A Moneyless Civilization

Inka Quipu for record-keeping.
A quipu – the Inka method for keeping accounts and records. Wikimedia Commons

A Civilisation Without Money

Money and markets are as ubiquitous to us as water is to a fish. As a fish can’t imagine a world without water, we can’t imagine one without money. Surprisingly, a moneyless civilisation encompassing tens of millions of well-nourished people did exist. Stretching from Colombia to Argentina and Chile, the Inka empire covered much of South America. It might still be there today had it not been felled by disease.

The Importance of Bureaucracy to the Inka

The Inka not only survived without money and markets; they prospered. Not only were the Inka people well-nourished and sheltered; they produced a significant surplus. That surplus made it possible to support a large bureaucracy and a privileged class.
We tend to think of the bureaucracies of “primative” cultures such as the Inka in terms of religion and ceremony. However, in the Inka empire they were largely engineers and planners. It was these engineers and planners who made possible the feeding and sheltering of an empire in some of the world’s most difficult terrain.

Geography Matters

Because of their location in the rugged Andes, the Inka focused on travelling up and down. After that, they thought of North and South and finally East and West. Verticality was important because it was possible for the Inka to traverse agricultural zones from the ocean through tropical, temperate and sub-arctic conditions in a very short distance. The Inka, combined the compressed zones with engineering and agricultural techniques provided the bounty that fed a nation and fed it well. It also provided the surplus they needed to support a gold and silver industry, provide for the independent invention of writing, books and calendars.

So how did they manage all of this without money or markets?

Perhaps their biggest secret was that taxation was in the form of labor. Through this method terraces for farming, raised-bed fields, roads running thousands of miles and cities of stone were built. Fish and tropical foods were brought to the mountains. Maize and beans were transported to the lowlands. Gold, tin and copper were mined. Beautiful artificts were created and robust tools manufactured.

Today’s Problem Isn’t Bureaucracy – It’s Self-Serving Bureaucrats

Lenin despaired of communism’s ability to centrally control Russia’s economy and so introduced his New Economic Policy. By doing so he thought that he could allow capitalism to proceed to its natural self-destruction after which communism would result. I wonder what he would have thought if he was aware that nearly a thousand years before the Incas had pretty much worked out the elements of central planning needed for a civilisation.In the event, Lenin died and Stalin impatiently implemented his five year plans. Ambition, impatience, self-serving and incompetence led to failure after failure. In the end, the idea of extreme central planning fell into disrepute. We should not forget that the Inka proved that in the right circumstances, it can work.

Is Xi’s Move a Bad Thing for China?

China GDP Change (PPP)

Recent History Isn’t Encouraging

By now it is a well-known fact that Xi Jinping will be in charge in China until he decides to step down. Dictators don’t often do so voluntarily; they are usually the last to figure out that their time is past. Robert Mugabe is the prime example of a dictator who could have left behind an increasingly prosperous nation.  Instead he chose to hang on, seemingly forever, and bring his country to ruin. Closer to home we saw Ferdinand Marcos subvert the blossoming Philippine economy for his own gains.

In Singapore Lee Kuan Yew orchestrated slow progress toward democracy while keeping a firm hand on the economic tiller. While Singapore is not a liberal democracy, its widely shared prosperity means that relatively few Singaporeans are complaining. Furthermore, its relative openness allows its citizens free interchange with the outside world.

And Then There’s China

China is a different case. Its immense size and recent backwardness, made it seem to be a hopeless basket case. The rise of Deng Xiao Ping and then his insistance on term limits for his successors has underpinned the steady growth of China. That spectacular growth is unaparalleled in history for a large country. Even with those gains, though, China still remains far behind the developed world. Glitzy skyscrapers, high-speed trains and car-filled highways are signs of progress. However, they aren’t by themselves indicators of the well-being of its people.

Let’s compare. The IMF ranks the following six countries as indicated by GDP (PPP) per person:

  • 1 – Macau ($96,100)
  • 3 – Singapore ($87,100)
  • 9 – Hong Kong ($58,100)
  • 11 – United States ($57,300)
  • 19 – Taiwan ($47,800)
  • 79 – China ($15,400)

Small economies specialize and can grow to phenomenal levels very quickly. It is much harder for a broadly-based, large economy such as that of China. But the difference between the U.S. and China shows that China still has a long way to go. China will never be a Singapore or a Macau, but attaining parity with the U.S. should be feasible. The question is, can that be done in an economy that is largely controlled by a single person? Or even one party?

