Money Laundering - Full

ARTICLE
When the information

revolution and the US
security state collide
............................................................................................................................................................................................................................................
Money laundering and the proliferation of
surveillance
............................................................................................................................................................................................................................................
PETER SHIELDS
Bowling Green State University, USA
............................................................................................................................................................................................................................................
Abstract
For law enforcement agencies, the information revolution
is eroding their capacity to regulate money laundering,
thereby undermining their ability to combat drug
trafcking and terrorism. They argue that without
enhanced surveillance powers, these problems will be
exacerbated. This emphasis on the control problems
precipitated by technology distorts our understanding of
the relationship between the information revolution and
money laundering, much of which has been fuelled not by
technology but by the dynamic interaction between
technology developments and ongoing changes in criminal
justice policy and the US state. An alternative narrative is
sketched: the escalation of the USs failed War on Drugs
has been a key factor driving both money laundering and
the proliferation of surveillance countermeasures. In this
context, information and communication technologies
have been key resources/sites of struggle for both money
launderers and law enforcement. The expansion of
surveillance powers will do little to curb illicit action.
Indeed, the expansion may escalate laundering as well as
erode citizens privacy. The article suggests that a similar
new media & society
Copyright 2005 SAGE Publications
London, Thousand Oaks, CA and New Delhi
Vol7(4):483512 [DOI: 10.1177/1461444805054110]
........................................................................................................................................................................................................................................................
483
dynamic may be operating in the US states New War on
Terrorism.
Key words
cyberpayment technologies drug trafcking information
revolution law enforcement money laundering
surveillance telecommunications networks terrorism
INTRODUCTION
In recent years, the widespread euphoria accompanying the ongoing
information revolution has been paralleled and tempered by growing
consternation that the revolution has also been a boon to the underworld.
Law enforcement agencies and regulatory authorities, as well as many
policymakers and journalists, have expressed alarm that developments in
information and communication technology (ICT) have provided terrorists,
drug trafckers, pedophiles and the like with unnerving new capacities and
opportunities to commit crimes and evade law enforcement. Dire
consequences are predicted for the political and social order if these
developments are not checked. The loss-of-control theme and sense of
impending crisis that pervades this discourse provides a powerful and
seductively straightforward justication for an array of regulatory proposals
and countermeasures which advocates believe will restore control, thereby
safeguarding social and political order. More often than not, these proposals
and countermeasures involve the ratcheting-up of electronic surveillance.
Invariably, this has precipitated heated debate as to their implications for
individual privacy and freedom of expression.
Focusing on the US context, this article examines a prolic strand of this
discourse, the argument that ICT developments are exacerbating greatly the
problem of money laundering. Widely perceived in policy circles as the sine
qua non of drug trafcking and terrorism, money laundering refers to the
process by which criminals or criminal organizations seek to disguise the
illicit nature of their proceeds by introducing them into the stream of
legitimate commerce and nance (US Department of Treasury, 2000: 2). A
US Ofce of Technology Assessment report asserts: Terrorists as well as drug
trafckers and other criminal organizations need to launder money. It takes
money for weapons and explosives. It takes money to get terrorists to their
targets, and then into hiding (1995: 129). Accordingly, following the
money trail is viewed by many law enforcement agencies and policymakers
as a critical strategy in combating drug trafcking and terrorism. Indeed,
since the attacks on the World Trade Center and the Pentagon, the Bush
administration has portrayed anti-money-laundering initiatives as crucial
weapons in its War on Terrorism. As the US Department of Treasury
(2002: 3) recently asserted: Following the terrorist attacks ... we also
New Media & Society 7(4)
484
recognize that the ght against money laundering is integral to the war
against terrorism, and that effective anti-money-laundering practices will
save innocent lives.
Initially, law enforcement agencies complained that their follow-the-
money strategy was being undercut by the electronic funds transfer systems
that were deployed throughout the nancial sector of the world economy,
beginning in the 1970s and 1980s. It is said that these high-speed, border-
spanning telecommunications networks have provided money launderers
with a swift, almost risk-free pipeline for moving and hiding vast amounts
of illicit funds. Attempting to stem this clandestine ow, law enforcement
agencies and regulatory authorities have responded by bolstering their ability
to monitor nancial transactions systematically.
More recently, alarm bells have been ringing over the fact that emerging
cyberpayment systems are threatening to aggravate greatly law
enforcements money laundering woes. Developed to address the perceived
demands of e-commerce, these systems involve new forms of currency, such
as stored value cards and network-based products (digital cash), which can
be used to make payments over the internet. It is said these applications are
likely to give rise to a whole new set of institutions and transactions, which
drug trafckers and terrorists can use to circumvent current law-
enforcement tracing methods. Law enforcement agencies are currently
grappling with the question of how to extend their surveillance powers to
these new forms of transactions.
Is the information revolution really eroding law enforcements ability to
regulate money laundering, thereby undermining the US states capacity to
effectively combat problems such as drug trafcking and terrorism? Will
more anti-money-laundering initiatives, including enhanced surveillance of
nancial transactions, increase the US states capacity to control these
problems?
This article addresses these questions. It begins by outlining the money-
laundering process and surveying the control problems that ICTs
purportedly pose for law enforcement agencies. The various surveillance-
intensive countermeasures ostensibly called forth by these control problems
are also summarized. In the second part of the article, it is argued that law
enforcements emphasis on the control problems precipitated by technology
developments greatly oversimplies and distorts our understanding of the
relationship between the information revolution and money laundering.
That is, this loss-of-control narrative obscures the fact that much of the
money-laundering problem has been fueled not by technology developments
per se, but by the dynamic interaction between these technological
developments and ongoing developments in criminal justice policy and
associated changes in the US state. In so doing, the narrative masks the fact
that the US state has contributed to some of the very problems (e.g. drug
Shields: When the information revolution and the US security state collide
485
trafcking) that anti-money-laundering initiatives are supposed to address.
An alternative narrative is sketched, one which places the US state at the
center of analysis.
1
It is argued that the escalation of the US states failed
War on Drugs has been a key factor driving both the money-laundering
problem and the proliferation of surveillance countermeasures in the last
decade or so. Within this context, ICTs have been key resources and sites of
struggle for both money launderers and law enforcement. In sharp contrast
to the loss-of-control narrative, this alternative narrative claims that the
expansion of law enforcements surveillance powers will do little to curb
money-laundering practices or the illicit drug trade. Indeed, the
consequences of this expansion include the escalation of the money-
laundering problem and the steady erosion of citizens civil liberties. The
article concludes by suggesting that a similar dynamic may be operating in
the US states War on Terrorism.
MONEY LAUNDERING: SCOPE AND PROCESS
Since the 1980s, there has been a boom in money laundering (Strange,
1998: 123).
2
The International Monetary Fund has estimated the global
value of money laundering at between 2 and 5 percent of the worlds annual
gross domestic product, a range which encompasses sums between $600
billion and $1.8 trillion (US Department of Treasury, 2002). The Financial
Crimes Enforcement Network, a division of the US Department of
Treasury, estimates that about $300 billion is laundered in or through the
US annually (Richards, 1998).
3
Although there are many ways to launder
money, the process generally involves three stages: placement, layering and
integration (Solomon, 1997).
