Dirty Laundry

20 August 2001
This article first appeared in Tornado Insider Magazine. Copyright 2001 Tornado Insider Group.

By Alan R. Katz

Picture the 1920s: organized crime rings in the US buy coin-operated Laundromats to provide the cover for their profits from liquor sales, gambling operations, and prostitution rings. Picture 2001: organized crime rings use Internet casinos and online banks to provide a cover for profits from drug sales, human and goods smuggling operations, and prostitution rings - that, at least, is the contention of a growing number of governments and international organizations.

Ill-gotten gains could, for example, be deposited via credit card or wire transfer in a player's account at an Internet casino in one of the Caribbean countries that offers little regulation. Those funds could be cashed out via a payment service through a correspondent bank to an account controlled by the depositor, but under a different name, and recorded as gambling gains - taxable, but legitimate. To make life even easier, some casinos, such as King's Casino in Antigua, accept cash deposits to accounts via registered mail.

Three characteristics of the Internet that aggravate "conventional" money laundering risks are: (1) ease of access through the Internet, (2) depersonalization of contact between the customer and the institution, and (3) rapidity of electronic transactions, according to the Financial Action Task Force (FATF) in its February 2001 report on money laundering. The FATF, established in 1989, brings together 29 countries, including most European countries, as well as the US and Japan among others.

But as yet there have been no major convictions in Europe of money laundering via Internet casinos and online banks. The FATF lists three cases that are currently being investigated, including $178 million that was laundered through a sports betting operation, but declined to provide further details. "We think there is a real and growing threat of money laundering via Internet banking and casinos, but none yet have reached court judgment," says Patrick Moulette, FATF executive secretary. "And the problem with casinos is that we haven't yet been able to regulate traditional casinos and now we have moved on to the online menace." While no accurate estimates exist for the total amount of money laundered each year, experts place the figure at several hundreds of billions of dollars per year.

Patrick Humphries, spokesman for the Financial Services Authority (FSA) in the UK says that online banks must be especially vigilant. "There may be some additional challenges about identifying customers," he says of Internet-based banks, but he adds that the FSA guidelines, expected to come into force in November, will impose the same "know your customer" and reporting guidelines on all UK banks. The idea behind the rules is to lessen the tendency among banks not to question large depositors for fear that they will take their business elsewhere. Those rules come after the FSA issued a report in March blasting 15 unnamed British banks for lax oversight of potential money laundering activities.

Fleur Strong of the UK's National Crime Intelligence Unit agrees that online banking heightens the risk of money laundering since more and more transactions are made without human intervention. "The whole rise of electronic money and money laundering go hand in hand," she says. Strong also notes that the global nature of money laundering - in which the funds often pass through four or five countries - makes policing problematic. "Jurisdiction is a major headache for us. For example, if someone in the UK uses an offshore casino and an offshore bank, where does the investigation take place?" she asks.

Neither is the US immune from money laundering. In an April column, US Senator Carl Levin wrote, "US banks, through the services they provide to high-risk foreign banks, become aiders and abettors, unwittingly, of laundering the proceeds from drug trafficking, financial fraud, tax evasion, and other illegal acts." These happen via correspondent accounts, in which US banks accept accounts from foreign banks that may have different or weaker regulation than their US counterparts. "Inattention and disinterest by US banks," Levin says, "in screening the foreign banks they take in as clients, have allowed rogue foreign banks and their criminal clients to carry on money laundering and other criminal activity in the United States." For example, a report compiled by Levin's staff cited the Swiss American Bank and Swiss American National Bank, both units in Antigua and Barbuda of the same holding bank, as funneling illegal Internet gambling proceeds through a correspondent US bank for mostly European customers. Detecting problems becomes even harder, however, when there is a series of correspondent accounts and the initial deposit may be made four or five banks and countries away from where the cash comes to rest.

As Internet gambling and banking become more popular, it will be harder to discern unusual cash flows from within the mass of money moving through banks and casinos. According to Jacob Hayler at Datamonitor, combined revenue from both in the US and Europe is predicted to grow from an estimated $6.7 billion in 2001 to $20.8 billion in 2005. Hayler adds that countries won't be able to stop their citizens from gambling online and that they should therefore legalize it and try to bring the operations onshore to reap the tax revenue and to try to control money laundering. "You can't stop people from gambling, so you may as well get the money from it," he says.

There are companies that are trying to give online and traditional banks the tools to detect money laundering even when there is no human oversight of a particular account or transfer. One of these is NetEconomy, the software arm of privately held EDR Group of the Netherlands. The company claims its ERASE software uses statistical algorithms to compare transaction patterns with a customer's previous patterns. If the deviation is large, an alarm is triggered for manual follow up by a bank representative, says Robin Bodaan, head of sales at EDR Group.

The company also meets with bank risk specialists to define fraud concerns and set up modules for those cases as well. ING is one of NetEconomy's large customers and the company has contracts with several other banks that have requested anonymity. NetEconomy is also in the process of negotiating with some online banks, Bodaan says, adding that the increased use of Internet banking has boosted bank interest in the company's software. As for major money laundering cases, Bodaan says he expects judgments in the near future. "We haven't seen any convictions yet, but I would expect to see one in a few months" given the sharp increase in attention given to the problem by national governments, police forces, and banks themselves, he says.

In June, the FATF released a new list of "offenders," or countries that turn a blind eye to money laundering, and has threatened counter-measures against countries that do not make an effort to more closely regulate their financial institutions, such as Russia, the Philippines, and Nauru. While some countries on the blacklist have changed their laws to better comply, a split is also developing over what exactly constitutes money laundering. France, for example, considers tax evasion to be money laundering, while other countries do not. In addition, the US' concern about the Organization for Economic Cooperation and Development's push against tax havens could impede a common framework on how to deal with both issues.

As Internet banking and gambling increase, it will be a battle for regulators and the companies themselves to try to provide the security assurances needed to attract customers without making reporting and risk rules so burdensome that clients decide instead to stick their money under their mattresses (a favorite in France, for example) or to place their bets only within a circle of friends.