Every few days, government bulletins raises speculation such as India banning cryptos, or that wallets must be registered with the state. If it’s seems confusing, that’s because long-term crypto strategies are not carefully understood by the sovereign regulatory agencies. However some areas are clearer than others.
“More shoreline…more shoreline than the whole coast of California.” Marty’s life is spared as he piqued Del’s interest in Lake Ozark. Del just popped four people in front of Marty as he was not happy with his money laundering service. And with that enigmatic line, Marty’s life is spared for the time being, although at the cost of completely upending his family and trading in the white picket fence of Chicago for the white trailer-park trash of Lake Ozark.
For the fictitious protagonist, Marty Byrde, in the Netflix series, Ozark, he and his family deals with the never-ending stream of belligerent ex-cons, cartel drop-ins, paranoid poppy farmers, corrupt politicians, troubling law enforcement and who knows what else.
Money laundering is not easy. Powerful clients with anger management issues are common. Then there are the feds: FinCEN, FBI, IRS, and the Fed. Nosy banking institutions with their diligent know-your-customer (KYC) rules. The USA is arguably the most stringent although others are quickly catching up. Meanwhile some countries, like China, have restrictive forex currency controls, especially on money leaving the country.
Money laundering is the illegal process of concealing the origins of money obtained illegally by passing it through a complex sequence of banking transfers or commercial transactions. The overall scheme of this process returns the “clean” money to the launderer in an obscure and indirect way. The IMF estimates that about 5% of the global GDP is laundered, or roughly $4T annually.
But why do we need anti-money laundering (AML) regulations and its piggybacking sister, counter-financing of terrorism (CFT) policies in the first place? What is wrong with cleaning money? Many reasons. Money laundering deprives society of legitimate revenue and places an unfair burden on those paying their fair share of taxes. The beneficiaries of money laundering are criminals, not just by definition, but in real practice. Drug dealers, human traffickers and other criminal enterprises.
Mind you that legitimate banking is not guiltless in their participation of laundering, and even though they are fined whenever they are caught, it’s small price to pay as the cost of doing business. Nevertheless, it is indisputable that money laundering can never be condone for its nefarious effect on society. A criminal enterprise which can gain an advantage from money laundering will soon take control of the community. Do you think they would just turn over a new leaf and suddenly become benevolent? Society must always tamper criminal activity and it’s financial bloodline by effectively managing money laundering.
How do you do Money Laundering
It’s not like it is in Ozark series which would never work at the scale of over $100M a year, although it is entertaining. Assuming that your money is clean it can be traced to a legitimate source. Just think about the money in your wallet. Your bank account is probably funded from your job, or investments. Maybe you get cash gifts for your birthday or the Lunar New Year and any significant amounts can be attributed to a family or friend. But if there is peculiar pattern of such gifts in an inordinate amount, it may be at risk for a red flagging if it touches the banking system.
The process of placing, through deposits or other means, unlawful cash proceeds into traditional financial institutions. At this stage cash derived from criminal activity is infused into the financial system. The placement makes the funds more liquid since by depositing cash into a bank account can be transfer and manipulated easier. When criminals are in physical possession of cash that can directly link them to predicate criminal conduct, they are at their most vulnerable. Such criminals need to place the cash into the financial system, usually through the use of bank accounts, in order to commence the laundering process.
This is the first stage in the washing cycle. Money laundering is a “cash-intensive” business, generating vast amounts of cash from illegal activities (for example, street dealing of drugs where payment takes the form of cash in small denominations). The monies are placed into the financial system or retail economy or are smuggled out of the country. The aims of the launderer are to remove the cash from the location of acquisition so as to avoid detection from the authorities and to then transform it into other asset forms; for example: travellers cheques, postal orders, etc.
Layering is the process of separating the proceeds of criminal activity from their origin through the use of many different techniques to layer the funds. These include using multiple banks and accounts, having professionals act as intermediaries and transacting through corporations and trusts, layers of complex financial transactions, such as converting cash into traveler’s checks, money orders, wire transfers, letters of credit, stocks, bonds, or purchasing valuable assets, such as art or jewelry. All these transactions are designed to disguise the audit trail and provide anonymity.
Layering usually involves a complex system of transactions designed to hide the source and ownership of the funds. Once cash has been successfully placed into the financial system, launderers can engage in an infinite number of complex transactions and transfers designed to disguise the audit trail and thus the source of the property and provide anonymity. One of the primary objectives of the layering stage is to confuse any criminal investigation and place as much distance as possible between the source of the ill-gotten gains and their present status and appearance.