At the placement stage, cash derived from criminal activities is slipped
into the nancial system. This is not as easy as it might seem, since in many
advanced capitalist societies banks and other nancial institutions are
required to report large cash transactions, including deposits and the
opening of accounts in the form of currency transaction reports in the
US, $10,000 is the threshold gure (US Department of Treasury, 2002).
Smurng is one tactic used to circumvent this requirement; numerous
individuals are employed to make large numbers of small deposits (always
under the $10,000 threshold). This facilitates the injection of large quantities
of cash into the banking system without triggering the reporting system.
Non-banking nancial institutions, such as casinos and bureaux de change, are
also well suited to cash placement using this method. Shipping cash to
banking jurisdictions which do not have compulsory reporting rules is
another strategy that is used. However, there is signicant risk that law
enforcement may interdict and seize these cross-border shipments.
Once criminal proceeds have been placed in the nancial system, the
next stage is that of layering. At this point, the illicit funds are circulated
486
typically through various nancial institutions and across multiple
jurisdictions in order to obscure their source and ownership. Certainly this
process does not depend necessarily on ICTs, but the use of electronic funds
transfers or wire transfers has emerged as by far the most common layering
technique. In 1989, the American Bankers Association Money Laundering
Task Force (1989) claimed that wire transactions, which are essentially
unregulated, have emerged as the primary method by which high-volume
launderers ply their trade. And in 2000, James Sloan, Director of the
Financial Crimes Enforcement Network, observed:
Electronic funds transfer systems are the fundamental building blocks for both
the legitimate and illicit movement of money domestically and globally. The
large-scale money laundering cases described by law enforcement also most
universally involve a wire transfer component by which millions of dollars in
drug and non-drug criminal nancial activity are camouaged. (Sloan, 2000: 2)
The challenges posed by electronic funds transfer systems for law
enforcement are discussed below.
The integration stage is the last step in the money-laundering process.
After moving through multiple transactions in the nancial system, the
laundered funds are then integrated into the mainstream nancial world.
Typically, this is done by purchasing numerous nancial instruments (e.g.
stocks, bonds) or by investing in real estate and other legitimate businesses.
ELECTRONIC FUNDS TRANSFERS
In the US, individuals typically initiate electronic funds transfers through
banks or money transmitter services (e.g. Western Union, Moneygram). The
funds are transferred using one of the two major vehicles for electronic
funds transfer: the Federal Reserve Wire Network (Fedwire) and the
Clearing House Interbank Payment System (CHIPS). Fedwire, which
primarily facilitates domestic transfers, connects the 12 Federal Reserve
banks with approximately 11,700 banks in the US. International dollar
transfers usually move through CHIPS. There are 115 large banks which
participate in CHIPS, representing 29 countries. A third operation, the
Brussels-based Society for Worldwide Interbank Financial
Telecommunications (SWIFT), mainly functions as an international
communication system, facilitating Fedwire and CHIPS transfers by
transmitting nancial information such as payment instructions and
statements (Baldwin, 1996). Taken together, these electronic funds transfer
systems handle a massive volume of transactions. Each day more than
465,000 wire transfers, valued at more than $2 trillion are moved by
Fedwire and CHIPS, and an estimated 222,000 transfer messages are sent by
SWIFT (US Ofce of Technology Assessment, 1995).
Reportedly, law enforcement agencies have had great difculty
monitoring the ow of illicit funds over these wire transfer systems. This
487
state of affairs is due partly to the manner in which banks have traditionally
maintained records of funds transfers. Wire transfers commonly involve a
series of transactions as the funds move from the originators account to the
beneciarys account, a series which can often involve several intermediary
banks. The separate payment orders necessary for each bank-to-bank transfer
in the wire-transfer chain will contain different information; often, as the
payment order is reformatted for the next phase of the transfer, the bank
will omit identication of earlier participants, such as the sender or
intermediate banks. Generally, in the past (in the US) the originators
account number has been dropped from subsequent payment orders to keep
this information condential (Hughes, 1992; Richards, 1998; US Ofce of
Technology Assessment, 1995). Furthermore, when the transfers circulate
through banks operating in countries which have strict customer
condentiality laws, banks are not required to record the identity of the
originator. Indeed, the recording of this information may be actively
discouraged. This problem is of growing interest to US law enforcement, as
a good deal of the money wired overseas for laundering is thought to ow
back to the US, also by wire transfer, for investment (US Ofce of
Technology Assessment, 1995). Recent national and international policy
initiatives have sought to address these issues. These are briey discussed
below.
The way in which banks maintain wire transfer records makes the task of
examining these transactions for law enforcement purposes a difcult one.
The high volume of electronic funds transfers that occur daily is said to
exacerbate the problem. The US Ofce of Technology Assessment sums up
the comparative advantage of wire transfers systems to money launderers as
follows:
The fastest way to move millions of dollars out of sight of law enforcement is
to use international wire transfers, even though this requires rst placing the
money into a bank. With approximately 700,000 wire transfers every day,
illegal transfers are easily hidden. Their audit trails are obscured within
enormous databases that are generally safe from law enforcement investigators.
By comparison, physically smuggling cash and even paper-based monetary
instruments across national boundaries although often successful is slow and
unacceptable risky. (1995: 1212)
4
ANTI-MONEY LAUNDERING INITIATIVES
Generally speaking, anti-money-laundering initiatives have focused on
information choke points or portals through which all funds earmarked for
wire transfer must pass (Harte, 1995: 245). One set of choke points
comprises the gateways to wire transfer systems the various nancial
institutions that handle deposits (i.e. the placement stage). Another set is
488
distributed throughout the electronic funds transfer systems themselves
(i.e. the layering stage).
Placement-stage surveillance initiatives
Initial law enforcement surveillance of the placement stage involved
regulations that require nancial banks to le currency transaction reports
(CTRs) on all deposits of $10,000 or more.
5
In the aftermath of the attacks
on the World Trade Center and the Pentagon, the USA Patriot Act of 2001
extended this requirement to a host of other institutions (e.g. casinos,
money transmitter services such as Western Union, car dealers, mutual
funds, insurance companies) (US Department of Treasury, 2002). Partly due
to the smurng problem alluded to earlier, a second line of defense was
added with the passage of the Money Laundering Suppression Act of 1994.
This law requires all banks to le suspicious activity reports (SARs). As the
name implies, these reports must be led when a bank knows or suspects
that money laundering may be occurring. The $10,000 threshold is not
required to trigger this reporting requirement.
6
Again, the USA Patriot Act
has extended this requirement to a variety of other institutions (Sloan, 2003;
US Department of Treasury, 2002: 43). In 1999, law enforcement agencies
pushed for a third layer of mandatory reporting requirements, the so-called
know-your-customer rules. The rules require all nancial institutions to
develop detailed proles on their customers and determine the source of
funds that may be incommensurate with a customers prole or typical bank
activity (Hinterseer, 2002).
7
The initiative failed in the face of strong
opposition from many nancial institutions and civil liberty groups.
However, law enforcement agencies have persuaded many banks to
implement the rules on a voluntary basis (Nojeim, 1999: 2).
