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Electronic payment systems and money laundering
Material posted: Grinyaev SergeyPublication date: 08-09-2005

Today much is said about that in recent months has sharply reduced the number of civil liberties related to free circulation and information retrieval. Over the past few weeks under pressure from the U.S. in a number of countries hastily adjusted the legislation in any way associated with combating terrorism. According to the recent legislative initiatives of the White house, is equated to terror and crimes in the sphere of high technologies. To identify terrorists, the FBI actively employ different control systems, including electronic.

Today increasingly heard such names as "Carnivore" (control system of electronic communications and interception of communications), "Echelon" (the global system of electronic surveillance), etc.

The whole flow of information is the most important financial information. It is here that the real power is concentrated. Timely information about financial flows can be very valuable. Disregarding this significant piece of global information space for US would be simply impossible. Therefore, in 1998 the experts of the RAND study was conducted, the results of which were to form the basis for the creation of a new system of monitoring of financial flows in the systems of electronic payments.

Electronic payments is a recently emerged class of instruments-based payment systems that support electronic transfer of cash. The transfer of cash, in systems of this class can be implemented using global networks like Internet or through the physical movement of highly rated smart cards with the recorded value of cash sum of money. New technologies of payment intended mainly to replace cash in the retail trade, as well as in the transactions of the consumer level.

Effect the efficiency and ease with which they replace cash with electronic payments comes new challenges legal support of transactions. Existing technologies that are implemented in such systems, allow to combine the speed of transfer of cash inherent in the existing banking systems, wire transfer, and the anonymity of foreign currency deposits. In the result, there are problems that need to be resolved in the process of development of systems of this class to ensure the detection and prevention operations for money laundering and other illegal financial transactions.

As noted above, in 1998 the General staff of the specialized units of the Department of Commerce (a network for the investigation of financial crimes, FinCEN) in cooperation with experts of RAND Corporation conducted a series of studies to analyse and identify possible ways of using current electronic payment systems for transactions to launder illicit funds.

FinCEN's first step in moving the issue occurred in September 1995 when a workshop was held on this issue in the Legal Institute of the city of new York. Further, in may 1996, FinCEN, in conjunction with staff at the National defense University, conducted a large-scale exercise to simulate the actions associated with the detection of illegal operations on money laundering conducted using electronic payment systems. The exercise simulated a set of scenarios of use of electronic payment systems in illegal operations.

The electronic payment system was in the sphere of interest of the White house, the Congress of the United States and several other structures. In July 1997, the President presented a report on Global information infrastructure (GII), entitled "Framework for global electronic Commerce", part of which directly addressed the value of electronic payments.

In addition, the electronic payment system was the subject of hearings conducted in 1996 by the Subcommittee on domestic and international monetary policy, Committee on banking and financial services.

Electronic payment also received focused attention at the international level. Multilateral discussions and studies were undertaken by the working groups on counteraction to laundering of illicit funds (FATF) "big seven". In June 1996, we added a new recommendation No. 13 to the FATF Recommendations. She States that "...all countries should pay particular attention to the schemes of money laundering inherent in new or developing technologies and take measures, if needed, to prevent their use in such schemes...".

Classic credit or debit cards allow their holder to buy goods and services without using cash, but invariably involve intermediary financial institution or credit card provider. On the contrary, the main characteristic of many modern systems of electronic payments is associated with the elimination of regulatory third party (e.g. Bank) for the transfer of funds between two (or more) objects. The ability to transfer cash through information networks without the mediation decreases the costs for transactions. As a result, economic competitiveness and efficiency expand the space of network components that can significantly extend the range of users of such services, which in turn require new types of instruments of payment.

The global scale of such systems and the fact that the transfer of cash can take place at high speed and degree of anonymity that prevents the proper control of government structures is a major concern of governments.



1.2. Traditional laundering schemes

Money laundering is an illegal activity through which legalized criminal proceeds. This is a feature common to almost all action to create profit criminal associations. So the criminal code of the United States contains more than 100 articles, violations of which are crimes related to money laundering. These violations cover areas of activity from drug trafficking and financial fraud, to theft and espionage.

The majority of financial transactions peculiar to some trail clearly linking the amount to a specific person. Criminals avoid the use of traditional payment systems checks, credit cards, etc., precisely because of the presence of this trace. They prefer to use cash because it's anonymous. Physical cash, however, is of very considerable inconvenience. First of all is a large volume and mass. For example, 44 pounds of cocaine, standing $ 1 million, equivalent to 256 pounds of cash in the amount of $ 1 million. Cash more than six times the weight of the drugs. The existing payment systems and cash is a big problem for criminals. And much more they are for large international groups of organized crime. Legislative regulation and banking supervision have increased their costs and risks associated with money laundering.

