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Dirty Money Goes Digital


Finance: Banking

Dirty Money Goes Digital

Criminals tap into the high-speed world of wire transfers

In the annals of organized crime, money laundering once was hard work. Consider the plight of a typical 1980s Florida drug smuggler looking to move his money offshore. A boatload of marijuana could be sold on the street back then for $20 million. But pot smokers paid in small bills, and the cash would weigh a ton and a half, says David L. McGee, a former federal prosecutor. Talk about heavy lifting. "You can't carry $20 million in street cash in a pickup truck," McGee says.

The solution for drug dealers was called "smurfing." Smugglers would hire people--smurfs--to go to as many banks as possible and buy cashier's checks under $10,000, the threshold for filing a government disclosure report. The smurfs would then fly the checks to an offshore bank and deposit them. From there, the money could be used or invested in ways to make the dealers look like legitimate businessmen.

What a difference a decade makes. Federal authorities are now investigating a case that makes the smurfs look like the cavemen of some criminal Stone Age. Russian racketeers are suspected of laundering up to $10 billion through accounts at the Bank of New York. And all the Russians needed to do was switch on their personal computers.

Money laundering is taking a terrifying high-tech turn. Criminals sitting at keyboards are concealing their gains by mixing them with the trillions of dollars that swirl through the global banking system every day. And slowing down the money launderers will almost certainly impose costs on banks and other legitimate businesses that benefit from rapid movements of money.

"There is no panacea available today," says Jerome Walker, a former federal banking regulator and now an attorney who specializes in money-laundering matters. "There is no silver bullet that will get you where you want to be."CRUDE SCHEMES. Properly understood, money laundering is the final act of any financial crime--the real getaway, in which criminals hide the origins of their proceeds so they can be used. The key is moving money through as many bank accounts and countries as possible so it takes on the appearance of legitimate income. How this is done involves any number of variations--crude schemes from the past can coexist with the latest ruses. But the idea is to be able to claim that the boss is a legitimate businessman.

The problem facing law enforcement is that big criminals no longer need furtive couriers with fancy briefcases to move money. The staggering amounts allegedly involved in the Bank of New York case suggest that Russian mobsters have advanced beyond street businesses like drugs or prostitution. The suspicion is they are diverting government or corporate funds--that is, money in its electronic form. Nor did the Russians even have to go on the street to transport funds. They could initiate their own wire transfers using bank software--standard stuff for business customers these days, but a potent weapon for a money launderer.

Once plugged in, criminals can take advantage of the Achilles' heel in the global battle against money laundering--the high-speed wire-transfer system. Money put in any bank anywhere in the world can be transferred just about anywhere else in the blink of an eye. And criminal groups can execute so many transfers so quickly that law enforcement authorities can't keep up.

In effect, the wire-transfer regime undercuts U.S. laws that require banks to "know their customer," that is, to know the customer's source of funds. In a transfer, the bank's customer often is another bank, acting on behalf of an account holder. If that first bank doesn't know its customer--or doesn't care to--the sky is the limit for the criminal. Wire transfers are "one of the most used techniques" for laundering money, says Patrick Moulette, executive secretary of the Financial Action Task Force on Money Laundering in Paris, which was set up by the leading industrial countries to combat the problem. "It's very easy for the launderer."

Compounding the problem is the staggering volume and velocity of wire transfers. More than $2 trillion moves every day through the U.S., and globally the total is more than that. The Bank of New York says it handles $600 billion in wire transfers every day. All this traffic makes it hard for human beings such as bank examiners and compliance officials to spot unusual action--even on the scale of the Russian case.

You need technology to fight technology. Software filters that enable banks to monitor wires for suspicious patterns of activity are being developed. But these filters are costly and could slow down transfers, punishing legitimate businesses. Banks, in turn, would have to sacrifice earnings to scrutinize wire traffic more thoroughly. And neither senior compliance officers at some big banks nor federal regulators are convinced that the results from more filtering justify the potential losses.

But the Russian episode may be a reason to start thinking more seriously about such responses. Money is pouring out of Russia. And while there's a debate about what kind of money is actually moving--one man's criminal proceeds are another's capital flight--there is a U.S. interest in making sure Russia isn't bled dry. Russia remains a nuclear power, after all. "This is a national security issue more than a banking issue," says House Banking Committee Chairman James A. Leach (R-Iowa), who will be holding hearings on whether International Monetary Fund loan money was diverted through the Bank of New York. "If Russia can't get itself together on the financial side, it could return to communism."

To be sure, money laundering hasn't become completely automated. Account officers--who are supposed to know the bank's customers--can make it easier for criminals to launder money through sins of omission or commission.

And so far, the Bank of New York has taken action against three employees. Two were fired, including Lucy Edwards, a Russian-born vice-president. Her husband is Peter Berlin, the director of Benex Worldwide Ltd., who set up the accounts being investigated. Natasha Gurfinkel Kogalovsky, who headed BONY's Eastern European business, is on leave. She, too, is married to a Russian businessman: banker and oil executive Konstanin Kogalovsky, who once represented Russia in talks with the IMF. The Bank of New York is cooperating with the investigation, noting there have been no allegations of wrongdoing on its part. Attempts to reach the three employees and Berlin were unsuccessful.DAISY CHAIN. But senior bankers and money laundering experts say the Bank of New York accounts could turn out to be just one stop in a daisy chain of accounts around the world through which suspicious Russian money moved. And that points up the difficulties that authorities are having in policing international money flows.