In addition, there has been a sustained attempt at internationalizing the
mandatory reporting requirements. For example, the Kerry Amendment
to the Anti-Drug Abuse Act of 1988 gave the US Government the power to
deny foreign banks access to CHIPS, the US-controlled international wire
transfer system. With this stick in hand, foreign governments were more apt
to adopt the reporting requirements (Naylor, 2002; Sica, 2000). And for the
last decade, the US Government has worked through the G7s Financial
Action Task Force (FATF) to push other governments to adopt US-style
reporting requirements and to establish mechanisms whereby such records
may be made available to US law enforcement (Helleiner, 1999; Reinicke,
1998; Williams, 2001).
8
This effort has taken on a new urgency since the
September 11 attacks (Financial Action Task Force, 2003; Sloan, 2003).
Each of the reporting requirements referred to above qualitatively changes
the relationships between nancial institutions and customers, and nancial
institutions and law enforcement agencies:
489
A CTR is the least problematic. If a certain threshold is reached, then the
institution is required by a clear, externally imposed rule to gather specic
information and pass it on to the authorities. The institutions role is passive
it acts as a conduit for given types of data between client and government
agency; the data is the same for all clients, and the client acts as a fully
informed, conscious participant in the process ...
[The nancial institutions] role with regard to a suspicious activity report is
reactive. The client or the clients transaction exhibits certain characteristics that
trigger a response. The bank is not an automatic conduit but a police
informant. Despite efforts by law enforcement to draw up lists of objective
characteristics of suspicious transactions, the banks decision is really based on
subjective hunches ... Meantime the client is not informed.
With know-your-client rules, the nancial institution notches up its role
once again ... It has, in effect, been deputized by the law enforcement
apparatus. Nor is it clear where the nancial institutions responsibilities stop.
To really know a clients business, it is necessary to know the clients clients,
and perhaps the clients clients clients the institution may go overboard ...
And while all of this is happening, the client is left totally in the dark. (Naylor,
2002: 2712)
The steady ratcheting-up of reporting requirements raises questions about
how far nancial institutions will be expected to dig into their customers
affairs, and just how much police work these institutions can be reasonably
expected to perform.
CTRs and SARs from 21,000 depository institutions and 200,000 non-
bank nancial institutions are fed to the Financial Crimes Enforcement
Network (FinCEN), a division of the US Department of Treasury
(Wakeeld, 2000).
9
FinCEN was created in 1990 to serve as the nations
central clearinghouse for intelligence and information-sharing on money
laundering. The agency analyzes the millions of nancial transaction reports
with the help of the Financial Articial Intelligence System (FAIS).
Established in 1993, FAIS has reportedly enhanced FinCENs capacity to
identify suspect patterns of money movements. As a former director of
FinCEN observes:
[The] AI system for the rst time permits all incoming [transaction records] to
be screened against a set of rules aimed at nding the clues to wrongdoing ...
It gives federal investigators ... the ability to link ostensibly disparate banking
transactions which reveal patterns of nancial transactions that are known to be
used to launder money. (Morris, 1996: 1)
Using this method, analysts select suspects and accounts for further
analysis. This includes matching them with information in a score of other
government and commercial databases using link analysis (Kimery, 1993;
US Ofce of Technology Assessment, 1995).
10
Critics have raised concerns
that the manipulation and matching of information from many databases to
reveal a complex pattern of nancial activity by an individual is a substantial
intrusion of citizens privacy (Kimery, 1993; Nojeim, 1999).
490
A related FinCEN initiative, the Gateway Project, permits myriad federal
and state law enforcement agencies to gain direct electronic access to the
agencys nancial transactions database. By the end of 1999, Gateway
granted password access to more than 600 law enforcement users who led
nearly 85,000 queries, an increase of 18 percent for the year before
(Wakeeld, 2000). Civil liberty groups have expressed concerns about
Gateways popularity within the law enforcement community. For example,
they are critical of the fact that users do not have to demonstrate probable
cause or even relevance to an ongoing investigation before gaining access to
the database. As the argument runs, since targeted court orders or warrants
are not required, users often use a vacuum cleaner approach when
downloading data: They tend to suck up everything FinCEN has to offer
by periodically downloading the entire harvest of new information
(Nojeim, 1999: 4). The potential for abuse of this information is high,
because the downloaded information can be kept indenitely and there are
no guidelines on how it should or should not be used. This state of affairs is
symptomatic of the conspicuous disinterest in privacy issues among those
involved in money-laundering law enforcement. Peter Swire (1999: 480),
the Clinton administrations Chief Counselor for Privacy, notes that
throughout the 1990s there was no political pressure from above on the
money-laundering law enforcement community to address the privacy
concerns raised by the rapidly expanding web of money-laundering laws
and the proliferation of high-tech surveillance techniques. Swires conclusion
is based on interviews conducted with US prosecutors and others involved
in money laundering law enforcement.
Layering-stage surveillance initiatives
Enhanced surveillance of the placement stage has yet to succeed in blocking
money launderers access to wire transfer systems (US Ofce of Technology
Assessment, 1995). Therefore, making these conduits less attractive to
launderers has been a top law-enforcement priority. To this end, two
strategies have been pursued. The rst involves improving law enforcements
access to wire transfer records and to have the information content of the
records increased and standardized. As discussed earlier, from a law-
enforcement perspective these records have been relatively uninformative
because of the sparse and inconsistent information contained in the payment
orders which route funds through the various stages of the wire-transfer
process. After a protracted struggle between law enforcement and the
banking industry, new record-keeping rules were enacted in 1996. These
rules require each bank in the wire-transfer process to include all identifying
information in the payment order as sent to the next bank. The identifying
information thus travels with the payment order from beginning to end
(Baldwin, 1986; Solomon, 1997).
491
While this regulation increases US law enforcements capacity to monitor
wire transfers originating in the US, it does little to enhance its ability to
monitor and trace incoming wire transfers from offshore banking havens.
The banks in these jurisdictions may be compelled to protect their
customers anonymity by not identifying the originator on a wire-transfer
message. Again, the US Government, working through the FATF, has
sought to persuade these havens to record this information and make it
available to US law enforcement (US Ofce of Technology Assessment,
1995; Stessens, 2000). In the wake of September 11, FATF has stepped up
its efforts to pressure countries to require banks and money transmitter
services to include accurate and meaningful originator information ... on
[electronic] funds transfers and related messages that are sent... Furthermore,
[this] ... information should remain with the transfer or related message
through the payment chain (Financial Action Task Force, 2002: 2). In
essence, this is an attempt to internationalize the US Department of
Treasurys 1996 record-keeping rules.
While these record-keeping rules are designed to make it easier for law
enforcement to nd and retrieve evidence that can be used against suspects,
it does not address the detection of unsuspected operations (Baldwin, 1996).
To address this problem, law enforcement agencies have proposed the real-
time monitoring of wire transfer systems using articial intelligence
applications. The proposed surveillance system would monitor wire-transfer
trafc on a continuous basis, comparing messages to proles of illicit
transfers. The sites for this monitoring system would be various choke points
on the three main wire transfer systems:
For CHIPS monitoring could be done ... at the 35 to 40 US participating
banks, all in New York; most of the wire transfers pass through the 10 or 12
largest commercial banks ...
