Changing dynamics of financial crime in the digital era

Submitted by Anonymous on Mon, 01/02/2012 - 20:31 in

Financial crime, such as terrorism financing and money laundering, has gotten a lot of attention from regulators. In the US there is the Terrorist Finance Tracking Program, which was initiated after the 9/11 attacks. In Europe there has been a lot of discussion about the monitoring of transactions as the EU has been looking for alternatives for the US system. In America concerns have been raised in the last year over Bitcoin, a decentralized, peer-to-peer network that can be used for making anonymous payments. US Senator Schumer called Bitcoin ‘a system for online money laundering and drug financing’.

In general, we can distinguish between three types of financial crime: 

  1. Terrorism financing: obfuscating the source of the money used by terrorist organizations (money in, point A)
  2. Criminal money transfer: transferring money from point A to B (within the system), preferably untraceably 
  3. Money laundering: obfuscating the destination of the money laundered by criminal organizations (money out, point B)

There are a numerous ways in which financial crime may take place. The big question is how law enforcement agencies can monitor all of this.

First of all, the source (in) and the destination (out) of the money will eventually always lead back to cash/physical goods or a bank account. In addition, the money transfer is traditionally done via bank networks. This can be made more complex through multiple bank accounts and countries and via multiple middle-men, but is still within the banking system. Much of current regulation and anti-crime measures are based on this banking system and the entry/exit points. Even though it does not cover everything, it does cover a very large part of the worldwide financial transactions.

However, the rise of the internet and digitalization of the payment world has created endless new possibilities for criminals to perform terrorist financing and money laundering. Electronic money (e-money) systems are built on top of existing (banking) infrastructure, based on credit cards, direct debits and credit transfers. Online payment platforms (e-wallets) such as PayPal, Neteller and Alipay allow users to transfer funds online between accounts, outside the banking network. Although these platforms are required to conform to KYC (Know Your Customer) laws, these are usually much less thorough than the requirements for banks.

In addition, there are virtual currencies used in communities (Facebook credits), games (World of Warcraft) and on gambling websites or even general purpose virtual currencies such as Bitcoin or Goldmoney. These virtual currencies allow the exchanging of money almost completely anonymously. For example, one could purposely lose to an accomplice on Pokerstars or trade virtual items in Second Life. This can all be highly automated with the use of dummy accounts. Other advanced techniques include the exchange of user accounts with stored value, in place of exchanging money. In these cases the money does not move, the owner of the account simply changes.

With the ongoing digitalization these e-money systems become more important when trying to fight financial crime. As the online payment platforms and virtual currencies are online and digital, almost all information is stored somewhere. Thus it would seem an easy task to monitor such transactions. However, keeping an eye on everything requires a large degree of control over the online system itself, which is currently still a black box to regulators.

It can be a daunting task for governments to monitor financial crime. The current anti-crime measures are based on the traditional bank networks. However, with the increasing digitalization the money transfers are increasingly harder to follow. Therefore, it remains important to focus on the end points. No matter what, money will always have to enter and exit the system to be of use to the criminal.


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Submitted by Benjamin Franklin (not verified) on Tue, 01/03/2012 - 02:32.

He who sacrifices freedom for security deserves neither.

Submitted by Benjamin Franklin (not verified) on Tue, 01/03/2012 - 03:00.

If your not a criminal then you'll love Bitcoin
their are all-kinds of things you can buy with Bitcoin.
go see the list!

Submitted by Anonymous (not verified) on Tue, 01/03/2012 - 06:23.

I lot more crime and blood will be spill if there is no alternative to the current monetary system where the rich get richer and the rest gets poorer.

Submitted by Jon Matonis (not verified) on Wed, 01/04/2012 - 22:33.

A currency doesn't have a morality. Bitcoin doesn't do bad things. People do bad things. Unfortunately for the statist, I'm afraid that the era of using money for identity tracking is drawing to a close.

Submitted by Jeroen (not verified) on Wed, 01/04/2012 - 23:24.

Hi Folks,
Thank you for your comments. I appreciate your feedback.
I reckon the blog got your attention for the mentioning of Bitcoin, the quote from Schumer and the discussion on financial crime. First of all, I want to clarify that I am in favor of any innovation in the e-payments landscape and I support Bitcoin.
Motivation for writing this blog is the increased attention from governments to monitor financial crime, specifically terrorist financing and money laundering of criminals. Regulators are slowly starting to understand that there is much more there than just the banks to exchange funds. With the eye of how/where criminals could all exchange funds, I want to provide an overview of all the new possibilities in the modern digital world.
In this background, I believe we must be realistic about the numerous new possibilities for criminals. Unfortunately, a first response from politicians like Schumer would be to think these systems by itself are bad, which I definitely would not want to say. That a very small proportion of its use may not be legitimate does not make a whole system bad. I largely agree with your comments. I believe key to this is educating people what it is and how it works.

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