The physical movement of large amounts of cash – the biggest problem for those engaged in money laundering. To better understand the potential for abuse of electronic payment systems for the purpose of money laundering, here is a brief explanation of how criminals "legalize" the cash through the traditional process of money laundering.

Placement, hierarchical representation and integration - the terms commonly used to describe the three stages through which legalized criminal proceeds.

Placement. Placement is the first stage in the process of money laundering. It was during the placement stage of physical currency introduced into the financial system, and illegal proceeds are most vulnerable to detection. When the amount of illegal money is successfully deposited in the financial institution, placement has occurred. The law established several types of transactions, which the Bank workers to inform law enforcement agencies. The criminal you want to hide their actions, so they need to circumvent the legitimate financial system, either to break the rules. Accordingly, officials who are watching observance of laws, working in cooperation with the financial sector, are in the unique position of contributing to the combat against money laundering at this stage.

A hierarchical view. The hierarchical representation describes the activities undertaken to obscure the mark left by the bill, paid "dirty" money. During the stage of hierarchical representation, the criminal can conduct a series of financial transactions to create the levels between funds and their illicit source. For example, the number of transfers from Bank to Bank would be a hierarchical view. Such actions can be so complicated that keep track of money becomes very difficult.

Integration. For this, the final stage in the laundering process, illicit funds are combined with monies from legitimate commercial activities as they enter into the economy. Thus, illegal means of acquiring legitimacy. The integration of illicit money into the legitimate economy it is very difficult to detect if an audit trail was not established throughout the stages of the hierarchical representation or placement.



Of the money laundering schemes can vary greatly in nature and complexity. They can involve any number of intermediaries and use of traditional and non-traditional payment systems. To a large extent, the possibility and nature of operations of money laundering is limited only by the creativity of the persons conducting them. For example, international drug traffickers can use many different methods of money laundering and schemes, each of which was created specifically to perform certain tasks and achieve certain goals.

Advanced computer technology and communication technology is now routinely used to increase the effectiveness and protection of drug-related acts of money laundering. The examples that follow below - base schema is intended to familiarize readers with a few simple methods to move illicit funds.


Figure 1. The movement of funds from the U.S. to a third country (first version)


Figure 2. The movement of funds from the U.S. to a third country (second version)


Example 1 (Fig. 1): the Movement of funds obtained illegally in the U.S. to a third country for use in the local economy.

1. Sale of drugs is carried out in the USA (cash is preferred form of payment for these transactions.).

2. Cash from one or multiple points of sale accumulates in the bandit den for processing.

3. The cash is transferred for shipment out of the country. To avoid attention from law enforcement or the Bank, the cash may be divided into amounts less than the minimum controlled amount (e.g. $ 10,000) and "blurred" (for this purpose, attracts a large number of individuals to make small-sum deposits) or structured (amounts are transferred to the portions below the Federal requirements for informing).

4. Funds are forwarded through the transfer of American sender to its foreign counterpart.

5. In a third country transfers are paid in national currency.


Example 2 (Fig. 2): the Movement of laundered money from the U.S. to a third country.

1. Money from the sale of drugs in the US are transferred in the payment order.

2. Payment orders are sent to a third country by Express mail.

3. American payment orders sold currency broker for the national currency of the country.



3.1. A brief overview of the technology

Currently exist and develop the system of electronic payments of several types. Meanwhile, today dominated by two generic types of systems: (1) systems based on smart cards that stores the amount of cash and (2) the payment system based on the Internet. Recent developments show that these two types of systems will remain dominant in the coming years.

At the present time there has been significant progress in standardization of systems of electronic payments. However, issues of financial cooperation (settlement), and related issues of liability between companies in different countries, are today, a significant obstacle to the promotion of payment systems of this type.

Some of the features of electronic payment systems, such as the possibility of transferring cash from person to person, on the condition of anonymity of the payer offering the services to the client with the properties of flexibility and ease of handling cash, along with expanded ability to conduct purchases on an almost global scale.

3.2. Four models of electronic payment systems

Following are the four main types of construction of systems of electronic payments:

1. Model based trading company acting as the Issuer of the cards (figure 3). In this model, the Issuer of the smart card and the seller of goods is one and the same company.