[With respect to Fedwire] it would probably be most efcient to do any
screening ... at the 12 Regional Federal Reserve Banks ... SWIFT transfer
instructions are used by about 148 US banks and 300 US subsidiaries of
foreign banks. Perhaps three-quarters of these transfer messages too are believed
to go through a dozen very large banks. (US Ofce of Technology Assessment,
1995: 1345)
Intrigued by this proposal, Congress asked the Ofce of Technology
Assessment to evaluate its feasibility. The Ofce of Technology Assessment
concluded that such a system was not possible at the time because law
enforcement has yet to delineate distinct money-laundering patterns or
proles against which to compare messages. It also raised concerns about the
privacy implications of the proposed system:
[It] conjures up the image of the computer state, where all data, no matter
how innocuous or elliptical in itself, may be collected, aggregated,
492
manipulated, and cross-related with other databases to the point where it
becomes information with a context and no longer innocuous. (Ofce of
Technology Assessment, 1995: 76)
11
CYBERPAYMENT TECHNOLOGY
In essence, during the past decade or so (and with some success), US law
enforcement agencies have struggled to engineer their surveillance interests
into the interstices of the evolving nancial system. There is now
widespread concern among these agencies that this surveillance infrastructure
may be rendered useless by an emerging new class of payment systems
which support the electronic transfer of value.
These systems involve new forms of currency such as stored value cards
(smart cards or electronic purse) and network-based products (digital
cash), which can be used to make payments over the internet. In contrast
to credit or debit cards, these new devices do not access a bank account or
credit line, but represent the general liabilities of the issuer. When money is
spent with them, there is usually an electronic link to the issuer or to a
central database which keeps track of balances and transactions. But some
ofine devices permit direct purse-to-purse payments without any
authorization or interaction with a centralized location (Financial Crimes
Enforcement Network, 2000; Good, 2000; Molander et al., 1998). Because
these payment systems are still in the early stages of development, much of
the commentary on their potential inuence on money laundering practices
is tentative and suggestive rather than denitive.
12
One concern is that these new forms of money will make the detection
of illicit funds much more difcult. Smart cards and digital cash often rely
on complex encryption technologies that reduce the likelihood of
transactions leaving a traceable electronic trail (Mussington et al., 1998;
Rueda, 2001). In fact, the developers of these payment methods are keen to
highlight encryption-enabled payer anonymity as a selling point of their
products. Consequently, the worry is that money launderers could circulate
millions of dollars of electronic money around the world with little risk of
detection.
In addition, regulatory initiatives may be rendered more difcult because
the money ows associated with these new payment systems could bypass
the central choke points which regulators have relied on for monitoring
purposes. For example, the new forms of electronic money could permit
launderers to avoid contact with established depository institutions, thus
skirting the raft of reporting requirements and know-your-customer rules.
And peer-to-peer internet transactions may provide money launderers with
an alternative to electronic funds transfers systems (Fedwire, CHIPS,
SWIFT), thus avoiding the choke points located on these systems (Financial
Action Task Force, 1997; Helleiner, 1998; Weimer, 2000).
493
For law enforcement agencies, the existence of an audit trail is the key.
Their goal is to ensure that their surveillance interests are hardwired into the
design of the still-nascent cyberpayment systems. Over the last few years,
the strategy has been to nudge the industry in this direction without
mandating a new regulatory scheme (Financial Action Task Force, 1996;
Welling and Rickman, 1998). For example, in 1996 FATF convened a
meeting in which law enforcement ofcials and regulators expressed their
concerns to leading developers of new forms of electronic money.
According to the FATF, these concerns were heeded:
[T]he e-money industry representatives stated that they want and need more
feedback from law enforcement in order to understand their concerns and to
be able to incorporate possible solutions in their systems... For example,
measures that are necessary for anti-money laundering purposes need to be
considered alongside the safeguards that the industry is building in to
preventing fraud and other security issues. (Financial Action Task Force,
1997: 14)
Even if such exercises prove fruitless from a law enforcement perspective,
it would appear unlikely that the US Government (or some other
governments) will permit the introduction of payment systems based on
totally anonymous digital cash. Grabosky and Smith (1998: 183) note that
one option available to governments is to restrict the ability to issue
electronic cash to traditional banks or other nancial institutions (e.g. credit
card companies) that are already subject to regulatory supervision. This
option is made more convenient by the fact that currently, traditional
nancial institutions are playing a major role as sponsors of the emerging
cyberpayment systems (Group of Ten, 2000; Weatherford, 1997). Of course,
the more surveillance-intensive the design of the new payment systems, the
greater the resistance may be on the part of many individuals and
institutions to move to cyberpayment systems (Rahn, 2000).
If the US Government was to endorse a policy prohibiting anonymous
electronic cash, or a US banking policy is adopted that encourages a fully
traceable electronic cash system, this may well lead to many other countries
deploying similar surveillance-intensive systems. First, research and
development on cyberpayment systems elsewhere in the world will be done
with at least one eye on the US market, the largest in the world to date
(Swire, 1999). Thus new technologies are likely to be consistent with the
requirements of the US market. Second, since many international nancial
transactions originate, terminate or pass through the domestic or
international ofces of US nancial institutions, these banks or other
institutions are likely to have systems in place, even for their foreign ofces,
that will be consistent with US law (Swire, 1999). Third, as alluded to
above, the US Government is not averse to coaxing other countries into
adopting measures which support surveillance of the nancial system.
494
THE LOSS-OF-CONTROL NARRATIVE
What explains the exacerbation of the money-laundering problem and the
associated proliferation of surveillance-intensive money-laundering
countermeasures? The argument here is that it would be a mistake to view
the information revolution as the sole or primary driver of these
phenomena. Such a one-sided view obscures the ways in which
developments in criminal justice policies and associated changes in the US
state have fueled money laundering and law enforcements response to it. As
is suggested below, the law enforcement establishment has been a primary
beneciary of this state of affairs.
In discussions about the inuence of ICT developments on money
laundering and in the debates over the various anti-money-laundering
initiatives, loss of control has been the dominant narrative. For law
enforcement agencies and regulatory authorities, as well as many
policymakers, academics and journalists, a central element of this storyline is
that the information revolution has plunged law enforcement into crisis.
That is, along with the liberalization of cross-border nancial ows, the
rapid deployment of electronic funds transfer networks has permitted
organized crime, particularly drug trafckers, to leap ahead in their
internecine struggle with law enforcement. Specically, these networks are
portrayed as undermining law enforcements follow-the-money approach to
combating organized crime and winning the War on Drugs. In this
narrative, emerging cyberpayment systems may well provide the underworld
with an unassailable advantage. Referring to these technological
developments, one commentator notes:
[T]he contemporary nancial system has become a money launderers dream.