Normal is, well, normal

There is a statistical phenomenon known as “reversion to the mean”. Simply put, it means that, in general, exceptional performances don’t stay exceptional. Managers of investment funds can be stars one year but they are unlikely to stay stars. Football teams may have one or two or three good years but they’ll move back into the pack. The exceptional performer turns out to be pretty normal over the long term. Politicians may make a few good decisions and those may carry them through an entire career, but the countries they lead would be better off replacing them with new leaders who have a better chance of making good decisions.

Which brings us to Mr. Xi. In terms of growth, China has certainly done well under Xi, most countries would be ecstatic to have growth as robust as China. However, there’s been nothing exceptional about the rate of growth under Xi. That isn’t necessarily bad as Mr. Xi has taken some positive steps to reduce corruption and to reduce China’s fouling of its own nest with industrial pollution. On the other hand, there are still hundreds of millions of Chinese who are barely touched by the improvements in the economy but who are victims of the pollution. Is the answer for them, more of the same? If Xi extends his term beyond 2022 that is what they are likely to get, more of the same.

China’s Prosperity is Threatened… by China

China has prospered first because of cheap labour, then because of lax environmental regulations and increasingly, because of its growing intellectual prowress. However, both labour and intellect are increasingly under threat from the one-two punch of robotics and artificial intelligence (AI) China has declared that it wants to lead the world in AI. Fair enough. But the better and more ubiquitous AI becomes, the less need there is for the talented people that China is churning out of its universities. (That’s a global problem, of course, but every country needs to face this alone.) If Mr. Xi fosters an explosion in Chinese AI over the next four years, will he be the right person to fix the massive negative consequences that will result?

Xi Jinping is the beneficiary of the flexibility that term limits has provided. Now that he proposes to end term limits, he is proposing to end that flexibility as well. Reversion to the mean virtually guarantees that his third and successive terms are going to be mediocre no matter how successful he has been in the past.

Gleanings from the 19th CCP Congress

Xi Jin Ping addresses the 19th China National Congress

China gives Xi Jin Ping Five More Years

General Secretary Xi Jin Ping has virtually cemented his permanent position. Informed speculations is that he will continue in power long after 2022 when he is due to step down. By selecting Chen Min Er as his successor in 2022, he ensures that he will continue to be of consequence when he steps down. What does that mean for China, Asia and the world?

A Brief History of China’s Modern Leadership

After the Tian An Men demonstration and massacre in 1989, the Standing Committee of the Politburo came to an informal agreement. They would ensure both stability and an orderly transfer of power going forth through consensus agreements worked out well in advance. That worked for a while, but then in 2007 they tapped Xi Jin Ping to succeed Hu Jin Tao in 2012. Xi went to work to ensure not only the success of his forthcoming administration, but also its permanence.
Jiang Zi Min’s performance after vacating the General Secretary’s position had provided clues as to how it should be done. Jiang had retained enough power after he stepped down to hamstring Hu Jin Tao and render him relatively weak. Xi saw what was going on and would have none of that when he assumed power.

Enter Xi Jin Ping

His entry point was the rampant corruption under Jiang and Hu. Lip service had been paid to reforms but little concrete had been accomplished. Given the muck that adhered to Jiang and Hu, it was no wonder they did so little. Sure, 10,000 people were convicted of corruption each year, but that number was a thimble of water in a Yangtze-scale flood. Here was an opportunity to rid the country of corruption and himself of competitors.
During this time, China was becomingly increasingly open as a consequence of the relative freedom of social media. Corruption was on everyone’s mind because it was everywhere on-line. Then came the Arab Spring. The insanity of the Cultural Revolution and the danger of the Tian An Men square protests leapt to mind. The Party, the Politburo and the Standing Committee were worried. Internal calls for a “Jasmin Revolution”, the uncovering of a massive CIA network within the country and Edward Snowden’s revelations of U.S. capabilities turned worry to panic. Xi needed to prove that he was up to the task. If he did not, Bo Xi Lai, might sit in the chair of General Secretary.

Bo Xi Lai’s Challenge

Bo had made himself a popular anti-corruption leader from his position as mayor of far-off Chongqing. His many popular reforms had made him a national figure and a likely challenger to Xi. But Bo had his own popularity problem; his police chief, Wang Li Jun, was rapidly becoming as popular as Bo at home. Bo’s answer was to demote him. Four days later Wang was at the U.S. Embassy asking for asylum and exposing Bo’s dirty underwear. The Americans didn’t take him in, but Bo’s fate was sealed. On March 15, 2012 he was stripped of his Party Chief. By April 10 he and his wife were under investigation. Finally, in 2013 he and his wife were put on trial. Xi’s purge of his rivals and potential rivals was underway using the Central Commission for Discipline Inspection (CCDI) as his tool.

