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Cyber Laundering, Bank Secrecy Act, and terrorist financing

Anti-money laundering laws have traditionally served the purpose of eliminating the profits for he commission of crimes. After September 11th, 2001, the focus of anti-money laundering laws expanded to include the funding of terrorist organizations, and multiple reforms to the Bank Secrecy Act and anti-money laundering laws generally, were enacted with the passage of the USA PATRIOT Act.

Reforms included the creation of registration requirements for informal financial entities like money transmitters and the creation of an electronic filing system for suspicious activity reports to reduce time and costs associated with compliance with reporting requirements. The USA PATRIOT Act also enacted other reforms independently, such as enhanced customer due diligence measures and identification requirements and the prohibition of maintaining correspondent accounts with shell banks. Yet despite these reforms, the law is only gradually catching up to advances made by changing technology.

The advent of e-currencies are not new, but as it stands now, there are means of finance which avoid the regulated banking sector completely. These changing technologies pose a problem for the most basic and fundamental tenants of the US anti-money laundering system-the elements of customer due diligence and reporting.

Current anti-money laundering laws regarding foreign owned or controlled private bank accounts or correspondent accounts of $1,000,000 USD require an initial examination of the identity of the owner or beneficial owner, the source of their funds, and whether the individual or individuals are senior foreign political figures. Cash transactions of $10,000 USD or more, however, have to be reported as well but are not subject to the same customer due diligence requirements.

Unfortunately, cyber banks and do not operate with these sorts of requirements and will take money provided for them with as little as an email address. As for 2013, Online currency exchanges are obligated to conform to the same federal laws governing conventional financial institutions. Despite these efforts to rein in potential cyber laundering, gaps still exist.

Title 31 of federal code governs most of the anti-money laundering approach taken by the US federal government. The rise of anonymous payment services and cyber banks only present a significant problem for regulation if the problem is purely limited to domestic responses. The Liberty Reserve, an online anonymous currency exchange found to be used for money laundering operations was incorporated in Costa Rica, yet it is one of multiple such entities incorporated outside of US jurisdiction.

With the legal troubles faced by Liberty Reserve, launderers simply switched venues to mask and transfer their funds, using services such as Perfect Money, a Panamanian entity, to facilitate their business. International cooperation in holding these service providers is necessary for effective prevention of money laundering.

The current provisions governing tracing cross-border transfers permit regulations to be made regarding certain amounts of such transfers but the Financial Crimes Enforcement Network is still in the process of lowering the threshold for reporting cross-border transactions to $1,000 USD. This could increase incentives for the US government to cultivate more cooperative an internationally integrated approach to reaching anonymous payment and currency exchange services based in foreign countries.

The first gap within the anti-money laundering regime is the application of customer due diligence and enhanced due diligence measures apply only to accounts owned by or controlled by foreign nationals. This may allow for detection of some potential terrorist finance accounts, it neglects the potential domestic financier of international terrorism who uses their own accounts to wire money. The laws attempt to prevent this by attaching reporting requirements for transfers to international sources provided they are large enough, either individually or in an aggregate, but these can be circumvented.

The second gap is the inability of the current legal structure to adjust to the increasingly decentralized nature of payment transfers online. The guidance released by FinCEN only addresses individuals who convert hard currency into virtual currency and those who issue virtual currency, but federal law attempts to regulate these entities with larger definition of money transmitters. Despite the increase in regulation, anonymous payment services continue to be utilized and have become more prolific with the rise of mobile technology.

It is still unclear how the US government intends to cope with these changes in technology. It is also unknown what sorts of laws could impact anonymous payment and banking services. There are literally hundreds of such services. The current federal regulations implicitly assume that agents of foreign terrorist organizations will attempt to utilize domestic formal financial services in the US. It is perhaps time for policy makers to reconsider this approach.


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