Conversely, it is a nightmare for law enforcement agencies that have to work
through a jurisdictional and bureaucratic morass in their efforts to follow and
seize the money. (Williams, 2001: 110; see also Reinicke, 1998; Shelley, 1998)
Without appropriate policy responses, the argument runs, there will be
grave consequences for public safety and national security. The following
comment from former FinCEN director, Stanley Morris, exemplies much
of the policy discourse:
History has shown us that as we invent new technologies, criminals are waiting
on the periphery to use them credit cards produce credit card fraud;
computers create computer hacking; and automatic teller machines produce
unique opportunities for theft. In the same way, the possibility of virtually
untraceable nancial dealings ... would create new, but this time, perhaps
unparalleled problems for law enforcement. Those of us who have fought so
hard to end bank secrecy as a convenient excuse around which criminals can
cluster will have won little if we now turn to a world in which nancial
institutions can easily be bypassed via the internet or use of the telephone
495
lines. That leads to an important point about money laundering and related
nancial crimes. They all involve taking acts that are themselves, in isolation,
not only legal, but commonplace opening bank accounts, wiring funds, and
exchanging currencies in international trade. Given that basic fact, we have few
ways now to separate the malefactors from the businessmen. The new
technologies will give us even fewer ways, unless we work with their
developers. How should we do so? First, we will need partnerships with these
new industries ... Without thoughtful and balanced attention to law
enforcement concerns now before criminals begin to exploit the new
technology the prospects [for abuse of this technology] by organized crime,
money launderers, and other nancial criminals could be too great. (Morris,
1996: 45)
13
In this discourse, the emphasis is on the loss of state control and its
consequences. The discourse also focuses on the technical changes that
supposedly precipitated this loss of control, as well as on more recent
technical developments that may undercut this control even more. A
solution to the problem is embedded in the storyline: the state must regain
control. Since the problem is in large part a technological one, the solution
largely rests in the technical domain. Application of articial intelligence to
nancial transaction databases, attempting to engineer an enhanced
monitoring capability into wire transfer systems, the current strategy of
building a similar surveillance capability into cyberpayment technologies
all have been justied on the grounds that they will allow law enforcement
to close the technology gap on criminals. Such initiatives, it is said, will
result in law enforcement control over criminal activity being re-established.
As Shelley asserts:
Just as we pursue the drug problem by going to the source, the same may be
said for crimes facilitated and perpetuated through high technology. The cure
for the problem may be found in both the technology itself and the companies
which control access to it. (1998: 620)
Most of those who have opposed the proliferation of money-laundering
countermeasures have done so without seriously questioning the loss-of-
control narrative. For example, accepting the narrative, many nancial
institutions focus on what they perceive as the unacceptable costs of the
initiatives. For example, it is argued that the costs associated with
standardizing payment order communication formats for policing purposes
will eliminate the chief attraction of wire transfers as inexpensive, speedy,
efcient payment mechanisms. US nancial institutions have voiced concern
also that their global competitiveness may be undercut as customers seek to
deposit their money in less surveillance-intensive environments. Further,
focusing on costs, civil liberty advocates argue that the proliferation of
surveillance-intensive anti-money-laundering initiatives has substantially
eroded traditional presumptions of nancial privacy. Again, underscoring
496
costs, other critics contend that the US states drive to export its
surveillance-intensive countermeasures to other countries, particularly
developing countries, unfairly undercuts the economic development
strategies.
14
Most of these arguments contain important truths. However, the basic
problem is that the general acceptance of the loss-of-control theme has led
to a fundamental misunderstanding of the forces driving the money-
laundering problem and US law enforcements responses to it. Specically,
by characterizing the state as purely reactive, the loss-of-control narrative
greatly understates the degree to which the US state has actually helped to
create the conditions that have generated and exacerbated the money-
laundering problem and the calls for enhanced surveillance powers. In large
measure, this is due to the fact that the loss-of-control narrative takes the
problem as a given (technical innovations are exacerbating the money-
laundering problem). Only the means to its solution is in doubt (how much
additional surveillance is necessary to bridge the technology gap between
law enforcement and its criminal adversaries, and at what cost?). The result
is that the narrative is bereft of any understanding or explanation of the key
social forces and social contexts that have shaped the money-laundering
problem.
In what follows, an alternative narrative is sketched. This narrative reverses
the terms of the argument. Instead of placing technology developments at
the center of analysis, it begins with an examination of how the money-
laundering problem has been constituted. It is within this broader inquiry
that questions are asked about the role played by technological developments
in exacerbating the money-laundering problem.
15
Two conceptual positions
sensitize the analysis. The rst is found in a particular variant of state theory,
which holds that the state does not simply react to external factors (e.g.
technological changes, the pressure of various societal interests) but often
makes policy based on its own irreducible interests. These include the
political and bureaucratic interests of state actors, and law-enforcement and
national security surveillance interests (Giddens, 1985; Mann, 1986;
Mouzelis, 1990). This strand of theory suggests that it is important to
examine how state actors have shaped and interacted with money-
laundering practices and how developments in technology have enabled and
constrained state actors as they pursue their interests. It also directs the
analyst to examine the policies that state actors initiate in order to take
advantage of technological developments or to respond to the control
problems precipitated by technical change. The second position is found in
some critical approaches to the study of social control and social deviance
(Andreas, 2000; Marx, 1980). Contrary to the conventional notion that
social deviance and rule-breaking behavior occurs because of lack of social
control, these approaches suggest that in many situations the presence of
497
social control can actually help to explain the rule-breaking behavior. In
essence, the claim is that social controllers can often create, reproduce and
escalate what they set out to control. Central to this position is the
importance of examining the interdependence that may exist between law-
breakers (i.e. money launderers, drug trafckers and terrorists) and the
authorities (i.e. law enforcement and regulators).
BEYOND LOSS-OF-CONTROL
The thrust of the alternative narrative is that the escalation of the US states
failed War on Drugs has been the key factor driving the money-laundering
problem and law enforcements response to it. The inuence of the
information revolution on money-laundering practices and anti-money-
laundering initiatives must be assessed and weighed in relation to this
dynamic.
The War on Drugs
In the post-Cold War era concerns about organized crime, particularly drug
trafcking, have joined with terrorism to dominate the US domestic and
international security agendas. This shift in priorities is reected in the fact
that law enforcement has been the fastest (and one of the only) areas of
federal government expansion in the last decade or so. Until very recently,
the US states ongoing War on Drugs was the key factor driving this
expansion (Andreas, 1999a; see also Sheptycki, 1996). Characterized by the
language, strategies and tools of military deterrence, the US states approach
is premised on the notion that the best way to solve the problems of drug
abuse and addiction is to prohibit the supply of illicit drugs. That is, if law
enforcement can restrict the growing, manufacturing, distribution and sale
of illicit drugs, they will become scarce, their prices will rise, and drug
consumption will stop. This approach has entailed a variety of policies:
pressuring foreign governments to eliminate the production of coca, poppy
and marijuana production; targeting drugs at or en route to US borders
using planes, boats, border patrols and custom ofcers to interdict drug
shipments; and going after drugs within the US by trying to locate, arrest
and prosecute drug dealers and to seize drug supplies (Bertram et al., 1996).
It has been evident for some years now that this supply-side approach has
failed miserably; both the supply of drugs and levels of abuse and addiction
remain high. Moreover, the collateral damage associated with the supply-
side approach has been staggering: crime and health problems have been
exacerbated, race and class divisions have deepened and law enforcement
corruption in the US and in the source countries has intensied. In spite
of this dismal record, the policy response to this failure has been to escalate
the supply-side approach by getting tougher, by applying more funding and
more repower to the problem. In the process, law enforcement agencies
498
have thrived; agency budgets have grown and their tasks have expanded
(Bertram et al., 1996). In short, these agencies have developed a strong
material interest in continuation of this supply-side approach.