2. The model on the basis of the issuing Bank (figure 4). Trading company and card Issuer in this model, the various parties. Transactions are handled through the traditional financial system.

3. A model in which the Issuer is a non – banking company (figure 5). Users buy electronic cash from issuers using traditional money and spend the electronic cash in the companies-participants of the system. The Issuer subsequently pays electronic cash to the firm-seller

4. Peer-to-peer model (figure 6). The Bank or nonbank institution serves as a conduit between consumers. Point of contact between the traditional payments system and electronic cash is the initial purchase of electronic cash from the Issuer and payment of electronic cash from individuals or trading firms.

All four models allow you to easily add amount of cash or move them between cards by using various means.


3.3. The potential use of electronic payment systems for money laundering

A study conducted by experts at the RAND Corporation, focused on the search and study of the possibilities of electronic payment that can be used to implement the laundering of illicit funds. By their nature, system of electronic payments have the potential to solve one of the most serious problems for the shadow economy - the physical movement of large amounts of cash.

Globalization many existing systems of electronic payments enables the criminals to use national differences in security standards and oversight rules to conceal the movement of illicit funds.

The performed study has identified many features of transactions in the electronic payment systems that law enforcement must be examined closely. Among them - (1) waiver of mediation; (2) Bank or non-Bank entity as the card Issuer; (3) peer-to-peer transaction; (4) operating anonymity and (5) the limits of nomination and the date of expiration of the cards.

Each of these basic features are described in more detail below. On the one hand these basic features make electronic payments system attractive as a potential means to reduce the cost of transaction in the trade and contribute to increased economic efficiency, on the other - these features determine the vulnerabilities that can be exploited by criminals.

Refusal of mediation. Historically, law enforcement and regulators relied on the intermediation of banks and other regulated financial institutions to provide "interception points" through which funds must pass, and where it is possible to have a full account of their origin.

The rejection of mediation involves the transfer of funds between entities without the intermediate involvement of a third party, subject to governmental oversight (e.g., registration requirements through the Bank). If electronic payments systems allow the transfer of funds without intermediation in unlimited quantities, criminals can use this as an opportunity to avoid traditional methods of tracking the movement of funds.

The Bank and non-Bank institutions as a card Issuer. Banks and non-Bank institutions may be subject to different rules regarding their transactions with the electronic payment systems. This distinction already occurs in several countries where non-Bank institution card issuers of electronic payment systems is currently subject to a set of rules different from that for banks. A simple extension of the requirements generated previously for the traditional payment system, to a new non-Bank institution, the card Issuer can cause a number of complaints from clients about possible abuse.

However, the new system is built differently and constantly evolve so that the principle of "one size fits all" is not optimal.

Peer-to-peer transmission. Some electronic payment systems allow consumers to transfer value peer-to-peer (and thus, without an intermediary) the use of electronic "cash bags", phone, or Internet. This possibility is fraught with possible direct challenge to government oversight in the electronic payments systems. In the absence of information or evidence from other sources (e.g., physical monitoring), peer-to-peer transmission, unlikely, can be detected.

Operating anonymity. In some emerging electronic payment systems, the point of injection of funds into the system opaque and the identity of the object, transmitting them, it is difficult to determine. In fact, the anonymity of the payer (the identity of the parties initiating the transfer of cash to the electronic payment system) – the main characteristic of some proposed systems. When the transfer of cash into the system of electronic payments (e.g. through Internet or telephone network) operating anonymity would be an almost insuperable barrier to detect such operations. While solutions to this problem have been put forward, they raise issues regarding the confidentiality of private deposits.

The limits of nomination and the date of expiration of the cards. The creators of electronic payment systems are likely to limit the maximum amount that can be saved on the cards, thereby reducing the risk of fraud or other losses. As with credit cards, issuers of electronic payment systems also likely will establish the limits of dignity-based needs that are determined by the advertising and market factors. So recent testing of consumer electronic payment systems specify the likely limits consumer about 1,000 $ to 3,000 $. The system of electronic payments, between organizations are likely to have a much higher limit of nomination than those for individual customers, and will vary widely between firms.

Cards in the electronic payment system can be programmed to stop working after some number of transmissions.

The more an electronic payment system to imitate the currency, the greater the likelihood that records of transactions will be limited. So in some samples can be committed only by a limited number of most recent transactions.

Some examples on the use of electronic payment systems for money-laundering

Both the example are based on the use of vysokoperedelnyh smart cards.