The Purge Begins

Because government salaries had fallen far behind the cost of living, virtually everyone in the government was corrupt. If you weren’t corrupt, you led a pretty miserable life. So Xi had a wide open field – all he had to do is to name the individuals to be purged. Corruption would be found because it was there.

Social Media Tamed

As soon as he took office, Xi began to clamp down on the social media that were at the heart of dissent. Then human rights lawyers were shackled. Then NGOs were starved for funding. Foreign textbooks were removed from universities. And finally, in a move worthy of Donald Trump, territorial jingoism diverted attention from what was happening.
Merit no longer had as much a place in the Party as sycophantism. This most recent Congress is a testament to that. Who, other than a cadre of sycophants, would be willing to a droning three and one-half hour speech/lecture by their leader? But a
Xi has a tiger by the tail and he can ill-afford to let go in 2022. Chen Min Er is his response to that problem.

Chen Min Er

Few members of the Party know Xi as well as Chen. Chen was Xi’s head of propaganda in Zhejiang when they served there together for four years. During that time Chen worked closely with Xi to get his message out, helping Xi to write his weekly column in the Zhejiang party newspaper for four years until Xi was moved to Shanghai. After a couple of promotions, in 2012 when Xi was named as General Secretary, Chen was promoted to the Central Committee and made governor of Guizhou. Xi had already done the math and knew that if he appointed Chen as his successor, he’d be able to serve two full terms without having a problem with his age. (China has both a term limit and an age limit for the General Secretary.) In 2015 Xi promoted Chen to the position of Party Secretary in Guizhou. Chen delivered on Xi’s confidence with resounding economic growth. Now he’s in line for the top spot in five years.

Moving Forward

So where does that leave us today? The news coming out of the 19th Party Congress told us a lot. Knowing that can shape your decisions for the next several years.
For starts, the General Secretary set expectations in line with reality instead of opting for Trumpian layers of superlatives. Xi instead established the goal of a moderately prosperous society. That is sweet music to ears deafened with bombastic Trumpian braggadocio.

Growth is out. Quality is in.

Moderate prosperity has replaced a doubling of the GDP of China as the economic goal. Doubling by 2020 from 2012 may happen at the current rate of growth, but it is no longer the focus of economic policy. We’re unlikely to see steel production grow simply to support the production of more steel production facilities. The same is true in many other areas. What we are likely to see is an emphasis on decreasing income and wealth inequality and a consequent growth in the already vibrant consumer sector.

The Environment Is In.

During Xi’s marathon speech he mentioned the economy seventy times but eclipsed that with eighty-nine mentions of the environment. Coal-belching smokestacks and deadly foodstuffs will be a thing of the past by 2020 if Xi has his way.

Housing is a concern.

And rightly so, given their contribution to economic bubbles. Xi emphasised that houses are for living in, not for speculation. Whether he is willing to risk the unpopularity and possible unrest of instituting permanent controls remains to be seen. Popularity is a key element necessary to keep him in power after the end of this, his final term. For now Xi has the internal politics of the party under control. Losing his popularity with the people could quickly unravel that control.

Financial Risks to get More Attention.

The headlong push for growth has led not only to many failed projects, but to an inverted yield curve. Many, if not most, banks are insolvent and survive only on the largesse of the State. We expect to see this sector cleaned and consolidated over the next few years. It won’t be easy or quick because the problem is so big. But we can expect to see a start.

Xi’s plate is over-full. There’s no way to complete his work in the next five years. His selection of Chen as his replacement will ensure that a kindred spirit seeking to continue and improve on Xi’s reforms will be in place. Chen is likely to be more than a puppet but less than a free agent. That’s likely to make many people breathe easier.

Money Laundering and Your Bank Accounts – Part VIII – Trade Finance

Banks and containerisation are the cornerstone of international trade.
Photo by chuttersnap on Unsplash
This is the eighth part in our series revealing exactly what banks are looking for when they are combatting money laundering.
Trade finance is one of the most common areas for laundering money. Accordingly banks throughout the world look for suspicious transactions. Avoid the following situations if you want your business to flow smoothly.

Trade in Suspicious Goods

Businesses have standard types of goods associated with their businesses. When they shift to or add items to their normal purchases or sell products that aren’t their normal business, that sets off an alarm. For example, a company that sells perishables but switches to machinery would trigger an alert.

