M-payment: a Threat to Anti-money Laundering
that can be moved with less risk of attracting the authorities’ attention.
For instance, a drug dealer or terrorist can order ten different soldiers, or “smurfs,” to open ten different bank accounts, or conduct ten different financial transactions per day. After the accounts are open, the drug dealer or terrorist orders his smurfs to deposit amounts less than 9 per day—for example, 6 one day, 2 another day, and so on. By ensuring that the bank deposits, or other financial transactions, fall below the ,000 threshold, they can avoid suspicion and prevent the triggering of financial reporting requirements. In this example, ten different smurfs with ten different bank accounts who deposit an average of 0 per day can launder .21 million annually.
Although more sophisticated detection systems, increased government oversight, and heavier penalties have slowed down the practice of “smurfing” in recent years, this system remains a fundamental method for moving cash and cash equivalents.
Digital Value Smurfing (DVS)
M-payment with digital value removes the fundamental element of money laundering: cash. In the future, money launderers, drug dealers, and other criminals will no longer demand cash for their products or services; instead, they will demand digital payment sent via text message. With digital value, multiple smurfs will no longer be needed to make suspicious cash deposits. Criminals will be able to bypass regulated banks and their financial reporting requirements and exchange dirty money for digital value in the form of stored value cards or mobile payment credits. Moreover, with digital value instead of cash, they can instantly send—with a touch of a cell phone keypad—their digital value across the country, around the world, or to secret offshore bank accounts.
A single Digital Value Smurf (DVS) could open multiple m-payment accounts with multiple service providers, such as m-payment bank accounts, Internet payment accounts, and pre-paid mobile phones. Other avenues could include renting cell phones from others, or utilizing false identities to open additional accounts. The number of m-payment accounts that a single DVS could establish is unlimited. Thus, using the same example as above, a single DVS with merely ten different m-payment accounts could arguably launder the same amount of money that it would take ten different smurfs to accomplish.
Other Implications: Facilitation of Tax Evasion by Small Businesses
M-payment technology can facilitate tax evasion. Three billion people around the world own mobile phones, but only one billion possess bank accounts, according to the GSM Association. BearingPoint, a major management and technology consulting company, estimated the unbanked marketplace in the United States alone at 0 billion in 2006.
The fundamental rule in small business accounting is that all financial transactions are conducted through a business checking account provided by banks. For instance, when a sole proprietor, a partnership, or a corporation conducts business, it does so by using a business checking account. As required by law, banks employ the Know Your Customer (KYC) protocols by requesting identification from new customers along with evidence of the business entity (assumed names registration, business license, or articles of incorporation).
With an m-payment account, however, a small business owner can conduct business virtually under the radar. Instead of business deposits, the company can receive e-payments. Furthermore, instead of disbursing expenses through its business checking account, the company can make payments via m-payment. With no paper trail, the unbanked small business owner could easily evade income tax filing requirements, thus depriving the U.S. Treasury of billions of dollars in tax revenue.
“Much work and creative thinking will be required to maintain the advantages NPMs [new payment methods], including m-payments offer, while at the same time preventing exploitation and misuse by money launderers and terrorist financiers and simultaneously protecting user privacy and the integrity of the global financial systems.”
-INCSR, March, 2008
M-payment is revolutionary—mainly due to its convenience. This technology will literally change the way consumers pay for goods and services, the way they are compensated, the way they save money, the way they spend it, and the way they send money to family and friends abroad. This service will create new industries and new opportunities. M-payment is also radical because it may represent the final piece of the financial puzzle that moves our world into a cashless society.
With the convenience that m-payment offers, however,