Typically, layers are created by moving monies in and out of the offshore bank accounts of bearer share shell companies through electronic funds’ transfer (EFT). Given that there are over 500,000 wire transfers — representing in excess of $1 trillion — electronically circling the globe daily, most of which is legitimate, there isn’t enough information disclosed on any single wire transfer to know how clean or dirty the money is, therefore providing an excellent way for launderers to move their dirty money. Other forms used by launderers are complex dealings with stock, commodity and futures brokers. Given the sheer volume of daily transactions, and the high degree of anonymity available, the chances of transactions being traced is insignificant.
It is the stage at which laundered funds are reintroduced into the legitimate economy, appearing to have originated from a legitimate source. Integration is the final stage of the process, whereby criminally derived property that has been placed and layered is returned (integrated) to the legitimate economic and financial system and is assimilated with all other assets in the system. Integration of the “cleaned” money into the economy is accomplished by the launderer making it appear to have been legally earned. By this stage, it is exceedingly difficult to distinguish legal and illegal wealth.
Not all money laundering transactions go through this three-stage process. The three basic stages may occur as separate and distinct phases or may occur simultaneously or, more commonly, they may overlap. Transactions designed to launder funds can for example be effected in one or two stages, depending on the money laundering technique being used. How the basic steps are used depends on the available laundering mechanisms and requirements of the criminal organizations.
Crypto and Regulatory
Banks are part of the central monetary infrastructure and as such they are chartered and members of their local central banks upon which they are regulated. One of the mundane mandates of the Fed is to regulate, monitor, and manage its member banks. And that means keeping an eye on money laundering.
Money laundering and other illegal activities such as the drug trade got a head start using bitcoin but it did not last long after the FBI closed down the Silk Road Marketplace website and arrested the founder Ross Ulbricht. The feds made it clear that they were not going to allow cryptos to run amok by sentencing Ulbricht to a double life imprisonment plus an extra 40 years.
Libertarians protested the harsh sentence and cited that most of the money laundering volume was done by legitimate, traditional banking. Ulbricht’s appeal was denied and his request for a Trump presidential pardon has also failed. Moreover, bitcoin is a terrible way to launder money as the blockchain is an immutable audit trail. Firms like Chainalysis, are improving their tracing technologies and working closely with the government agencies. while criminals are using mixer technologies and privacy-focused cryptos such as Monero as each side tries to one-up each other.
The battles are crossing over sovereign borders as China laid the gauntlet in introducing of the digital yuan as an the most significant CDBC in an effort to usurp the king of currencies, the USD. But unless China can take over the lead as the dominant economy from China, there is little chance of that happening, especially since there is skepticism of China’s regulatory forex control and the global market’s reluctance to adopt the digital yuan. In fact, if any crypto product can challenge the USD, it will be some sort of EURO CBDC, and even that would still be highly unlikely.
Furthermore, the US has been on a regulatory wildfire by first announcing through the Office of the Comptroller of the Currency (OCC) that Federally regulated banks can use stablecoins to conduct payments and other activities, effectively complementing the SWIFT and FedWire which are used by banks for international and domestic transactions respectively. This is a brilliant defensive move to effectively take the wind out of the digital’s yuan’s sail and buy’s the US more time to figure its long-term strategy on cryptos.
And the US is not done yet as it is also pushing against self-hosted or non-custodial wallets. If that goes into effect, it means that legal wallets will be under some form of central intermediary which would certainly drive many crypto users to look for more friendlier, read libertarian, jurisdiction.
The global banking system is typically very conservative in nature but with the recent runup in BTC and ETH prices, the stakes are getting higher very quickly. Since money is one the most powerful and effective tools in the management of society, sovereignties will need to quickly start drawing the lines in the sand against its citizens while also carefully monitoring foreign advancements.
Money laundering is much more complicated than even what is portrayed in the Ozark series. Gone are the easy days of having a few simple cash heavy businesses, or spending a few hours at the casinos, which have heavier surveillance and technologies than any banks. But let’s be perfectly clear, AML, CFT, and KYC are here to stay. The key battlefront is always going to be the conversion between fiat and cryptos where the governments still hold the main advantage. Thus in large part, it’s really going to come down to how completely cryptos are going to take over from traditional finnace.
It’s game theory at its best. President Biden has appointed the tech-savvy Gary Gensler as the SEC Chair so there is no doubt that the US is taking crypto regulatory very seriously. It’s very difficult to gauge how things will turn out as there are many complex, moving pieces with institutions accelerating the pace of crypto incursion. One thing for sure is that 2021 will probably be the most significant year for crypto regulatory initiatives.
-Dedicated to Zhansaya, our AML Compliance Officer and so much more.