Cyberlaundering: Anonymous Digital Cash and Money Laundering

Cyberlaundering: Anonymous Digital Cash and Money Laundering
This article will explore the latest technique in money laundering: Cyberlaundering by means of anonymous digital cash. Part I is a brief race through laundering history. Part II discusses how anonymous Ecash may facilitate money laundering on the Intenet. Part iii examines the relationship between current money laundering law and cyberlaundering. Part IV addresses the underlying policy debate surrounding anonymous digital currency. Essentially, the balance between individual financial privacy rights and legitimate law enforcement interests. In conclusion, Part V raises a few unanswered societal questions and attempts to predict the future.

Although the author discusses this subject in a casual, rather than rigidly formal tone, money laundering is a serious issue which should not be taken lightly. As this article will show, fear of money laundering only serves to increase banking regulations which, in turn, affect everyone?s ability to conduct convenient, efficient and relatively private financial transactions.

Part I Humble Beginnings

In the beginning, laundering money was a physical effort. The art of concealing the existence, the illegal source, or illegal application of income, and then disguising that income to make it appear legitimate 1 required that the launderer have the means to physically transport the hard cash.2 The trick was, and still is, to avoid attracting unwanted attention, thus alerting the Internal Revenue Service (irs) and other government agencies 3 involved in searching out ill-gotten gains.4

In what could be described as the "lo-tech" world of money laundering, the process of cleaning "dirty money" was limited by the creative ability to manipulate the physical world. Other than flying cash out of one country and depositing it in a foreign bank with less stringent banking laws,5 bribing a bank teller, or discretely purchasing real or personal property, the classic approach was for a "smurf"6 to deposit cash at a bank. Essentially, platoons of couriers assaulted the lobbies of banks throughout the United States with deposits under the $10,000 reporting limit as required under the Bank Secrecy Act.7 The result was the formation of a serious loophole under the Bank Secrecy Act, allowing couriers almost limitless variables in depositing dirty money such as the number of banks, the number of branch offices, the number of teller stations at one branch office, the number of instruments purchased, the number of accounts at each bank, and the number of persons depositing the money.

In 1986, the Money Laundering Control Act (the Act)8 attempted to close the loopholes in the prior law that allowed for the structuring of transactions to flourish.9 In criminalizing the structuring of transactions to avoid reporting requirements, Congress attempted to "hit criminals right where they bruise: in the pocketbook."10 Under the Act, the filing of a currency transaction report (ctr)11 is required even if a bank employee "has knowledge" of any attempted structuring.12 Thus, it appeared as if the ability to launder the profits from illegal activity would be severely hampered.

As the physical world of money laundering began to erode, the tendency to use electronic transfers to avoid detection gained a loyal following. Electronic transfers of funds are known as wire transfers.13 Wire transfer systems allow criminal organizations, as well as legitimate businesses and individual banking customers, to enjoy a swift and nearly risk free conduit for moving money between countries.14 Considering that an estimated 700,000 wire transfers occur daily in the United States, moving well over $2 trillion, illicit wire transfers are easily hidden.15 Federal agencies estimate that as much as $300 billion is laundered annually, worldwide.16 As the mountain of stored, computerized information regarding these transfers reaches for the virtual stars above, the ability to successfully launder increases as the workload of investigators increases.17

Although wire transfers currently provide only limited information regarding the parties involved,18 the growing trend is for greater detail to be recorded.19 If the privacy of wire transfers is compromised, due to burdensomely detailed record keeping regulations,20 electronic surveillance of transfers, or other potentially invasionary tactics,21 then the leap from the physical to the virtual world will be nearly complete. If laundering is to survive it must expand its approach, entering the world of cyberspace.

While change is often a frighteningly awkward experience, for an enterprising criminal operation, that wishes to remain open for business, it is a necessity. As the above mentioned race through laundering history demonstrates, creativity, and not necessarily greed, has been the launderer?s salvation. The recent explosion of Internet access,22 may be the new type of detergent which allows for cleaner laundry.

