"An effective [anti-money laundering] program requires sound risk management," a point which I wholeheartedly agree with, but we must also be cautious that in our pursuit of A&L compliance, we do not use such a heavy hand that we end up pushing currently monitored transactions underground into a shadowy world of illicit transactions.1
For thirteen years, Cheng Chui-ping ran a small restaurant and clothing store in New York's Chinatown.2 Her restaurant on 47 East Broadway was located "directly across the street from a branch of the Bank of China."3 Outwardly, Ping lived a simple life-"[d]uring lunch hours she would chop vegetables, wash dishes and wait on tables . . . . Occasionally she could be seen tottering down the street struggling with bales of clothes, dragging them into her general-merchandise store."4 Despite her plain appearance, Ping was one of the world's most notorious snakeheads-the head of a gang that specializes in trafficking Chinese people.5 But for many people, Ping is a saint-not a criminal. Over the course of her career, she helped smuggle thousands of immigrants into the United States-giving them a new start in a new country. Ping's restaurant also became a major competitor to the Bank of China-she used her connections in mainland China to send money from those she smuggled to their families back home.6 A woman who used Ping's services explained: "The Bank of China took three weeks, charged a bad foreign-exchange rate and delivered the cash in yuan. Sister Ping delivered the money in hours, charged less and paid in American dollars. It was a better service."7 According to Steven Wong, an anti-snakehead activist, "things became so bad that the [Bank of China] began offering color televisions and prizes to those who used them to transfer money."8 But people still preferred Ping's restaurant.
This story illustrates a basic truth about the money transfer business- many consumers, especially immigrants, opt to send money through institutions like Ping's restaurant rather than with banks or Western Unionstyle money transmitters.9 And for good reason. As Ping's restaurant illustrates, these businesses, known as "informal value transfer systems" (IVTS), often provide excellent service. IVTS tend to be cheaper, quicker, and provide greater anonymity than formal channels.10 But IVTS may also have a darker side-the anonymity they provide make them susceptible to abuse by criminals trying to hide drug money and other illicit funds.11 Since the 9/11 terrorist attacks, IVTS have received special attention12 because policy makers have come to believe that terrorists use IVTS to covertly move the funds that finance their activities around the globe.13
Crafting an appropriate response to IVTS is no simple matter. Too weak a response would give criminals carte blanche to exploit IVTS for illicit purposes. But burdensome regulatory regimes drive money services underground and tend to lead to the proliferation, rather than the reduction, of IVTS and other underground banking systems.14 Flight away from regulated channels is no small concern-the philosophy behind U.S. antimoney laundering (AML) laws is that financial institutions are in the best position to detect money laundering.15 To that end, policy makers charge private actors with implementing policies that deter money laundering, maintaining records that law enforcement can use to catch criminals, and reporting suspicious transactions to the authorities.16 Patronage of underground banking services undermines this scheme because these businesses rarely keep adequate records for the purposes of an investigation, and it leads to the commingling of legitimate and illegitimate funds, making criminally derived funds harder to track.17 Our current sanction-based regime seeks to elicit compliance with AML laws through the imposition of penalties.18 But this approach has serious deficiencies-simply put, detecting IVTS, much less collecting enough evidence to prosecute the individuals that committed the underlying crime that generated the funds, is extremely difficult. …