Higher Risk Jurisdictions

Transactions involving parties in higher-risk jurisdictions automatically receive more scrutiny; activities that might pass muster in other jurisdictions may lead to problems.

Transiting Higher Risk Jurisdictions

Transactions that transit higher risk or non-cooperating jurisdictions receive additional scrutiny. That is because criminals may substitute cargo or divert funds,

Customers Involved in High Risk Activities

Banks scrutinize any customers handling risky products such as those below for possible involvement with criminal gangs or terrorists.

  • equipment for military or police organizations of foreign governments,
  • weapons,
  • ammunition,
  • chemical mixtures,
  • classified defense articles
  • sensitive technical data
  • nuclear materials
  • precious gems
  • certain natural resources such as metals, ores, and crude oil

Trade Pricing Fraud

Goods or services that are obviously mispriced are a common way to launder money and evade taxes. Central Bank authorities are well aware of this and in most cases require that their banks be alert for such activities and alert them to any such cases. And, of course, when periodic audits are conducted, this is one of the areas that receives close attention.

Misstating of the Quantity

This is a variant of Pricing Fraud where the unit cost is correct but the quantity is changed up or down to achieve the results that the company wants.


Just as corrupt governments create over-complex laws to enable graft and self-dealing, fraudsters design over-complex transactions to enable fraud in commerce. Banks are on the lookout for such transactions and are responsible to report such cases to the Central Bank.

Third Party Payments

If a transaction between party A and party B stipulates a payment to party C, this will alert the bank to look more deeply into the transaction. Obviously the could be a legitimate transaction but the method is often used to launder money.

L/C Inconsistency

If the terms of and L/C haven’t been precisely met, the bank will not honour it. If it does, either by accident or on purpose, then the examiners will conduct an investigation to determine why that was done.

L/C Amendments

Bank authorities will investigate all significant changes to L/Cs to determine the reason why the change(s) were made.

It is clear that international trade is an area in which it is relatively easy to launder money. Banks are alert to the possibilities but the sheer volume of trade makes this an area of ongoing concern.

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Money Laundering and Your Bank Accounts – Part VII – Unusual Activities

Banks Solve the Money Laundering Puzzle.
This is the seventh part in our series that reveals exactly what banks are looking for when they are combatting money laundering.

Bank-to-Bank Transactions

The size and frequency of currency deposits increases rapidly with no corresponding increase in noncurrency deposits.

You know if you expect to see an uptick in your currency deposits. If you do, pay a visit to your banker and explain to her what is happening. That will forestall any unnecessary problems.

A bank is unable to track the true account holder of correspondent or concentration account transactions.

You may have an account that receives deposits from several other banks. For example, for sales made in multiple countries plus deposits from a credit card bank. If the bank thinks you aren’t the actual account owner, then they are obligated to take action. They will report it to the appropriate authorities.

The turnover in large-denomination bills is significant and appears uncharacteristic, given the bank’s location.

There is a global effort to reduce the number of large currency bills in circulation because of their anonymity. Your account will be flagged if you process many of these through your account where this is unusual.

Changes in currency-shipment patterns between correspondent banks are significant.

Transactions between correspondent banks are tracked so that if an employee manages to bypass internal controls, she will be caught. There are several triggers to be aware of:

  1. Large volumes of small denomination bills are sold to U.S. banks. (This is a trigger in the EuroZone as well. In that case, triggering currencies are USD, GBP and EUR.)
  2. Multiple wire transfer instructions from foreign nonbank institutions requiring the bank to transfer funds to entities for which there seems to be no reasonable business purpose.
  3. Customers exchange large volumes of USD or Euros for larger denominations. This facilitates physical cross-border shipment of currency.
  4. Deposits of Euros or US Dollars by a foreign non-bank entity that subsequently transfers the funds via wire to foreign non-bank entities.

Even legitimate businesses risk losing access to their funds temporarily or permanently as well as prompting an investigation of the principals if they engage in any of these activities.

Protecting Your Information While Travelling.

Protecting Information
image by stevepb
We are interrupting our information series on the impact of money laundering controls on legitimate businesses to deal with a subject that has become increasingly urgent to many of our customers, and that is protecting their private information when traveling. We shall complete the money laundering series shortly.

Protecting Your Private Information During International Travel

Many businessmen have become worried about the increasingly intrusive nature of border inspections. Border security agents are beginning to treat information with the same level of concern as they do physical weapons. That concern is understandable but too often it leads to invasions of privacy that are not warranted. Furthermore, they can easily lead to the leakage or loss of critical commercial information or reveal embarrassing private facts. Governments should not act in these domains, but we’ve made it easy for them. So they do it.

