March 17, 1997

Nations Worry About a Rise In On-Line Money-Laundering


Digital cash is being hyped as a high-tech improvement over credit cards and cash.

But in postings on the Internet, computer gurus are already discussing ways criminals might use the new technology to launder illegal profits. "It can be set up anywhere and [can] even be done anonymously," claims one posting on a discussion group called the Cypherpunks Archive.

As electronic-money products proliferate, concerns are mounting among regulators, who fear that digital cash could roll back decades of progress in the fight against money-laundering. Now, some of them are asking what can be done to track cyberspace's elusive transactions.

The Financial Action Task Force, a Paris-based group of 26 countries fighting money-laundering, warns in a new report that the "speed, security and anonymity" of new Internet payment systems could render obsolete existing techniques to track tainted money, which center on monitoring bank transactions. Private and government investigators say such systems, which can be used to move funds across borders, could become more appealing to criminals than smuggling currency.

The U.S. Treasury Department's Financial Crimes Enforcement Network and Rand Corp., a think tank, are so concerned that they have invited computer and banking experts to sessions this spring to determine how criminals might use "e-money" in money-laundering schemes.

Until now, "our primary focus has been on banks as the linchpin of any effective anti-money-laundering strategy," says Stanley E. Morris, director of the Treasury's financial crimes unit. "If technology permits anonymous transactions outside the regulated banking sector, our efforts to make money-laundering riskier and costlier may go out the door."

Even some digital-cash providers admit electronic money has risks. David Chaum, founder of Amsterdam-based DigiCash Inc., acknowledges that his company has already received suspicious requests from individuals who want to convert offshore bank accounts to anonymous digital money, or vice versa. But, he adds, "We have consistently turned such inquiries away."

Still, regulators say they aren't ready even to recommend any new rules. Few countries have settled on policies for regulating Internet commerce, and rules on money-laundering itself vary widely.

Currently, a handful of digital-cash providers have a few thousand customers in the U.S., but there are many more in Europe. E-money systems generally allow customers to store funds on computer-chip cards or on computers. The accounts can be set up with funds electronically deducted from bank accounts or charged to credit cards. In some cases, people can use cash to buy limited amounts of electronic money, stored on "smart" cards.

They can then transfer the e-money to merchants, banks or other individuals. For example, a customer who wants to buy clothing from a retailer may go to the retailer's World Wide Web page, click on a box for buying merchandise and insert a smart card into a reader attached to his computer. The money then will be transmitted to the merchant.

Regulators worry that criminals could use e-money to escape bank reporting laws. Some kinds of digital cash can bounce between multiple intermediaries before re-entering the banking system, making funds hard to trace. Because e-money is encrypted to prevent counterfeiting and theft, law-enforcement authorities can have difficulty reconstructing transactions. DigiCash, for example, says its encryption technology makes transactions so private that it can't track how customers spend their money. Using a method called "one-way privacy," the system only records the origin of money that comes in, never the path of money when it goes out.

Under the U.S. Bank Secrecy Act, banks are required to report suspicious account activity. Banks and other financial institutions must also report deposits and withdrawals above $10,000 in cash and keep records of certain smaller transactions.

However, it is unclear whether the law governs Internet payment systems, says the Treasury Department's Mr. Morris. The American Bankers Association wants e-money providers to at least be subject to the same laws and record-keeping requirements as financial institutions. "Bankers want to see some assurance that if we're told we have to do certain things that our other competitors do, too," says John Byrne, senior counsel at the trade group..

Mr. Morris says: "Our goal is to try to nudge the industry in a direction that does not mandate any new regulatory scheme." Regulators are in talks with industry leaders to come up with solutions that would likely provide less anonymity than most current systems.

Some providers say they already can keep track of their electronic cash. Citibank NA, a unit of Citicorp, and other banks developing their own e-money say they plan to keep detailed records. "Our system traces the transactions so that after the fact, information is available to detect counterfeiting and potential money laundering," says Sholom Rosen, Citibank's vice president of emerging technologies.

Other digital-cash providers insist that criminals can't abuse their systems, in part because most banks that transfer cash into digital money systems limit the amount to a few hundred dollars. One company, CyberCash Inc. of Reston, Va., says one of its main businesses is "micropayments," the transfer of a few cents or dollars to pay for downloading articles and photographs off the Internet. The money is then withdrawn from a pooled company bank account, subject to regular reporting requirements, says CyberCash general counsel Russell Stevenson.

But Kawika Daguio, an electronic-money specialist at the American Bankers Association, says sophisticated computer users could set up an automated system with dozens or hundreds of accounts or cards and move large amounts of money through a virtually untraceable maze.

Robert Caplehorn, general counsel of Mondex International Ltd., a London-based company that recently franchised its e-money computer-card technology to eight U.S. banks and corporations, questions whether criminals will go to such trouble. "At the end of the day, is it really going to be convenient for a criminal to have hundreds and hundreds of cards?" he asks. "He might as well have hundreds and hundreds of dollar bills."