Part II Enter, Anonymous Ecash

In the virtual universe of cyberspace the demand for efficient consumer transactions has lead to the establishment of electronic cash.23 Electronic cash, or digital money, is an electronic replacement for cash.24 Digital cash has been defined as a series of numbers that have an intrinsic value in some form of currency.25 Using digital cash , actual assets are transferred through digital communications in the form of individually identified representations of bills and coins ? similar to serial numbers on hard currency.27 While the ultimate goal of each vendor is to facilitate transactional efficiency, bolster purchasing power on the Internet, and, of course, earn substantial profit in a new area of commerce, each vendor plays by slightly different rules.28 Although the intricacies of individual vendors are quite fascinating, for the purpose of this article, it is fair to say that all but one vendor have one trait in common: lack of anonymity.

The exception to the general rule of lack of anonymity is DigiCash.29 Digicash is an Amsterdam-based company created by David Chaum,30 a well respected cryptologist. DigiCash?s contribution to Internet commerce is an online payment product called "ecash."31 According to DigiCash, electronic cash by DigiCash "combines computerized convenience with security and privacy that improve on paper cash."32 Ecash is designed for secure payments from any personal computer to any other workstation, over e-mail or Internet.33 In providing security and privacy for its customers, DigiCash uses public key digital blind signature techniques.34 Ecash, unlike even paper cash, is unconditionally untraceable. The "blinding" carried out by the user?s own device makes it impossible for anyone to link payment to payer. But users can prove unequivocally that they did or did not make a particular payment, without revealing anything more.35 While ecash?s security technology may be among the best in the business as of this writing, the focus of this article is upon one aspect of DigiCash that is of particular interest to money launderers and law enforcement: Anonymity.

Part iii The Money Laundering Control Act and Anonymous Laundering

This section examines how the Amendments to the Bank Secrecy Act of 1970, commonly referred to as the Money Laundering Control Act of 1986,36 apply to cyberspace and cyberlaundering. Without delving into the actual techniques involved in using public keys, blind signatures or any other encryption or decryption device, the best way to explain how anonymous digital cash could benefit money launderers? is by example. The following example will be used to demonstrate the law?s application.

Doug Drug Dealer is the ceo of an ongoing narcotics corporation. Doug has rooms filled with hard currency which is the profits from his illegal enterprise. This currency needs to enter into the legitimate, mainstream economy so that Doug can either purchase needed supplies and employees, purchase real or personal property or even draw interest on these ill-gotten gains. Of course, this could be accomplished without a bank account, but efficiency demands legality. Anyhow, Doug employs Linda Launderer to wash this dirty money. Linda hires couriers ("smurfs") to deposit funds under different names in amounts between $7500 and $8500 at branches of every bank in certain cities. This operation is repeated twice a week for as long as is required. In the meantime, Linda Launderer has been transferring these same funds from each branch, making withdrawals only once a week, and depositing the money with Internet banks that accept ecash. To be safe, Linda has these transfers limited to a maximum of $8200 each. Once the hard currency has been converted into digital ecash, the illegally earned money has become virtually untraceable; anonymous. Doug Drug Dealer now has access to legitimate electronic cash.

Doug Drug Dealer is, of course, likely to be found guilty of more than just participating in a money laundering scheme. However, how the law applies to Linda Launderer and the Internet banks is more confusing. The purpose of the 1986 Act was to specifically criminalize the structuring of transactions so as to avoid the reporting requirements.37 Linda and her army of couriers are almost certainly violating structuring regulations by depositing small amounts in regular bank accounts.38 The problem is how to apply current money laundering law to cyberlaundering.

In the scenario above, Linda Launderer transfers sums of money less than $10,000 from non-Internet bank accounts to Internet-based ecash accounts. If the Internet bank is fdic insured,39 as Mark Twain Bank40 then federal depository regulations may apply. However, the cyberbank will not automatically be required to file a ctr regarding these transactions as all are under the $10,000 filing requirement. Nevertheless, if any employee of the Internet bank has even a suspicion of structuring,41 a ctr may be filed.42 As in the tangible banking world, the information contained on a ctr is only as insightful as the information presented by the bank conducting the prior transaction.43 In essence, each record in the chain of transfers is only as strong as the previous recordation.

The catch is that Linda Launderer?s transfer was deposited into an ecash account. According to one cyberbank which currently accepts ecash,44 ecash accounts are not fdic insured.45 A lack of federal insurance protection is understandable for the reason that digital money is currently created by private vendors, rather than the Federal Reserve.46 Thus, digital cash does not enter into the marketplace of hard currency thereby affecting monetary supply or policy, yet.