As Andreas (1999b) has convincingly shown, the US states War on
Drugs illustrates both the power and the limits of the state; even as the state
fails to deter the illicit drug trade, there is no illicit drug trade without the
state. The state shapes the drug trade in at least three ways. First, the state
literally creates businesses for criminal organizations; state-created and
enforced drug laws provide the very opening for (and high protability of)
smuggling drugs. Just as alcohol prohibition helped to fuel the growth of
organized crime in the US, drug prohibition has been a major impetus for
the emergence of drug-trafcking organizations. Second, law enforcement
plays an important role in shaping the illicit drug trade. For example, US
law enforcement pressure on cocaine smuggling through South Florida in
the early 1980s simply caused drug trafckers to shift to Mexican smuggling
routes. More effective air interdiction efforts caused trafckers to rely more
on commercial cargo shipping. Third, as law enforcement efforts escalate,
many inefcient suppliers and distributors of illicit drugs are pushed out of
business, replaced by others who are better organized and more sophisticated
at evading law enforcement.
Supply-side dynamics, money laundering and the
follow-the-money approach
The dynamics of the supply-side approach have contributed in a
foundational way to the money-laundering problem. In its Annual Report
for 19967, the FATF (1997) identied drug trafcking as the single biggest
source of illegal proceeds. These illicit funds have been generated by illegal
businesses that exist and ourish because of drug prohibition laws. Put
differently, the US state indirectly helps to generate the illicit ow of funds
that later become the target of law enforcement efforts to eradicate drug
trafcking.
Supply-side dynamics have also conditioned and shaped law enforcements
anti-money-laundering practices and the calls for more surveillance powers.
In the last decade or so, the follow-the-money approach has been
portrayed repeatedly as an indispensable supply-side tool. A reading of the
policy debates on the various surveillance initiatives surveyed above shows
that the War on Drugs is by far the most cited justication for these
initiatives. In fact, the follow-the-money approach was a creation of the
War on Drugs. In the mid-1980s, the strategy of interdicting and
conscating laundered proceeds emerged as a central supply-side technique;
it was thought that taking assets accumulated by drug trafckers would
remove simultaneously the motive (prot) and the means (operating capital)
to commit further crimes (Naylor, 2002: 247). Congress provided the legal
499
framework for this approach when it passed the Money Laundering Control
Act of 1986, which made money laundering a crime in its own right for
the rst time. Equally consequential was the passage of the Anti-Drug Abuse
Act of 1988, which increased the penalties for money laundering to include
forfeiture to law enforcement of any assets involved in illegal transactions
related to money laundering (Maroldy, 1991; Stessens, 2000). In essence,
this legislation gave law enforcement a nancial stake in the follow-the-
money strategy. As a result, many law enforcement agencies across the US
have become highly dependent on income from asset forfeiture, and there is
evidence of goal displacement as enforcement agencies increasingly target
forfeitable assets, which are associated with economically motivated crime
rather than serious violent offenders (Blumenson and Nilsen, 1998).
As evidence of the effectiveness of the follow-the-money approach, top
law enforcement ofcials most often point to the huge amounts of
laundered drug money seized from bank accounts and other sources in
high-prole police actions such as Operation Casablanca, Operation Polar
Cap, and Operation Greenback (e.g. US Department of Treasury, 1999,
2002). These statistics are used with other body count numbers the
number of drug trafckers captured, the amount of drugs seized and
destroyed, and so on as evidence of success in the War on Drugs, even as
the ow of illicit funds and supply of illicit drugs ows unabated (Levi,
2002).
Supply-side dynamics, ICT and the logic of escalation
Certainly, the technologies associated with the information revolution have
presented businesses in the illicit economy with opportunities for greater
efciencies (International Narcotics Control Board, 2001). As already noted,
drug trafckers have made heavy use of electronic funds transfer networks to
launder prots more efciently and to evade law enforcement more easily.
An appreciation of supply-side dynamics suggests that the emergence of the
follow-the-money approach in the mid-1980s provided drug trafckers
with an incentive to use electronic funds transfer networks for laundering
prots. That is, as law enforcement efforts began a full-scale assault on
traditional money laundering operations which involved smuggling illicit
funds across borders, drug trafckers migrated to the recently-deployed
electronic transfer networks. After all, these networks were widely publicized
as being more difcult to police than traditional methods of layering. As a
result, electronic funds transfer networks emerged as the most common
method of laundering money, as discussed earlier.
This development has been depicted as a major loss of state control in
discussions concerning the impact of the information revolution on money
laundering and in the policy debates on the various money-laundering
countermeasures. Assuming the moral correctness and unproblematic nature
500
of the supply-side approach, the problem is viewed primarily as a
technological one; advances in ICT enable drug trafckers and other
criminals to circumvent the law. Law enforcements surveillance initiatives
are portrayed as defensive responses that will restore control. This is
misleading. It glosses over the fact that the US states failed supply-side
approach to the illicit drug trade has created the conditions which have led
to the call for these surveillance initiatives. It is the very existence of the
supply-side controls which has made it necessary for many drug trafckers
to try to circumvent them, by drawing on recent ICT developments, for
example. It is this dynamic, not technical innovation per se, which has
exacerbated the money-laundering problem and called forth recent
surveillance initiatives.
These initiatives, which are the product of supply-side escalation, should
be viewed as visible signs of the US states resolve that may well create the
conditions for further escalation. For example, as noted above, by the late
1980s and early 1990s, drug trafcking organizations were heavily using
electronic funds transfer systems to launder their prots. As law enforcement
agencies began to meet this challenge by developing the capability to
monitor the various choke points in electronic funds transfer processes, the
more sophisticated drug trafckers responded by adopting a number of
strategies to stay one step ahead of law enforcement.
One strategy has been to reduce the risk of detection at the choke points.
For example, money launderers have attempted to get on the list of
businesses exempted from ling CTRs some types of businesses are
automatically exempt because they generate large amounts of cash. Setting-
up or purchasing such a business allows the launderer to make deposits that
avoid scrutiny by FAIS (Naylor, 2002). As the risk of laundering money
over electronic funds transfers systems has increased, a second strategy has
been to develop new ways of smuggling cash across borders. Thus in the
mid-1990s, FATF noted an appreciable rise in the amount of illicit funds
moving covertly across borders: Criminals have shown great sophistication
in these operations, often purchasing businesses engaged in the shipment of
goods and hiding dirty money inside the product (1996: 5). Yet another
strategy has been to shift some laundering operations to internet gambling
sites. Typically, the launderer buys chips in order to gamble (e.g. with a
credit card). While the launderer usually loses a percentage of the funds, this
is a price they are willing to pay to clean the money. At the end of the
gambling session, the launderer cashes in their chips and takes payment by
means of a draft which can be paid into the launderers account. The
payment will appear to come from a legitimate source the casino. Given
that many internet gambling sites are located offshore, it is difcult for law
enforcement to access the relevant records (Financial Action Task Force,
2001; Mueller, 2002; Philippsohn, 2001).
501
Commenting on these sorts of evasive strategies, law enforcement ofcials
simultaneously praise their own progress (e.g. the passage of various
surveillance initiatives aimed at attacking money laundering on electronic
funds transfer networks) while pointing to the emergence of these
formidable new threats. These threats are used, in turn, to justify calls for
further regulatory measures (e.g. Gest, 2003; Morris, 1997; Sloan, 2000).
The point here is that drug trafckers who respond to drug enforcement
supply-side techniques with alternative laundering techniques provide a
rationale for more supply-side tools. Escalation, in other words, feeds on
itself. In this upward spiral, the fact that the follow-the-money approach
and the proliferation of surveillance initiatives have not reduced the ow of
illicit funds or the supply of illicit drugs is not seen as a reason for
questioning the approach. Rather, it is only interpreted as evidence that
more surveillance, intelligence and forfeiture are required.
