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M-Payment: a threat to anti-money laundering

By H. Paul Leyva, JD, C.AM.C.

1st October 2008

International Narcotics Control Strategy Report (INCSR), March 2008:

"… There are already signs that money launderers and those who finance terrorism, will operate the new M-payment systems. "

NEW YORK, NY-Brittany Never give an income tax return filed by their income + $ 200,000.00 as a high-class call girl report. In order to continue their illegal profits from the IRS and law enforcement authorities to hide, Brittany has an m-payment function to their mobile phone and PDA. With the M-Payment function exists, it is now living virtually cashless. For example, ask her Brittany Customers for the "e" (street slang for electronic payment, mobile or e-pay). "E" is a text message such as transfer of funds from a client-Mobile m-m-account to the account in Brittany phone. After hours of Brittany Black Berry now works like a debit card for all their needs Editions: shopping at Nordstrom's, that buy designer handbag, sending a car payment for her new Mercedes-Benz via SMS and clubbing all night with her friends. Today, Brittany earned $ 800 for their Services. Before the M-payment technology, they had no choice but to make daily cash deposits into their bank about suspicious accounts. With the rise of m-payment, they are no longer Worried about someone tracking their bank activity. As a precautionary measure, Brittany destroyed the SIM cards from their mobile phone and PDA devices at the end of each week and replaced with new ones. As a result, gets if they ever arrested for their activities, no digital evidence of their occupation, income, lifestyle or remains.

Logan Square, Chicago, IL-Alex, an accountant by day or by night, drug users, uses his computer to transfer $ 400 from his personal checking account to his cell phone, the M-Payment Account. Alex is in need of Ecstasy from his dealer. take their time by agreement, the buyer and supplier in the local cafe on the corner of California Avenue and Logan Square Boulevard. As usual, the dealer sent the Ecstasy hidden in an empty cup of coffee, and Alex transmits the "e" Via SMS the supplier's phone. If the transaction is complete, Alex slips away to plan his evening.

When the dealer enjoying his latte, he uses his phone to text the funds to a bank in the Cayman Islands, where the deposit just go to the multitude of other small value transfers are lost. Once the transaction is complete, the provider gasps a sigh of relief, because he knows he is safe. When a rival gang member trying to steal the cash, he will find no trace of the money. Similarly, if the police trying to understand it by pressing the Delete Delete Transaction History "function on his cell phone-detection software that it from the network-all incriminating evidence downloaded is gone. With no evidence of his crime, the authorities were forced to let the dealers go.

Nairobi, Kenya-International Press: 7 August. kills on the anniversary of the suicide attacks that killed more than two hundred people at the U.S. Embassy in Nairobi, another suicide bomber fifty-eight people near the rebuilt U.S. Embassy in Kenya. At this point the authorities are not able to identify the terrorists or the group responsibility to determine for this attack, but many believe it to be the work of Al Qaeda. Officials admit the FBI-in-charge and top Kenyan security officials that they could have been found the remains of a pre-paid m-payment mobile phone in the wreckage, but as these devices are not registered, the phone anywhere and purchased by anyone. In Kenya as in many other parts of Africa the use of mobile phones and mobile payment technology is common as a miniature-banking units. Critics have repeatedly that M-payment technology makes it easier for terrorists to send and receive money transfers via SMS transmission.

These scenarios are examples of the warnings issued in the March 2008 International Narcotics Control Strategy Report (INCSR), entitled "Mobile Payments: a growing threat," the exploitation of the potential of m-payment technology described by money launderers, criminals and terrorists.

What is M-Payment? How does it work? Is it already in other countries? How can Money launderers, criminals, and terrorists use this technology to conceal their illegal activities? Most importantly, what steps can the United States and to take other countries to the potential abuse of m-payment circumcised?

