Strange Bedfellows: Linden Dollars, BitCoin, Casino Tokens, and the FCPA

5 Jul

I just read an excellent article about virtual currency and anti-money laundering at Games Cheats and Tricks.  Kevin Sullivan (a guy with serious LE background) wrote about how Linden dollars, as an example, can be used to launder money.  Now, I’m a geek, but I’m not that much of one: I’ve never even been on a virtual world site (unless you count Virtual Legal Tech).  I’ve also never been involved in the whole gaming community,  MMOLs, I think they’re called.  Call of Duty (although I love their commercials) etc.

Sullivan makes the argument that once you assign a value to something, it can be used by money launderers to transfer money.  He’s right.

For those anti-corruption people, you might want a primer on money laundering.  Let me give you the absolute basics.  Illegal activities generate revenue.  Sometimes, and most popularly, large amounts of cash.  Because drug dealers want to buy nice things like houses and cars, and because you usually can’t pay for a house with $2.3 million in $10 bills, drug dealers want to get their cash into a bank.  Once it’s in a bank, they can get credit cards and checks, and pay for their house and their cars.  Getting it into a bank isn’t the only end goal: the drug dealers also want to avoid capture by law enforcement who are actively searching for them.  If a drug dealer were to put on his account opening documents, “Joe Smith, drug dealer,” and then deposit lots of cash every week, it’d make law enforcement’s job pretty easy.  So Joe lies and says he’s an art dealer who deals in cash.  That’s money laundering, lying to hide where the cash is coming from.

The lying has gotten really complicated as law enforcement and banks have gotten savvier: all cash deposits over $10,000 have to be reported, banks have to do diligence on their clients and monitor account activity, suspicious activity has to get reported to the Treasury Department.  As with all things fraud, the drug dealers try to stay one step ahead of the law.  And so began a round robin of the drug dealers making it harder for the law to track them.  This process is called “layering.”  You get $20,000 in drug cash that you want to buy a Hyundai with.  You find a bank that’s a little lax in its procedures, and you deposit the $20,000 using four shnooks who answered an email about a job opportunity for people with clean credit.  Those four receive $5,000 cash each, deposit it into their own account, and wire $4,500 into the dealer’s account, keeping $500 for their trouble.  Now the dealer has $18,000.  But the money is only one step removed from the illegal activity.  One subpoena gets the four “innocent” people’s accounts, and we’re right back to the cash.  The dealers want to make it difficult on the poor Assistant US Attorney, so they take the $18,000 and wire it into an account in the Bahamas, then they split it into 18 different $1,000 cashier’s checks, and deposit them into 8 different accounts in four different people’s names.  Those people take the money and buy stock, which they sell, transferring the money into a different set of accounts.  Those accounts are then used to buy a piece of art, which is then sold and the money transferred into yet another account, which is used to buy the Hyundai.  For the all car dealer knows, he’s being paid by a bank transfer, just like always.  The money is now next to impossible to trace back to the cash.  It’s been laundered.

Why do we anti-corruption people care about this stuff?  Well, there are two truths which we have to accept:

1.  Bribes require money or other value and

2.  No one wants to get caught

Because of these two truths, anti-corruption people need to worry about money laundering.  The essence of the books and records provisions is that people can’t lie about where their money is going.  Funny, because that’s exactly what AML is all about.

Now think about any alternative currency—things that have value attached to them.  Casino tokens, for example.  The Secret Service is charged with the protection of our currency.  They go bonkers over people using something other than dollars to represent money.  People paying taxi drivers in Vegas with casino tokens, for example.  That’s a problem.  Recognize the difference between this and barter.  Barter is the exchange of value for value: a chicken for medical services.  A casino token has no inherent value other than a belief that it can be redeemed for value at a recognized rate of exchange: the definition of currency.  If it’s currency, you can use it to layer in an AML scheme.  This is what Sullivan was talking about using Linden Dollars as an example.

Imagine that someone wants to pay a bribe, but doesn’t want to get caught (see truth #2.)  Maybe they pay it using airline loyalty reward points.  Or maybe they pay it in product (computers, iPhones, etc.).  Or if they’re really inventive, in BitCoins, or Linden Dollars.  I had a nice conversation with the great people at BitCoin about it.  Nothing resolved, but I expressed the concern.

This is another argument for anti-corruption people to start talking to their AML colleagues.  Or taking the ACAMS classes.  Because with bribery comes money laundering.

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One Response to “Strange Bedfellows: Linden Dollars, BitCoin, Casino Tokens, and the FCPA”

  1. David Harley July 15, 2011 at 5:52 am #

    Right again Howard, there is a real need for holistic aml fraud and bribery programs where people talk to one another about issues.

    David

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