Since Linda Launderer?s transfer was deposited into a non-fdic insured, and thus, presumably non-federally regulated account, then there should be no mandatory compliance with the filing regulations contained within the Money Laundering Control Act of 1986. If these assumptions prove correct, whether digital money is anonymous or not will be of less relevance to money launderers and law enforcement. If certain cyberbanks, or even specific non-fdic currency accounts within a cyberbank are able to operate outside the reach of current federal regulations, laundering on the Web may become one of the most rapidly expanding growth industries. It should be remembered that a criminal organization desires to clean its dirty money, not necessarily protect their deposits from institutional banking failures.

Once the ecash account has been established, digital funds can be accessed from any computer that is properly connected to the Intenet. A truly creative, if not paranoid, launderer could access funds via telnet.47 Telnet is a basic command that involves the protocol for connecting to another computer on the Internet.48 Thus, Linda Launderer could transfer illegally earned funds from her laptop on the Pacific Island of Vanuatu, telneting to her account leased from any unknowing Internet Service Provider49 in the United States and have her leased Internet account actually call the bank to transfer the funds, thus concealing her true identity. This would, of course, leave an even longer trail for law enforcement to follow. Anyhow, ecash, being completely anonymous, allows the account holder total privacy to make Internet transactions. Thus, the bank holding the digital cash, as well as any seller which accepts ecash, has virtually no means of identifying the purchaser. Therefore, the combination of anonymous ecash and the availability of telnet may give a launderer enough of a head start to evade law enforcement, for the moment.

In the world of earth and soil, money can be laundered by the purchase of real and personal property. However, any cash transaction over $10,000 is subject to a transaction filing requirement.50 Real estate agents and automobile dealers, to name a few, are prime targets for the deposit of large sums of cash. In fact, such agents and dealers have been indicted for allowing drug money to be used to purchase expensive property.51

On the Internet, anonymous ecash would allow for anonymous purchases of real and personal property. This fact yields at least two separate, but interrelated problems. First, the launderer or drug dealer will be able to discretely use illegally obtained profits to legitimately purchase property. However, currently, the opportunity to spend thousands of dollars of digital money, or ecash for that matter, on the Internet is virtually nonexistent.52 Second, the temptation for automobile and real property dealers to become players in the game for anonymous ecash seems overwhelming. If a seller or dealer understands that it can not possibly trace who spent ecash at its establishment, the fear of becoming involved with dirty money is drastically reduced.53 Under current law, a seller of property must file a ctr for any cash transaction over $10,000.54 If the purchaser?s identity is anonymous, and even the bank can not trace the spent ecash, the force of the Money Laundering Control Act of 1986 is withered into mere words on a page. Of course, Congress could attempt to legislate in this new area of commerce.

Obviously, transferring hard currency to ecash and then spending the ecash is an appealing opportunity to potential launderers?. What if the ecash is then transferred back to a regular hard currency account? This may seem a foolish act as the entire purpose is to reap the benefits of anonymous ecash. However, presently, there are no opportunities to purchase automobiles or real property by the exclusive use of anonymous ecash. Thus, the desire to convert private and untraceable ecash into a more functional means of purchasing is understandable.

Whether a regular, non-Internet currency account already exists or must be created to deposit the transferred ecash into may be irrelevant. Filing a ctr would be a legal necessity if the transfer amount is over the $10,000 reporting limit, as the transfer will deposit hard currency in a tangible, institutionalized, and regulated bank account. A transfer from completely anonymous ecash to hard currency might alert law enforcement as to the existence of the ecash account. While this alone would not track down laundered money, it might put a suspicious agent on notice.