Taking the loss-of-control narrative for granted, it is all too easy to accept
that nancial privacy may need to be trimmed so the state can begin once
again, through new surveillance powers, to regain control and so protect
public safety and national security. The export of surveillance-intensive
money laundering countermeasures to unwilling countries can be justied
in a similar way in this narrative. In this scenario, whatever erosion of
privacy (or national sovereignty) occurs is an unfortunate but necessary
sacrice in what is a just war. By contrast, the alternative narrative sketched
out above suggests that it is more accurate to view this erosion as yet
another instance of collateral damage in the failed War on Drugs. This
narrative also suggests that a fundamental shift in US drug policy would
have important implications for the US states current policy of intensifying
law-enforcement surveillance of the nancial system and the electronic
networks that increasingly undergird the system. An alternative approach
could involve putting greater emphasis on actions and resources that address
the fundamental causes of the problem, namely the demand for drugs and
the lack of economic opportunities in both developing countries and US
urban centers (see Bertram et al., 1996). Given that the law enforcement
establishment has developed a strong material interest in the supply-side
approach in general, and the follow-the-money strategy in particular, there
may be little chance of such a reversal in the near future.
THE NEW WAR ON TERRORISM
In the past year or so, the US states ongoing War on Drugs has been
eclipsed by its new War on Terrorism. Immediately following the attacks
on the World Trade Center and the Pentagon, attention quickly focused on
how the attacks were nanced. Telecommunication technology appears to
have played a signicant role. As the FATF recently observed:
502
[E]xamination of the nancial connections between the September 11 hijackers
and their overseas accounts showed that most of the individual transactions
were small sums, that is, less than $10,000 and in most cases the operations
consisted of nothing more than wire transfers. (2002: 6)
Apparently, the funds were transferred to the US using the Al-Barakaat
network, a money transmitter service based in the Persian Gulf region
(Beckett, 2001).
As discussed earlier, the Bush administration has portrayed anti-money-
laundering initiatives as pivotal weapons in the new War on Drugs. It
rushed to close the Al-Barakaat network and pushed Congress to enact
sweeping new money laundering countermeasures. Congress obliged by
passing Title III of the USA Patriot Act of 2001. The legislation adapts and
builds on the anti-money laundering tools used to wage the War on Drugs
(Hinterseer, 2002). For example, as alluded to earlier, the legislation
conscripts into service numerous businesses that previously had limited or
no involvement in the struggle against money laundering (Lyden, 2003:
219). With more traditional nancial institutions involved, these businesses
are now required to le CTRs and suspicious transaction reports. The
legislation also provides substantial incentives to err on the side of maximum
reporting, since various institutions covered by the Act are held liable for
failure to identify terrorist activities. Despite the heavier penalties at stake
for failing to identify suspicious activities, no clearly dened standards for
what constitutes suspicious activities have been developed (Lyden, 2003).
Section 326 of the USA Patriot Act of 2001 also requires that nancial
institutions develop a customer identication program. This new regulation
mandates all nancial institutions to verify customers identities, maintain
records relating to identity verication and determine whether customers
appear on any list of suspected terrorists or terrorist organizations (Financial
Crimes Enforcement Network, 2003). Banks are now required to know
more about their overseas counterparts before agreeing to send and receive
wire transfers from them (Stevenson and Wayne, 2002). And, as alluded to
earlier, there has been an attempt to internationalize the US Department of
Treasurys 1996 record-keeping rules associated with wire transfers.
Mirroring previous debates, some industry actors have expressed concerns
about the costs of these policies and regulations. One commentator
summarizes the concerns as follows:
The War on Terrorism is hitting nancial-service companies hard ... Every
couple of months, the Treasury Department proposes rules that force banks to
collect more data, dig deeper into databases, and rene their analyses,
increasing the regulatory burden on an industry struggling to comply with
existing rules. (Cuneo, 2003: 1)
503
For some, this administrative burden could well decrease the
competitiveness of US nancial institutions (Haggman, 2002; Quittner,
2002). As in previous debates, civil liberty advocates perceive the initiatives
as posing serious dangers to citizens rights. For example, to further enhance
law enforcements ability to detect suspicious activity, the USA Patriot Act
of 2001 suspends normal bank secrecy rules so that nancial institutions can
share information with one another regarding individuals who are suspected
of possible terrorist or money-laundering activity. They can do so without
facing any liability to their customers. For Schulhofer,
this step will make more banks aware of more reasons for considering
consumer transactions suspicious and will further increase the ow of reports
to the government ... [T]he implications of this change for a customers ability
to maintain condentiality vis-` a-vis competitors and private sector snoops are
far-reaching and as yet barely understood. (2002: 53)
In addition to law enforcement, agencies such as the Central Intelligence
Agency (CIA) are able to receive suspicious activity reports under the
provisions of the USA Patriot Act of 2001. It also provides law enforcement
and intelligence agencies with easier access to individual credit reports
without notice or third-party review. According to Murphy and Corrigan,
these provisions put
the CIA ... back in the business of spying on Americans, and law enforcement
and intelligence agencies ... have access to a range of personal nancial
information without ever showing good cause as to why such information is
relevant to a particular investigation. (2001: 1)
The justications for the post-September 11 initiatives have taken a
familiar form. Law enforcement agencies are emphasizing a variation of the
loss-of-control theme as the rationale for expanding their surveillance
powers. A combination of technical factors (e.g. terrorists continued use of
wire transfer systems and other laundering techniques)
16
and customer
condentiality requirements are said to be obstructing effective intelligence-
gathering, thus undermining effective control of the terrorist problem. The
solution is to solve the technical and procedural problems and scale back
privacy safeguards where necessary. Probing questions about the historic role
that the US state and other social forces have played in conditioning and
shaping the terrorist threat are declared unpatriotic and pushed into the
shadows, as the struggle to gather more intelligence (in order to regain
control) takes center stage. Clearly, the burgeoning surveillance capabilities
designed into the nancial system over the last decade or so were unable to
detect the ow of funds to the hijackers. Yet this not seen as a reason for
questioning the wisdom of this approach.
17
Rather, it is only interpreted as
evidence that more surveillance and more intelligence are required.
504
Perhaps the lesson from the War on Drugs is that the emphasis on
containment and control through technical means may lead to further
escalation of law enforcements surveillance of nancial transactions, as those
committed to attacking Americans nd new ways of moving their funds. As
they nd ways to circumvent existing money laundering laws, no doubt law
enforcements response will be to apply more of the same. And as the
federal law enforcement establishment develops a deepening material interest
in this escalation (e.g. budget growth may depend on it), this process may
be difcult to reverse. Certainly, more erosion of nancial privacy can be
expected if this scenario plays out.
CONCLUSION
Is the information revolution eroding the ability of law enforcement to
regulate money laundering? Will enhanced surveillance of nancial
transactions increase the US states capacity to control money laundering?