Border Interrogation

When you cross into a country, there is no limit to the amount of information border control agents may demand. Your very first line of protection is to be normal in every possible way. Act as a businessman, a tourist or a relative. Don’t draw attention. Don’t project an aura of being special.

Answer questions matter-of-factly. Tell the truth. Don’t joke.

If they select you for further questioning, you’ll go to a separate interrogation room. They are being paid for the time they are there. Meanwhile, the loss of time is costing you money. You want to leave quickly. They want overtime pay. They will use your impatience against you.

When they finish asking you questions or perhaps before, they will ask to look into your laptop and phone. Of course, they will tell you to provide the passwords. Now the trouble starts. As an international traveler entering a country, you have no rights. You are at the mercy of the inspector in front of you. You have two rational choices and one irrational:

  1. Give up your passwords and give them the keys to your life.
  2. Give up your passwords and let them find nothing useful.
  3. Try to fight them.

We encourage option two. Give them the passwords to unlock your devices and any applications on them. Just ensure there’s nothing important for them to see.

Fingerprints, Pattern Tracing and Iris Scans

None of these are as effective as the old-fashioned password for protection – if you create a good password and change it from time to time.
As a matter, of course, you should have your devices set for complete encryption of all the data on them whether you are at home or on the road. Then, if you have any concern at all that your device may be lost, stolen or compromised, you should be certain to use a well-formed password to protect it.

Invisible Information is the Best Defense

When you cross a border, take the minimum necessary information with you. Fortunately, in the twenty-first century, you can transport minimal data easily. On the other hand, ferreting out your secrets is easier than ever, too. Especially if you aren’t careful. There are several data storage areas you need to be aware of; border agents certainly are.

  1. Your digital devices
  2. The cloud
  3. Social media

Let’s cover these in a bit of detail:

Digital Devices 1

There is virtually no possibility that you know what data can be found stored on you digital devices. Poor programming practices and lazy habits ensure that practically everyone has far more information on their devices than they can imagine. Every time we upgrade devices, we get more memory and transfer more history from our old devices to our new ones. Oftentimes it is buried so far that we don’t even know it is there. And if we don’t know it is there, we certainly can’t remove it. Some of it may be embarrassing. Some of it may be incriminating.

On top of that, as almost anyone with even a slight bit of computer literacy can tell you, erasing things doesn’t actually erase them. Generally, erasing just changes the first character to let the system know that space is available, but all the rest of the information is still there if it hasn’t been overwritten. Destructive erasure is possible with modern operating systems but it is slow and not one hundred percent certain.
Your best option is  to leave your daily-use digital devices at home.

Digital Devices 2

From now on, carry only the bare-bones hardware that you need. For example, an iPad and a Samsung phone. For communications, set up your iPad to connect to a straw iCloud account that is bare-bones and is not your regular one. On your Huawei, keep only the phone numbers of your office, home and a couple of restaurants where you have business lunches.
Pay for the equipment and cloud accounts in cash or through your company account. Do not use your credit cards.  Purchase the SIM for the phone using  cash and without identification or, at worst, use your company account; your concern isn’t anonymity, it is their collection of your personal information.

Memorize your cloud account information. Do not write it down. You will use that information later to download everything that you need.

Once  in your hotel room, you can connect your iPad to your main Cloud account and then download the business information and any apps (e.g. WhatsApp and Skype) that you need. You can then proceed about your business as normal.

Before departing the country, you will upload all of the new data to the cloud and then reset your iPad to factory specs and erase everything. Then you will connect the iPad to your innocuous straw iCloud account.

Handle your Samsung or other phone similarly. Each manufacturer handles data erasure differently. The iPhone is probably the most convenient and secure – you simply go to General->reset->Erase all settings and content, tap on that and you are done.  Rather than erasing the data, the iPhone erases the codes that are used to encrypt every bit of data on the phone. So, although the data is there, no one is going to read it.

The Cloud

Digital devices love the cloud. You probably have at least ten cloud accounts of one sort or another without realizing it, and some of us have acquired hundreds. There are a variety of ways to track the passwords for them including through special password apps, through your digital device operating system or some manual system of your own.  Once your iPad and phone are set for travel, you will connect your iPad only to your straw account. Your straw account will contain real information but not information that you wish the border agents not to see.

Social Media

This may be your biggest problem if you have been putting information on your social media that you would prefer that the border security agents not know about. They will check the most popular social media sites. Using your name and variants of it. They may also do a search of the Internet using your photo and Google’s image search function. If you don’t want everyone in the world to know something about you, don’t put it on the Internet.