Currently, money is routed around the world via three major computer superhighways: Fedwire, in the U.S.; the Society for Worldwide Interbank Financial Telecommunication (SWIFT), overseas; and the Clearing House Interbank Payment Systems (CHIPS) in New York, for payments moving into and out of the U.S.

Together, these systems make it possible to conduct global commerce and currency trading on a grand scale. But the underside of this efficiency is a lack of supervision. CHIPS and SWIFT are private, while Fedwire is run by the Federal Reserve. And all three are lightly regulated; you can think of the systems as bank clubs run on an honor system. At CHIPS, for example, a couple dozen leading banks handle the bulk of more than $1 trillion a day in transfers, often serving smaller banks, known as correspondents. Once a big bank decides it can work with a smaller bank--in Russia, say--it processes transfer requests more or less automatically.

However, big banks can have thousands of correspondents--the Bank of New York serves 2,300. And there is pressure to move quickly. If a big bank doesn't process a correspondent's transaction by day's end, it can wind up paying interest costs.

As a result, anonymous money moves easily through the global banking system. A Canadian government report estimates that up to $1 trillion in criminal proceeds gets laundered every year. But given the black hole of wire transfers, no one can know for sure.

Handling these massive money movements, though, has become a key business for banks. In recent years, banks have lost market share in any number of core areas as savers plow more money into stocks and nonbanks extend credit. But only a bank can handle payments--and that leads to other opportunities. By managing a company's cash, for example, a bank positions itself to conduct currency trades, even design derivatives for hedging. Yet those huge cash flows in banks also attract individuals with illicit intentions.

Cash processing has been a particularly important business at the Bank of New York. Fees from that business added up to $256 million in 1998, up 13% from the year before. And in its last annual report, the bank bragged: "In the last five years, we were the only bank to significantly increase our market share" in the global cash processing business.

One way the bank expanded its processing income was by moving quickly into Russia. The bank began operations there in the early 1990s, working first through its Swiss-based private banking joint venture--the Bank of New York-Inter Maritime Bank of Geneva.

The Bank of New York, in turn, became one of the first foreign banks to set up correspondent relationships with Russian banks. One Russian bank, Inkombank, averaged more than 250 wire transfers a day with the Bank of New York. When Inkombank applied to set up a representative office in the U.S., Gurfinkel Kogalovsky, the now-suspended head of BONY's Eastern European business, wrote a letter of recommendation in 1996 to Federal Reserve Chairman Alan Greenspan. "Having worked with all the top banks in Russia, there is no question that Inkombank is one of the most stable, sophisticated, and technologically advanced commercial banks in Russia," she wrote. Inkombank is now insolvent.

Bank of New York officials also helped its Russian business customers obtain the latest tools in computer banking. At least one of the accounts under investigation was equipped with a product that enables the account holder to transfer money, a government source says.

The quandary for banks is that each time they introduce a new service, they may inadvertently be helping money launderers. And it's a dilemma that will only deepen as technology develops. Indeed, the Financial Action Task Force on Money Laundering warned this year that criminals could begin using smart cards, online banking, and electronic cash to launder money.

Just consider the potential threat from smart cards--which electronically store cash. They would enable criminals to move money in bulk without using banks at all. And because they are plastic, the cards might even elude one of man's best friends in the fight against money-laundering--cash-sniffing dogs used at border crossings.

Small wonder, then, that bankers and law enforcement officials differ about the proper response to the latest high-tech money laundering schemes. "There is no doubt we could design a system that would be impenetrable to people who want to launder money, but I doubt the banks would stand for it," says Samuel D. Porteous, director of business intelligence for Kroll Associates Canada, the Canadian arm of the investigative firm. "It's a question of how much people want to spend."

There is precedent for action. Currently, banks use software that screens transfers to make sure they don't go directly to enemies of the U.S. The Treasury Dept.'s Office of Foreign Assets Control, or OFAC, prints a detailed list of countries, companies, and people that aren't allowed to receive wires. Banks have staffs that do nothing but monitor transfers to make sure money isn't being sent to the likes of Saddam Hussein or Slobodan Milosevic.

But there's a big difference between the OFAC list and a search for money launderers. The OFAC list requires banks to look for particular needles in the haystack of fund transfers. Detecting money laundering would require programs that would notice transfers exceeding amount or frequency parameters. Transfer messages are short and not particularly standardized. Computers could be faked out--and the result could be just reams of paper.

The case of suspected Russian money laundering seems to suggest software filters could help. In August, 1998, a year before the case broke, Republic National Bank of New York filed a government report noting suspicious transfers of money from Russia--through Republic--to BONY. Republic detected the activity only a month after installing a filtering system. The Bank of New York declined comment on whether it had such software filters at the time.

But more monitoring would be a tough sell. This year, federal officials dropped proposed rules that would have tightened "know your customer" requirements after fierce protests. "We don't need new laws and regulations," says John J. Byrne, senior counsel at the American Bankers Association. "The easiest thing is to overreact."

That raises the question of whether monitoring could be done at the computer highways that carry transfers--at CHIPS, say. But again, that's unlikely. "If we took a role like that, we would have to do things for the IRS, try to hunt down deadbeat dads, things like that," says George F. Thomas, senior vice-president at CHIPS. "It's the bank's responsibility."

It should be someone's.By Gary Silverman in New York, with Margaret Coker in Moscow, Joseph Weber in Toronto, Laura Cohn in Washington, and Carol Matlack in ParisReturn to top


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