3.4. Street sale of drugs

In this example (see figure 7) drugs are sold to users in exchange for disposable cards, face value, typically associated with a drug transaction of 20$, 50 $ or 100 $. These cards are collected by the drug dealer and sold through a shell company in the retail field. This company sends the electronic value cards from their terminals in the Bank. Firm receives some fee for the use of its capabilities.

As soon as the funds have entered into legal payment system, they move along the chain standard of the process, and introduced into the economy third country.


3.5. Two types of cash transfer in systems of electronic payments

In this example (see figure 8) funds received from the activities of drug trafficking and placed on a smart card can be transferred to at least two simple ways. Arguably the most predictable way of cash movement through the physical movement of highly rated cards containing the proceeds of drug trafficking. Because of their small size, these cards can be easily and safely hidden, and ultimately to be cashed out through re-Deposit, but in a foreign country.

The second route means beyond the reach of the powers of law enforcement may consist in the transfer of funds on the card on the phone. And cellular and conventional analog phones easily interact with different service that allows you to perform such operations.

Once funds enter the payment system, they are indistinguishable from funds derived from legitimate sources.


3.6. Remittances through system based on the Internet

In this example (see figure 9) with low nominal card value is passed to personal computers, which transmit this value over the Internet, using increasingly available anonymous services to hide the entry points for illicit funds. The recipient of the funds has the ability to unite doskonalenie payments and re-integration to the payment system.


3.7. Electronic money and the world wide web

The latest example of the illegal use of electronic payments (see figure 10) carried out under the banner of mercy, which serves only as a cover for receiving transfers in the form of donations. The funds, originally created as a charity, and honestly carrying out his mission, however, could act as one link of the chain of laundering criminal funds using electronic payment systems.

In such systems, the funds could be transferred from the electronic purses on PCs holders to the Bank account and then transferred from one financial institution to another, located in any place of the planet, the laws which are most favorable for investment of illegal funds into the real economy.



The participants in the study, regardless of their views on certain issues, agreed that government involvement is necessary. It is required to start a dialogue about how to provide appropriate regulation and organization of the enforcement actions needed to improve the efficiency of electronic payment systems both existing and under design. Today, the U.S. government, understanding the role and place of electronic payments in the budgeting process of world terrorist organizations, actively involved in the activities on prevention of the use of advanced technologies in the financial sector for financing a criminal Association.

Analysis of existing and promising technologies and technical features of the new class of systems - the first step to understanding the use of existing enforcement provisions, as well as a step towards the formation of new legislation. As you know, most of electronic payment are developed by commercial firms. The presence of competition in this area allows you to organize work involving the most advanced information technologies. In this regard, it is desirable that the government launched the dialogue with the private sector on measures to improve normative and legal base of electronic payment systems, including information security in such systems. The information obtained in the result of the study facilitated a thorough assessment of security threats, specific to the electronic payment systems.



What conclusions can be drawn after studying the materials of the RAND on the use of electronic payment systems for money laundering? First of all is that studies have shown the existence of a wide range of problems associated with accountability in systems of this kind, and associated with information security. Current law enforcement practices do not always effectively address the issues related to the prevention of the use of electronic payment systems for money laundering.

The wide cooperation and joint actions of the government and developers of electronic payment systems, and the governments of leading States to cut off the channels of legalization of illegal funds using electronic payment systems. International cooperation, practically, the only really effective way to block such flows.

Cooperation on standards, regulatory transparency, and active monitoring of possible exploitation of identified vulnerabilities in the interest of criminal groups is the key to successful protection of electronic payment abuse. In addition, the problem of international money laundering. Effective enforcement requires that national governments cooperated in the resolution of the basic rules of creation of systems of electronic payments and transactions with their use.

This research served as a kind of proving ground where prototypes of such international action within the framework of the mining policy of functioning of systems of electronic payments could be worked out. In the future, expanding the simulation to include international participants would allow for a deeper understanding of the challenges involved. In turn, the research highlighted the importance of harmonizing approaches to the monitoring of electronic payments systems. The danger that criminals will seek to exploit weaknesses in the instructions, wherever they appear suggests that governments need to coordinate the research and actions of coercion, aimed, rolling potential abuse.

While it is premature to talk about the formation of the draft comprehensive regulatory regime for electronic payment systems, expanded and more in-depth dialogue between companies CT, the government and the system developers will help shape the direction of such a regime. The authors also hope that an understanding of the issues raised in the survey will help promote public debate on the organization of reliable protection of the electronic payments system and in defining the necessary role for government in this fast-growing sector of the Global Information Infrastructure.

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