If you are able, you can try to clean up your social accounts, but generally, there’s not much you can do. What’s done is done. You can start flooding your accounts with entries every day so that the investigator gives up searching before getting to what you want to conceal or can’t distinguish the wheat from the chaff, but, in general, if you’ve put it on line, if they are sufficiently interested in you, they will find what you are trying to hide if you maintain your account.

It is possible to request Facebook to completely delete your account.  Once that is done, you’ll never be able to access it again. You can find information on how to delete it here. If you still want a Facebook account, you can then create another account under a different name.

These steps are designed to protect you as you pass through borders, but you may find them useful for day-to-day work in some police states. Depending on the country you will be entering, you may find that you need to augment these steps, but they form a solid basis for travel throughout most, if not all, the world.


Money Laundering and Your Bank Accounts – Part VI – Loans

photo by Drew Hays, unsplash.com
This is the sixth part in our series revealing exactly what banks are looking for when they are combatting money laundering.

Laundering Money Through Lending Activity

Money launderers course massive sums through loans and investments. Bank authorities must perform significant due diligence to detect money laundering in these cases. To top that off, some governments try to discourage detection of such money laundering activities through legislation and regulation.

A borrower secures loans using pledged assets held by third parties unrelated to the borrower.

Launderers clean dirty money by pledging an asset purchased with dirty money to secure a clean loan. Sometimes, they course the funds through several banks, several shell companies, and one or two straw men. The bank may ask many questions to prevent any money laundering. The borrower must answer those questions convincingly.

A borrower secures a loan by using readily marketable assets, such as securities. If a third party owns the assets then the transaction is especially suspicious.

Borrowers don’t usually pledge easily marketable assets to get cash. The borrower can sell such assets with less difficulty than taking out a loan. If a borrower does not, he needs to be able to explain why. He will need to provide a convincing reason.

A borrower defaults on a loan that is secured by easily marketable assets.

The borrower probably took out the loan in order to default on it. Launderers create these schemes as a way to convert somewhat clean assets and create clean money.

Loans are made for or are paid on behalf of, a third party with no reasonable explanation.

“Reasonable explanation” generally requires significant documentary support. Absent that support, someone is going to be sitting in front of an investigator trying to answer questions.

The borrower purchases a certificate of deposit using an unknown source of funds in order to secure a loan.

When funds are provided via currency or multiple monetary instruments the source of the security is even more suspicious.
Banks may permit the borrower to partially or fully secure a loan by purchasing a CD issued by the bank. However, banks that do so must thoroughly vet the source of the funds. If they don’t, regulators will suspect them of colluding in money laundering.

Banks make loans that lack a legitimate business purpose

Or they may provide the bank with significant fees for assuming little or no risk, or tend to obscure the movement of funds (e.g., loans made to a borrower and immediately sold to an entity related to the borrower) will be suspected of colluding to launder money.
In other words, they are loans that don’t make sense from both the borrower’s and lender’s point of view unless criminal activity is involved.

Money Laundering and Your Bank Accounts – Part V – Suspicious Activity

mental laundering - starkness
photo by Jace Grandinetti

Suspicious Activity: Any Activity Inconsistent with Your Business

This is the fifth part in our series revealing exactly what banks are looking for when they are combatting money laundering.
Money launderers sometimes try to fool banks by providing convincing evidence of their honesty when they open their account. Then when the account is running, they change their operations into money laundering mode.

A business’s pattern of currency transaction patterns shows a sudden change inconsistent with its normal activities.

For example, you operate an import-export business that receives £100,000 spread among ten customers. Then, over the course of a few months, you ramp up the deposits to £300,000 spread among several hundred customers. This is a clear change in the way you do business and would elicit an investigation. The bank would also find it suspicious if suddenly one customer paid you an unusually large amount.

Money Laundering by depositing a large volume of cashier’s checks, money orders, or funds transfers deposited into or purchased through, your account when the nature of your business would not appear to justify such activity.

This is an extension of the previous pattern but extends to domestic business and physical payments are also important.

Money Laundering through a retail business with dramatically different currency deposits from similar businesses in the same area.

Perhaps a drug gang purchases a restaurant to launder money. Similar restaurants in the neighborhood receive practically all of their payments through credit and debit cards. On the other hand, the gang’s restaurant’s receipts are almost all cash. This discrepancy will alert the bank inspectors. Because they inspect the banks, they are aware of the activity of all the banks in the neighborhood. Furthermore, this activity will alert bank software that keeps track of patterns for similar businesses, local and national.

