TPAtlanta has spent the last three months describing some of the less desirable aspects of the worldwide Transaction Processing Industry. We first described how terrorists can use Hawala to move money quietly, quickly, and surrepetiously. We then explored the many facets of money laundering including how money laundering can impact the economies of the world if left unchecked and what efforts are underway to curtail money laundering.

This month we will conclude our series on money laundering and non-electronic funds transfer mechanisms. We hope that these columns have proved useful and educational to you as Transaction Processing professionals by revealing to you how things can go wrong in the very industry where we all earn our livings.

By far the most important outcome of this new-fangled juridical homogeneity is the acceleration of the decline of off shore financial and banking centers and tax havens. Hopefully, the distinction between off-shore and on-shore will soon vanish. Of the Organization for Economic Cooperation and Development's Financial Action Task Force's "Name and Shame" original list of 19 "Black Holes" (poorly regulated territories, including Israel, Indonesia, and Russia) -- 11 have already substantially revamped their banking laws and financial regulators.

Coupled with the tightening of a variety of US, UK, and EU laws and the wider interpretation of money laundering to include political corruption, bribery, and embezzlement, these actions will ultimately make life a lot more difficult for venal politicians and major tax evaders.

The likes of Sani Abacha (the late President of Nigeria), Ferdinand Marcos (the late President of the Philippines), Vladimiro Montesinos (the former chief of the intelligence services of Peru, who is now standing trial), or Raul Salinas (the brother of Mexico's President) - would have found it impossible to loot their countries to the same disgraceful extent in today's financial environment. And Osama bin Laden himself would not have been able to wire funds so easily to US bank accounts from the Sudanese Al Shamal Bank, the "correspondent" of some 33 American banks.

So just what is the future of money laundering?

Unfortunately, crime is resilient and is fast adapting to these new realities. Organized crime is in the process of establishing an alternative banking system, only tangentially connected to the West's, in the fringes, and by proxy. Some of this transition is being accomplished by purchasing defunct banks or banking licenses in territories with lax regulation, cash economies, corrupt politicians, no tax collection, but reasonable infrastructure.

The countries of Eastern Europe - Yugoslavia (Montenegro and Serbia), Macedonia, Ukraine, Moldova, Belarus, and Albania, to mention a few - are natural targets. In some cases, organized crime is so all-pervasive and local politicians are so corrupt that the distinction between criminal and politician is spurious at best.

Gradually, money laundering rings move their operations to these new, accommodating territories. Their laundered funds are used to purchase assets in intentionally botched privatizations, real estate, existing businesses, and to finance trading operations. The wasteland that is Eastern Europe craves private capital and no questions are asked by both investor and recipient alike.

The next frontier is cyberspace. Internet banking, Internet gambling, day trading, foreign exchange cyber transactions, e-cash, e-commerce, and even fictitious invoicing of the launderer's genuine credit cards all hold the promise of the future to the money laundering criminal element. The Internet is the ideal vehicle for money launderers where transactions are sometimes impossible to track and to monitor. The Internet is ex-territorial, totally digital, and quite amenable to identity theft and fake identities .This nascent platform is still way too small to accommodate the enormous amounts of cash laundered daily. However, in five or ten years time, it may well be the location of choice for money launderers. This problem is likely to be exacerbated by the introduction of smart cards, electronic purses, and payment-enabled mobile phones.

In its "Report on Money Laundering Typologies" published in February 2001, the FATF was able to document concrete and suspected abuses of online banking, Internet casinos, and web-based financial services. The main conclusion of this report is that it is difficult to identify a customer and to get to know a customer in cyberspace. It is equally complicated for legal and justice officials to establish jurisdiction. These revelations should come as no surprise to us in the Transaction Processing Industry.

Many capable professionals - stockbrokers, lawyers, accountants, traders, insurance brokers, real estate agents, and sellers of high value items such as gold, diamonds, and art - are employed or co-opted by money laundering operations. Money launderers are likely to make increased use of global, around the clock, trading in foreign currencies and derivatives. These avenues provide instantaneous transfer of funds and virtually no audit trail.

The underlying securities involved are susceptible to market manipulation and fraud. Complex insurance policies with the "wrong" beneficiaries and the securitization of receivables, leasing contracts, mortgages, and low grade bonds are already used in money laundering schemes. In general, money laundering goes well with risk arbitraging financial instruments.

Trust-based, globe-spanning, money transfer systems that are based on authentication codes and generations of commercial relationships that are cemented in honor and blood are another wave of the future. The Hawala , the Chinese networks in Asia, the Black Market Peso Exchange (BMPE) in Latin America, and other evolving courier systems in Eastern Europe, mainly in Russia, Ukraine, and Albania, and in Western Europe, mainly in France and Spain, must all be reckoned with .

In conjunction with encrypted e-mail and web anonymizers, these networks are virtually impenetrable. As emigration increases, as more diasporas established, and as newer transport and telecommunications systems become even more ubiquitous, "ethnic banking" along the tradition of the Lombards and the Jews in medieval Europe may become the preferred venue of money laundering.

It behooves all of us in the Transaction Processing Industry to ensure that the products and services that we develop, market, and operate do not inadvertently lend themselves to help facilitate any aspect of money laundering.

As the Sergeant always said at a beginning of a shift on Hill Street Blues, "Hey, let's be careful out there!"

Finally, we at TPAtlanta would like to wish all of you a very Happy Holiday season and a most joyous New Year.

See you back here in 2007!

Calvin D. Johnson, Publisher
publisher@tpatlanta.com
Trans Atlantic Systems, Inc.