In summary, Linda Launderer has knowingly structured financial transactions so as to avoid reporting requirements. Under current law she is in violation of The Money Laundering Control Act of 1986. However, if the cyberbanks in which she has ecash deposits are outside the reach of current banking regulations, these banks have no duty to file any currency transaction reports. Nevertheless, assuming that cyberbanks which accept anonymous ecash are somehow subject to the same laws and regulations which financial institutions in the tangible world are, Linda must first be caught before she can be found guilty. This is where anonymous ecash may save Linda from fines and jail time.55 Even if cyberbanks are required to file transactional reports pertaining to ecash, the reports will be virtually useless, as the banks have no knowledge as to which funds are Linda?s. Thus, Linda, our overly creative launderer, and Doug, our devious drug dealer, may enjoy the benefits of completely anonymous money laundering. That is, unless Congress decides to attempt legislation in the area of digital money and virtual banking, or FinCen is somehow granted the constitutional authority to secretly monitor all cyberbanking transactions, despite its lack of accountability to the general population.

Part IV The Struggle For Privacy

To be or not to be? anonymous digital cash! That is the question! The battle that emerges is between the right to privacy by means of anonymous digital cash verses the desire of law enforcement to ferret out crime. The fact of complete anonymity guarantees that some money laundering will be easier to pull off. On the other hand, the lack of anonymity means that every move made on the Internet will be traceable. Thus, whether money laundering becomes rampant under the guise of anonymous ecash may be one of the first tests of the practical aspects of DigiCash?s future. Any discussion of privacy rights would be woefully incomplete without mentioning the famous privacy article published by Samuel Warren and Louis Brandeis in 1890.56 This article, barely a century after the Constitutional Convention, professed that the "right to be let alone"57 was of the utmost importance. Almost two hundred years after the Constitution was initially ratified, the Supreme Court defined the scope of privacy58 for an individual?s financial information in two landmark decisions.59

In California Bankers Association v. Schultz, the Court held that bank record keeping requirements do not violate the Fourth Amendment right to privacy and do not amount to an illegal search and seizure.60 In United States v. Miller, the Court held that a criminal defendant had no Fourth Amendment right to protection of his bank records,61 and did not have a legitimate expectation of privacy regarding these papers.62

Concluding over two centuries of Constitutional erosion, it is apparent that an individual?s right to financial privacy is limited. The issue involving cyberspace is whether financial privacy rights are so limited that the federal government could monitor a digital cash user?s financial transactions in a detailed fashion. In effect, rendering completely anonymous digital cash completely pointless.

While the Supreme Court has sliced financial privacy rights on several, previously mentioned, occasions, Congress has attempted to restore financial and informational privacy rights to the individual. The Privacy Act of 1974,63 The Right to Financial Privacy Act of 1982,64 and The Electronic Communications Privacy Act of 198665 are currently the three best hopes for individual financial privacy.

First, The Privacy Act of 1974 regulates the practices of federal agencies regarding personal information.66 With certain exceptions,67 no federal agency may disclose any record contained in its system to any other person or agency without the written request or consent of the individual.68

Next, The Right to Financial Privacy Act of 1982 ("rfpa") attempted to further protect financial records.69 Under rfpa, in order to obtain a customer?s financial records from a financial institution, the federal government must serve a subpoena on the customer before or concurrently with service on the bank.70 The government must show that the records are related to a "legitimate law enforcement inquiry,"71 and notify the customer that it can take steps to block the bank?s disclosure of the records.72

Finally, The Electronic Communications Privacy Act of 1986 ("ecpa") attempts to protect the individual against the unauthorized interception of electronic communications.73 Title I focuses on the interception of wire, oral and electronic communications.74 Title II prohibits an electronic communications service provider from knowingly divulging the contents of a communication while in electronic storage.75

Applying current law to the Internet, the result is inadequate protection of individual financial privacy. The combination of The Privacy Act and rfpa prevent the government from groundless searches of individual financial records. However, the standard required for a search is only that there exist some evidence that the records are related to a "legitimate law enforcement inquiry."76 Due to this relaxed standard, individual financial privacy may be violated without any probable cause.77 A "legitimate law enforcement inquiry" is clearly an easier requirement to meet than a Fourth Amendment probable cause standard.

Expanding into cyberspace, if the Internet falls under the protection of the ecpa, as it is an electronic communication, then individual financial privacy in cyberspace is afforded as little protection as financial privacy in the tangible world. Essentially, the government need only claim that it requires access to financial records due to a "legitimate law enforcement inquiry."

Taking one step further, the application of current financial privacy laws to DigiCash?s Ecash may be the eulogy for completely anonymous digital cash. If the government believes that ecash is overflowing with money launderers, a "legitimate law enforcement inquiry" into the situation would likely allow access to ecash account records. Since even the bank can not trace ecash to a user, pressure would be placed on various agencies to solve the problem.

