, store money at home or keep savings in the form of cattle or gold. High inflation, currency devaluations, and scarce resources mean many turn to purchases of high value goods to retain the value of their money. As a result of these and other conditions, many Africans use informal savings clubs or underground financial systems. The rapid spread of cell phones may be a major contributor to developing much-needed access to financial services. South Africa, Congo, and Kenya, are examples of countries where financial services are now being offered via cell phones. Subscribers can pay bills, transfer money, receive credits, open accounts, and check balances. Workers can be paid by phone. Before leaving on a trip, a subscriber can deposit money and then withdraw funds at the other end, which has many advantages over carrying a significant amount of cash. Cell phone money and credit transfers allow communities to bypass both brick-and-mortar banks and ATMs. The new mobile technology potentially provides a “virtual ATM” to every bearer of a mobile phone.
The World Bank estimates that global remittances exceed one quarter of a trillion dollars annually. Increasingly, in many areas, m-payments provide a new option to expatriates and “guest workers” that wish to send part of their wages home to support their families. M-payment transfers are replacing the use of traditional banks and money service businesses that historically have charged high fees for small transfers. M-payments also provide fast, safe, efficient value transfer service, which will encourage some users to bypass the use of underground remittance systems such as hawala.
The following is an example of how money can be moved via cell phones:
Unfortunately, these same promising m-payment developments in Africa, Asia, and elsewhere will assuredly bring abuse of the m-payments systems as well. There are numerous money laundering and terrorist financing implications and many potential scenarios, but “digital value smurfing”—a term coined by the Asian Development Bank—represents a very clear threat. In traditional money laundering, “smurfs” or “runners” deposit or place small amounts of illicit or “dirty” money into financial institutions in ways that do not trigger financial transparency reporting requirements. Today, digital smurfs are able to bypass regulated banks and their financial reporting requirements and exchange dirty money for digital value in the form of stored value cards or mobile payment credits. Proceeds of crime or contributions to terrorist organizations can now be transferred via cell phones. With such transfers, criminals avoid the risk of physical cash movement, bypass financial transparency reporting requirements, and rapidly send digital value across a country or around the world. Further advantages for money launderers employing digital value smurfing instead of traditional money brokers include the quick conversion of cash to digital value, and the potential to integrate different digital value pools such as SMART cards, on-line accounts, and Internet payment clearing services.
Unfortunately, there is little financial intelligence on most forms of NPMs, including m-payments. Many law enforcement and intelligence agencies currently have little expertise in m-payment methodologies and technology. This gap in expertise is often coupled with a lack of codified authority to examine abuses in the communications systems. Moreover, most m-payment networks have security features that hinder law enforcement and intelligence services in their efforts to detect suspect transactions.
A lack of physical evidence further handicaps law enforcement investigations, as there may not be any cash or cash equivalents to monitor or seize. If value is transferred electronically and the conveyor or recipient phone is destroyed, it may be impossible to reconstruct or determine the information that was on the phone. If both a mobile phone service and the funds used to facilitate m-payments are prepaid, the service provider may not fully identify its customers due to the absence of credit risk. The problems could be compounded by the use of false identification to obtain subscriber status or to purchase or rent m-payment services. Using prepaid cellular phones could allow criminals to buy handsets incognito and use their minutes without leaving a trace of their calling records.
Some countries, such as the Philippines, embrace m-payment innovations. According to the Asian Development Bank, 35 percent of the people in the Philippines have cell phones, while 95 percent of the rest have access to cell phones via friends or family. Even traditionally inaccessible areas increasingly have cell phone coverage. As a result, m-payments are rapidly growing in popularity and are commonly used to pay bills, buy goods, and transfer cash. In addition, Philippine workers in approximately 18 countries, including the United States, can use their cell phones to send money home.
The Philippines is one of the few countries proactively taking steps to monitor and regulate m-payments. Service providers have worked closely with the Central Bank and the financial intelligence unit to comply with anti-money laundering laws and regulations. Carriers are regulated as money service businesses. Following “know-your-customer” policies, the authorized subscriber must register in person with the service provider and present a valid photo identification document to either put cash in or take cash out of the system. There are also limits on the size of the customer’s “electronic wallet.” For example, the maximum a subscriber can transfer at one time is 10,000 pesos (approximately $247), or a maximum of 40,000 pesos (approximately $990) a day and 100,000 pesos (approximately $2,475) per month. However, the regulations and limits do not eliminate the vulnerabilities that false identification and networks of “digital smurfs” pose.
The United States currently has few safeguards against abuse of m-payments. M-payment service providers in the United States are classified as money service businesses and, in theory, must register with the United States FIU, the Financial Crimes Enforcement Network (FinCEN). However, most money service businesses do not comply with registration requirements and there is little enforcement of the regulations.
The NPM issue is briefly mentioned in the 2007 National Money Laundering Strategy:
“FinCEN, in coordination with the federal banking regulators and the industry, will issue guidance and develop regulatory definitions and requirements under the BSA for stored value products and payment systems.” Unfortunately, there has been little progress in formulating and disseminating guidance and our traditional money laundering countermeasures are not adequate to address the looming threat posed by abuse of m-payments to today’s e-banking and cashless system.
In the digital age, it is increasingly difficult to “follow the money.” The FATF and numerous organizations and governments worldwide recognize the use of NPMs, including m-payments, as a growing threat. Much work and creative thinking will be required to maintain the advantages NPMs, including m-payments offer, while at the same time preventing exploitation and misuse by money launderers and terrorist financiers and simultaneously protecting user privacy and the integrity of the global financial systems.