Pinning Down Online Money Laundering

By Piazza, Peter | Security Management, April 2006 | Go to article overview

Pinning Down Online Money Laundering


Piazza, Peter, Security Management


ARE CRIMINALS TAKING ADVANTAGE of online currency sites to launder money? Federal law enforcement agents worry that criminals are moving from "well-established techniques for integrating dirty money into the financial system to modern innovations that exploit global payment networks as well as the Internet."

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That's according to the Money Laundering Threat Assessment report from a federal working group that looked into the question. The working group was composed of law enforcement representatives from the United States Postal Service, the departments of Treasury, Justice, and Homeland Security, and the Board of Governors of the Federal Reserve System. Private sector financial experts were also part of the team.

The government report notes with some alarm the rise in popularity of online payment services that can accept funds in different ways, including cash and money orders. "The result is that some service providers pose a greater risk for money laundering," it says.

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With this type of transaction, a person wishing to send money from the United States to another country sends money (and a transaction fee) to an intermediate known as an exchange broker; this broker then trades the money to an online currency service provider for an "e-metal" such as gold or silver.

On the other end of the transaction, the value of the e-metal can be transferred instantly to the person overseas. This process avoids high fees associated with credit cards and can similarly bypass losses typically incurred from currency exchange.

Mark Herpel, who publishes the Gold Pages Directory, a resource guide to online currencies, says that the problem arises because these exchange agents are not now considered "financial institutions" in most countries. Consequently, they are excluded from some federal scrutiny--at least for now.

"I know that Australia recently required all exchange agents to register as financial agents and be government licensed," he says. "They all shut down or moved to other jurisdictions" as a result.

Herpel says that almost all of the major online currency players are located outside the United States and asks, "How would the U.S. impose [its] laws and regulations on these foreign companies?"

The task-force notes the same issue. "Most jurisdictions, including the U.S., have not established a licensing or regulatory framework for online payment systems with no physical presence in the jurisdiction," the report observes. That means they don't have to comply with established anti-money-laundering (AML) best practices.

"It's something that's of interest to the Secret Service," says Larry Johnson, special agent in charge, Criminal Investigative Division of the Secret Service. …

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