First, the Federal Reserve would likely announce that all cyberbanks accepting anonymous ecash conform with fdic regulations. Thus, these banks would be subject to federal scrutiny and pressured into insuring anonymous ecash deposits. Since insuring anonymous ecash might prove unprofitable, it is probable that many timid cyberbanks will succumb to federal intimidation and abandon anonymous ecash altogether.

Second, cyberbanks could be convinced to implement special "investigatory software" into their computer systems so as to flag suspicious ecash accounts. While the technical aspects of such a system are beyond the scope of this article, it is fair to say that if such programming is both possible and practical, then no ecash account would be safe from the "legitimate law enforcement inquiring" software.

Finally, if ecash accounts become subject to greater scrutiny, the irs and FinCen will capitalize on the additional information being unearthed. Since there is no requirement of probable cause to search an individual?s financial account, the irs and FinCen could use the preliminary information obtained from the "legitimate law enforcement inquiry" so as to have sufficient facts to establish probable cause, enabling a full scale search and seizure of an individual?s financial records.

Part V Conclusion

Above, the sky is a swirling mixture of pale blue and chalky white. Waves of liquid life endlessly wash ashore, greeting the soft warm sand. Palm trees gracefully sway in a quiet dance with the wind. Amidst this tranquil bliss, Linda Launderer sits on the beach with her laptop computer "jacked-in" to the Internet. Unlike the AT&T commercial which portrays an individual faxing messages from a sunny beach to a business associate in a cold northern state, Linda is simply transferring funds into anonymous ecash accounts so as to conceal the illegally obtained profits of her employer, Doug Drug Dealer. Hence, Linda is laundering money over the Internet while sipping a Margarita.

If anonymous digital cash becomes a practical reality, the scenario of a far away beach, a portable "laundering laptop" and one creative launderer may be more fact than fantasy. The truth is that technology has created the means and ability to launder money by use of completely untraceable digital currency. While current money laundering laws apply to the fledgling art of cyberlaundering, the actual effect of these laws may be limited.

Structuring of transactions so as to avoid currency reporting requirements becomes less risky if the funds used to structure are virtually untraceable. In addition, the filing of currency transaction reports may be pointless if the money can not be traced into a specific account. However, the actual requirement that a transaction report be filed may be nonexistent if cyberbanks which accept ecash deposit accounts do not fall under current federal or state regulation of financial institutions.

For these reasons, the federal government is justifiedly worried that the Internet may become a launderer?s paradise. Nevertheless, should completely anonymous digital cash be prohibited or secretly monitored solely for the reason that it may facilitate some illegal activities? Such action would be one additional nail in the coffin of privacy rights. Since the business of collecting and then selling information on individuals is becoming common, shouldn?t an individual who desires some protection from prying eyes have the right to prevent his or her financial history from becoming a mere commodity for sale to the highest bidder?

The result may be a compromise between federal agencies that wish to have access to all financial records and the individual desire for some reasonable level of financial privacy.78 Since it has been determined that there is no legitimate expectation of complete privacy in financial records held at a financial institution,79 and that the production of such records is not self-incriminating in violation of the Fifth Amendment,80 then allowing for anonymous digital cash transactions is not as threatening as once believed. In effect, it may be more difficult to trace criminal activity which uses anonymous currency. However, if sufficient cause exists,81 the government clearly has the right to compel an individual and his or her banking establishment to produce all relevant financial records upon court order. In essence, forcing the ecash account holder to disclose its identity by revealing its "blinding" factors.82 The result being that the privileged right to privacy regarding digital currency carries a price: responsibility. If such liberty is misused, then it should be taken away from that specific violator, rather than confiscated prior to its misuse.

Therefore, prohibiting or secretly monitoring ecash transactions on the grounds that such transactions are more difficult to trace is not sufficient justification for invasionary tactics aimed at further limiting financial privacy. Fear of the unknown is not an adequate reason to quash a potential privacy restoring means of conducting financial transactions.

Cyberlaundering: Anonymous Digital Cash and Money Laundering 9.8 of 10 on the basis of 1493 Review.