Clients effect unusual fund transfers among related accounts or among accounts that involve the same or related principals.

The owner of either a retail business and a cheque-cashing service does not ask for currency when depositing checks. He may have another source of currency.
Retail businesses in the 21st century frequently need to request currency because of a large number of credit card and debit card transactions. And, of course, a cheque cashing business that had no requirement for cash would be odd, indeed. If they don’t require currency from time to time, this is an item to be investigated.

Goods or services purchased by a business do not match the customer’s stated line of business.

A client layers transactions to launder money. For example, a fast-food restaurant assembles payments from street-corner drug dealers. Then the restaurant pays invoices for car parts to a gang-owned auto parts dealer. The dealer assembles the payments from several restaurants and passes them up the chain to a diamond wholesaler. A fast-food restaurant buying auto parts? An auto parts retailer buying diamonds? The bank sees these transactions and checks for money laundering.
A client pays for goods or services with checks, money orders, or bank drafts not drawn from the account of the entity that made the purchase.
Businesses should never pay on behalf of other businesses or individuals. Third-party transactions can mask illegal payments. Accountants will discourage such payments. Banks will suspect them.

Money Laundering and Your Bank Accounts – Part IV – Automated Clearing House (ACH)

dirty money needs laundering
image by Vitaly via unsplash.com

This is the fourth part in our series revealing exactly what banks are looking for when they combat money laundering.

Automated Clearing House Transactions – Policing Money Laundering

“Automated Clearing House” or ACH refers to all clearing houses, not only to the U.S. one with that name. GIRO, NETS, ACH, CHAPS, EFT, BACS, PEACH, SDD and others are all automated clearing houses. Launderers attempt to route transactions through them to bypass some anti-money laundering safeguards.


The rapid rise of financial technology (Fintech) third party quasi-banks has created new openings for money laundering. PayPal was one of the earliest Internet Fintech companies but many have followed in its wake. Fintech quasi-banks carve up the banking product into pieces. Each fintech company provides one or two services, adding to the burden of regulators. Ayden, LendingClub, Addepar, Commonbond, Kabbage, Transferwise, etc. are a few of the many third party fintechs. Fintechs are generally on the up-and-up but it is reasonable to assume that some are designed as money laundries and are even capitalized by dirty money.

Non-customers launder money by using large-value, ACH transactions through third-party service providers (TPSP) that don’t perform effective due diligence.

Regulators don’t control TPSPs as rigorously as banks. So money launderers can move money into the banking system without the usual controls. ACH systems must flag such transactions. Regulators are looking at the TPSP environment now. Even so, they only look at deposits, checks payment, and money lending.

TPSPs violate ACH network rules, or generate illegal transactions, or process manipulated or fraudulent transactions on behalf of their customers in order to facilitate money laundering.

Regulators should close down TPSPs after catching them breaking the law, but often they don’t. Usually, regulators don’t consider the transgressions to be bad enough to put them out of business and may impose lesser penalties. Bank regulators will look for regular patterns of abuse by TPSPs. When they find an abusive TPSP, they will punish banks that have done business with it. But that takes time. Meanwhile, money launderers and their crooked clients continue to operate.

Layers of TPSPs that appear to be unnecessary are involved in transactions in order to launder money.

Always and everywhere, officials use complexity to facilitate fraud or theft. Complex tax codes such as that of the U.S. are examples of regulations designed with malicious intent. Complex financial deals are often designed to defraud. Regulators find such fraud hard to detect if they were designed with care. Launderers use TPSP layers to facilitate much of the money laundering outside the main banking system.

Clients initiate an unusually high level of transactions over the Internet or by telephone.

This is simply smurfing by another means and is as easy to track as any other kind of smurfing. Banks will usually detect this in the twenty-first century, and if they don’t, their regulators will.

NACHA information requests indicate potential concerns with the bank’s usage of the ACH system… i.e. they may suspect money laundering.

NACHA doesn’t communicate directly with end users of the US ACH. That is important for you to know because fake NACHA emails are a goldmine for phishing attacks. However, NACHA does have a set of rules and the ability to fine members who do not obey them. Furthermore, banks can alert NACHA of suspicious transactions they see. Third party software such as that provided by NICE•Actimize can automatically detect the misuse of ACH transactions. Those are reported to NACHA and bank regulators.

Can Money Launderers penetrate the system?

Yes. Many people try to game the system and succeed. It is clear that in many governments themselves are anxious to leave some channels available to move dirty money with little friction. Power and money laundering go hand-in-hand.