"Some of the most innovative products are providing electronic payment systems and include mobile payments and m-payments … Driven by a remarkable convergence of the financial sector, telecommunications, the rapid global growth of m-payments requires special attention. M-payments can take many forms but are often the point of sale payments via a mobile device such as a mobile phone made, a smartphone or a Personal Digital Assistant (PDA). "

-INCSR, March 2008

Virtual Wallet

M-Payment (Mobile Payment) is synonymous with the terms m-commerce, M-Accounts, M-Wallet-, m-banking, electronic money or digital cash. For reasons of this Article, the widely be accepted term "M-Payment" is used. The best way to introduce this relatively exciting technology is a time when your cell phone or PDA as a wallet present act. In addition, there is a purse, you can not just withdraw money to pay it on goods and services but also enables you to deposit money into these systems so that monetary unit even more flexible and useful than a credit card. The widespread adoption of m-payment could eliminate need to carry cash, you visit an ATM to send remittances, or even use a credit card.

Currently, there are two platforms that facilitate the use of M-Payment. The first allows your phone to m-accounts, such as your bank account, credit cards, Internet payment service, or Link to another financial institution. The second makes it possible to trade mobile phone companies, like banks and allows customers to deposit and withdraw money from their mobile Accounts. Although this service is not available in the United States, m-payment already enjoyed acceptance and success in countries such as Japan, Korea and the Philippines. M-payment technology begins in South Africa, the Democratic Republic of Congo and Kenya thrive.

Currently no special hardware needed to use M-payment. A participant, in Web surfing, for an Internet-based mobile payment service, and then download the necessary software on almost any existing mobile phone. M-payment software uses existing text-messaging technology to confirm to send and receive funds, payments and credits, and bank statements.

The Virtual ATM

Make eat before they buy a McDonalds (or almost all retailers) for lunch and then the cashier asks for an additional $ 50 (or more) in cash. For a small fee will be the cashier not only charge a customer McDonalds M account for the hamburgers, soda and fries, but also ring up $ 50 in cash that he or she requested. As with debit cards, there is no need to find an ATM or pay high bank fees.

Person to Person (PTP) Transfers

From person to person (PTP) transfers are also possible. For example, friends, family and private parties in commercial transactions monies to each other delivered over their mobile phones. A parent can send their teenage daughter's Allowance by SMS. Employers can text message their employees' wages Phones. After winning an auction on eBay buyers to the text of the payment to the seller. Or an individual moves to sell in a garage, only to find that beautiful antique he has sought, but he has no money. In addition, the seller did not accept credit cards. The fix is simple: the buyer text messages the payment directly to the seller's cell phone. The possibilities are endless.

Wire transfers on mobile phones

The World Bank estimates that global transfers (ie international transfers) more than a quarter trillion dollars a year. Increasingly, in many areas of m-payments offer a new option for expatriates and "guest workers" who want to send part of their wages home to support their families.

In the United States, many migrant workers from Mexico and Central America and South America use transfer services such as Western Union and Money Gram to send money to their relatives abroad. In 2005 alone, Money to Mexico from the United States will transfer a total of more than $ 20,000,000,000th Unfortunately, these services come with wire high fees, and some of the beneficiary Banks also charge fees for the transaction as well. In addition, in rural areas in many countries people have no access to banks. With M-payment technology a migrant worker can literally text message payment to his relative's cell phone, thus circumventing the exorbitant fees by wire transfer services and Receiving banks charged.

Virtual Traveler's Check

Another amazing feature of M-payment technology, that allows a cellphone to act as a virtual traveler's checks. Before leaving on a family holiday, a subscriber can deposit money into his cell phone, the mobile payment account, then withdraw the funds as needed during the trip. Consumers will no longer need to purchase traveler's checks or travel with substantial amounts of cash.

Contract-Less, or Touch and Go, Mobile Phones

Through its use can send and receive text messages for mobile phones Fund in "contract-less" mode be placed. To activate this feature, a special chip can be mounted or inserted into the phone. It is likely that future cell phones already with this feature have integrated into them. When a consumer to make a purchase, he or she can simply "swipe" a mobile phone via a cashier scanning device and the transaction complete. With the "swipe" or "touch and go" function, no signature or additional data entry is required at the checkout.

Pre-paid mobile phone and M-Payment

Low-income consumers or those with poor credit who would not qualify for the monthly phone Contracts or credit cards can use prepaid cell phones to ask for m-payments. These people can load prepaid cards operation of various monetary denominations ($ 50, to allow for $ 100, $ 250 or more) on the phone, the device as a virtual wallet to be used. How can the previous examples, friends and family also transfers to the pre-paid mobile phone via SMS as well.