The foregoing analysis suggests that the answer to this question is a good
deal more complicated than the loss-of-control narrative suggests. To the
extent that ICT developments have posed control problems for law
enforcement in the last decade or so, this is in large measure due to the US
states supply-side approach to the drug problem. This approach has provided
the conditions for a vigorous dialectic between law enforcement on the one
hand, and illicit businesses engaged in the production and distribution of
illicit drugs on the other. Within this context, ICTs have emerged as key
resources and sites of struggle. On the look out for more efcient and less
risky ways of conducting their business, money launderers turned to
electronic funds transfer networks. This certainly caused control problems for
law enforcement agencies and regulatory authorities. These agencies and
authorities responded by drawing on computer database technology and
articial intelligence techniques, for example, in an attempt to detect ows
of illicit electronic funds. Have these measures enhanced law enforcements
regulatory capacity? The augmentation of law enforcements surveillance
powers has done little to enhance its ability to curb money-laundering
practices effectively. However, it does appear to have had a signicant effect
on how money laundering is conducted; increased surveillance of electronic
funds transfer networks has provided some money launderers (although
certainly not all) with an incentive to nd alternative money-laundering
techniques. At another level, however, this augmentation of surveillance
powers has provided law enforcement agencies and regulatory authorities
with greater control over legitimate nancial transactions, by stripping away
traditional privacy protections.
If cyberpayment systems catch on, the foregoing analysis suggests that
money launderers will shift some of their operations to the new systems if
the risks of doing so compare favorably with other laundering methods.
505
If this shift occurs, we can expect a proliferation of law enforcement
countermeasures. This will, in turn, provide an incentive for drug trafckers
and terrorists engaged in money laundering to develop or exploit alternative
laundering methods. Further erosion of nancial privacy is likely to occur as
this scenario plays out, even as the regulations continue to have a minimal
effect on curtailing money laundering.
The loss-of-control narrative not only oversimplies the relationship
between developments in ICT and money laundering, it also masks the root
causes of much of the money laundering problem. Put differently, the
technological determinism that resides at the heart of the loss-of-control
narrative functions to narrow the scope of policy analysis ... to encompass
only those changes within the established institutional structure (Melody,
1973; see also Jackson, 2002; Shields, 2002). The narratives heavy emphasis
on technology development as the major force exacerbating the money-
laundering problem has served to deect attention from the US states failed
supply-side approach to the illicit drug trade in general, and its follow-the
money strategy in particular. This has beneted those institutional interests
that have gained most from these approaches the law enforcement
establishment.
The alternative narrative suggests that decision-makers need to confront
the full range of policy options, including those that will ow logically from
a reframing of the money laundering, drug trafcking and terrorism
problems. As Rider (2002) notes:
To date, we have not even started to frame the right questions, let alone devise
the answers. Passing more laws or pouring more resources into the battle will
not win the war. It requires a more thoughtful and measured balancing of the
right response to the real threat.
Dwelling on control crises ostensibly precipitated by the information
revolution will contribute little to reducing the risk of a spiraling erosion of
civil liberties. Indeed, as a central theme of the loss-of-control narrative, it
may provide a key rationale for further erosions.
Acknowledgements
The author would like to thank two anonymous reviewers for their helpful comments.
Notes
1 My analysis has been inspired in large part by Andreas (2000) study of the politics of
border control in the United States. Andreas illuminates how the elaboration of a
loss-of-control narrative functions to support the increase of border controls a
policy which fails to deter the illegal drug trade or illegal immigration.
2 The practice of money laundering has been around for at least 3000 years (see
Naylor, 2002). As discussed later in the article, the practice was criminalized in the
US in the 1980s.
506
3 For a discussion of the methodology underlying theses calculations see van Duyne
(1998).
4 According to the US Ofce of Technology Assessment (1995), approximately 0.05
percent of all transfers on Fedwire, CHIPS and SWIFT (roughly 250 transactions a
day) involve money laundering.
5 This was mandated by the Bank Secrecy Act of 1970. The legislation was not
rigorously enforced until the mid-1980s when the War on Drugs was stepped up
(Nadelmann, 1993).
6 To encourage these reports, the regulations include a safe harbor provision
protecting nancial institutions and their employees from customers civil liability
actions.
7 These rules would have required nancial institutions to: identify their customers;
determine the source of funds for each customer; determine the normal and
expected transactions of each customer; monitor each customers account activity
and measure it against historical patterns; and report any transactions that are
suspicious because they do not conform to historical patterns (Nojeim, 1999).
8 In recent years, FATF has waged a name and shame campaign against non-
compliant countries. In essence, the campaign involves the publication of a list of
countries whose detrimental practices seriously and unjustiably hamper the ght
against money laundering (Financial Action Task Force, 2000). The idea is that
through publication of this list, the countries named will have pressure exerted on
them by the international community to adopt various money-laundering
countermeasures.
9 Since 1987, the number of CTRs led has tended to increase by 12 percent a year.
In 1994, 50 million CTRs alone were led and this gure was expected to double
in the next three years. Meanwhile, between 1996 and 1999 the number of SARs
increased from 49,786 to 120,506, before falling back in 2000 to 100,353
(Hinterseer, 2002).
10 Link analysis is a technique used to explore associations among a large number of
objects of different types (e.g. people, bank accounts, businesses, cash deposits, wire
transfers).
11 The US Ofce of Technology Assessment (1995) noted that the proposal would
require the roll-back of current privacy protections under law. For example, the
Electronic Communications Privacy Act of 1986 currently limits government access
to wire transfer records, and specically bars a service provider from monitoring
communications for evidence of criminal conduct. This provision would have to be
changed or new legislation written to allow the proposed wire transfer monitoring.
12 For information on recent developments in smart cards see Mondex Internationals
website (www.mondex.com). See www.digicash.com for details on digital cash
products. The Group of Ten (2000) provides a thorough overview of cyberpayment
pilot projects around the globe.
13 While these comments were made in the context of the debate on new
cyberpayment systems, the debates over electronic funds transfer networks are
suffused with similar rhetoric. For example, see US Ofce of Technology Assessment
(1995).
14 An overview of much of this opposition discourse can be found in Hinterseer
(2002), Naylor (2002), and Rahn (1999).
15 See Schlesinger (1987) for a discussion of this approach to studying the societal
inuences of ICTs.
507
16 Another technique which has received a good deal of press since September 11
involves the IndoPakistani hawala (or trust) systems. These systems came into being
in part because formal banking services, at least for ordinary people, were so poor.
The systems provide a cheap and trustworthy method for emigr e workers to send
money to their families. Typically, transfers do not involve the movement of cash, are
paperless and practically recordless. For a discussion of how the system works, see
Grabosky and Smith (1998) and Naylor (2002). According to US law enforcement
agencies, these systems are used by Al-Qaeda operatives to launder funds (e.g.
Thachuk, 2002).
17 Given that the incoming transfers were kept under $10,000, the banks used by the
hijackers did not le CTRs. However, as noted earlier, banks are mandated to le
SARs on transactions under $10,000 if they have reason to believe that the
transactions are suspicious. None of the banks detected unusual patterns in the
hijackers accounts. Therefore no SARs were led with FinCEN (Risen, 2002).
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PETER SHIELDS is a professor in the Department of Telecommunications at Bowling Green
State University. He teaches and researches in the areas of telecommunication policy, the
social implications of new media, and the implications of new media for national security and
law enforcement.
Address: 325 West Hall, Department of Telecommunications, Bowling Green State University,
Bowling Green, OH, 43403 USA. [email: pshield@bgnet.bgsu.edu]
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