How do money launderers work in the 21st century?

In one scheme, criminals route debt obligations across multiple borders to clean dirty money. For example, X takes out a loan for a million dollars from a peer-to-peer fintech lender in the U.S. He deposits the loan in his U.S. account. He then funds the repayment of the loan from a Bank of Cyprus account using a UK peer-to-peer fintech fund offset service. Money crossed no borders under this scheme. On the other hand, the launderer moved a million dollars from his Russian-controlled Cyprus account into the U.S. When he repays in amounts of around $5,400 per month they will be thought to be normal payments for a thirty-year loan. Only the structure of the transaction would give a clue as to what was going on and given the separation in location and time, no alarms will sound.

We will discuss other schemes later in this series.

Money Laundering and your Bank Accounts – Part III – Funds Transfers

image by Vitaly via unsplash.com

This is the third part in our series revealing exactly what banks are looking for when they are combatting money laundering.
Transferring funds is at the heart of commerce and is the most important function performed by modern banks. Transferring funds is also at the heart of money laundering. Move dirty money through enough hands by sufficiently devious means and at some point, it magically becomes clean.
Think about this, if we can describe an activity, it is possible to write software to detect it. Banks do just that.

Bank Checks on Money Laundering Funds Transfers

You transfer funds in large, round dollar, hundred dollar, or thousand dollar amounts.

This is classic smurfing. Sudafed smurfs were buyers for meth labs who would go from drugstore to drugstore purchasing Sudafed cold medicine containing pseudoephedrine. The manufacturer then made crystal meth from the pseudoephedrine. Smurfing has expanded into money laundering. Smurfs typically deposit small amounts to many accounts. The money from those accounts is then assembled and transferred to a master account in another country. Then someone transfers the money, this time to the actual beneficiary. Dirty money often travels through several jurisdictions before arriving at the final destination.

Funds transfer activity occurs to or from a financial secrecy haven, or to or from a higher-risk geographic location without an apparent business reason or when the activity is inconsistent with the customer’s business or history.

“Higher-risk geographic locations” tend to be tiny island nations such as the Cayman Islands, Vanuatu or the British Virgin Islands. But, they are also places such as Luxembourg and Gibraltar. Banks maintain a list of risky jurisdictions. Transactions involving such jurisdictions receive extra scrutiny.

Funds transfer activity occurs to or from a financial institution located in a higher risk jurisdiction distant from the customer’s operations.

There might be a logical reason for a Florida business to be remitting to or receiving funds from the British Virgin Islands, which are close by. On the other hand, it is unlikely that they’d be doing much business with the Cook Islands in the South Pacific. Again, banks will pay extra attention to such transactions.

Your accounts receive many small, incoming transfers of funds, or receive deposits of checks and money orders. Then, almost immediately, all or most of the transfers or deposits are wired to another city or country. Usually, the transfers are in a manner inconsistent with the customer’s business or history.

Again, we see smurfing on a large scale. Drug cartels purchase chain restaurants, casinos, entertainment and sports venues in order to be able to launder money through them. These venues typically have large numbers of small transactions; ideal for throwing banks off the scent. But law enforcement has statistical data that can sniff out this sort of money laundering.

Your accounts receive large, incoming funds transfers on behalf of a foreign client, with little or no explicit reason.

Banks want to know what to expect. If you are going to be receiving a large amount of money, it is wise to tell them in advance what is going on. Ensure that they write it down so that you can avoid suspicion. You may think it is troublesome, but having the FBI knocking on your door is real trouble.

Transferring funds is unexplained, repetitive, or shows unusual patterns.

To the average person, the world seems jumbled, chancy, ad hoc. But those who pay attention see patterns. So it is with bank accounts. Observe enough bank accounts and you’ll see that 99.9% of them follow predictable patterns. If your account is in the one-tenth of one percent, the bank will examine it closely.

You receive payments or receipts with no apparent links to legitimate contracts, goods, or services.

If you run an asphalt business and suddenly receive payment in your account for a Ferrari, that may well be flagged. Receive payment for a Ferrari and a luxury condo and it will be flagged.

You send funds to the same person using different accounts or to different accounts. Or the reverse.

Well Sir Smurf-a-lot, banks figured out this channel a long time ago. It can work, but only by using multiple aliases or smurfs at many banks over a long time.

You don’t provide enough information regarding funds transfers, not only the why but also the who of related parties.

Banks detect these omissions sometimes but they fall into a gray zone. Protect yourself by being open and up front in describing both why the transaction is taking place and who the beneficiary is.