Possible displacement of cash machines, Wire transfer companies and credit cards?

As with M-Payment holder accounts in other parts of the world, Americans will undoubtedly embrace the convenience and cost savings this virtual wallet. With the further spread M-payment technology, It can be argued that M-payment services could actually be the death of ATM sequence, transfer companies and high interest credit card fees. This prediction is well founded when one considers that the United States contains about 250 million mobile customers, a figure of 82 percent of the population and over three Billion mobile phones currently in use worldwide. In addition to these facts, The Wireless Association reported in its 2007 Wireless Industry Survey, consumers, almost one Billion text messages sent per day worldwide.

Even more compelling is the convenience offered by this service. Given this technology, customers need not longer to find an ATM to withdraw money. With a PC, they can transfer from their bank accounts directly to their mobile phone accounts. If a migrant worker to raise money for his Family must send abroad, he or she can only speed dial entry, the funds directly from his mobile phone to a relative's mobile phone. A person is no longer required to to the local Western Union outlet to complete the transaction drive. In contrast to the high-interest credit cards, m-payment service providers offer competitive prices, Rebates or other incentives to attract new customers. Finally, a further reason for concern on the part of banks and companies, the remittance fact that mobile phones already to the demise of pay phones, cameras and helped retail music stores.

PayPal enables a fundamental shift in M-Payment

In a report from Juniper Research has published a respected consultancy group that analytical services to the global hi-tech communication, Senior analyst Alan Goode concluded that the entry of PayPal in the micro-m-payment and M-Retail, "will only serve a fundamental shift in the global consumer Payment services to facilitate and now into the future. "Furthermore, forecast Goode, that" Mobile payments are set at $ 10000000000 in total sales in 2010 increase. "

Other players who have already entered the mobile payment market include Google's G-Pay, Horn Fire Holdings, LLC, mFoundry Inc. and Obopay, Inc. is the largest supplier with more than 100 million Internet accounts worldwide PayPal.

"There are numerous money laundering and terrorist financing impact] [M-payments, but digital value smurfing is a very clear threat. "

-INCSR, March 2008

Smurfing

The dark side of the m-payment, if the service is unregulated, there will be money launderers, criminals and terrorists to exploit this new technology. In particular, this new technology will undoubtedly facilitate Smurfing.

It is generally known that smart money launderers, criminals and terrorists have always been willing to keep their financial transactions under $ 1,000 per day to requirements for financial reporting to avoid. One way is to hide money by using multiple "Smurf" or "runners" to make payments, money orders to purchase, traveler's checks or other transactions with illegal or "dirty" money. Smurfing can spread through the small denomination payments or drug Contributions to terrorist causes, through various commissions centers are carried out one or more bank accounts. Essentially Smurfing illegal proceeds breaks into small Quantities, with less risk draws the authorities can be moved out.

For example, drug dealer or terrorist financing, a Smurfs "At ten several soldiers, or "ten ten different open bank accounts or conduct various financial transactions per day. After the accounts are opened to the drug dealers or terrorists Smurfs orders his security deposit is less than $ 999 per day, such as $ 756 a day, $ 922 on another day, and so on. By ensuring that the bank deposits or other financial transactions covered by the $ 1,000 threshold, they can report suspicions to avoid and prevent the triggering of financial reporting requirements. In this example, ten different accounts with ten other Smurfs Bank deposit to wash an average of $ 850 per day to $ 2,210,000 annually.

Although more sophisticated detection systems, increased government oversight, and severe penalties have slowed down the practice of "smurfing" in recent years, this system remains a basic method for moving cash and cash equivalents.

Digital Value Smurfing (DVS)

M-Payment with digital value from the basic element of money laundering: cash. In the future, Money launderers, drug traffickers and other criminals will not require more money for their products or services but they demand digital will pay by text message sent. With digital value, several Smurfs are no longer required to make suspicious cash. Criminals can bypass regulated banks and their requirements to the accounting and exchange dirty money for digital value in the form of cards or mobile payment credits. In addition to digital value instead of cash, they can immediately send, with a hint of a cell phone keyboard, their digital assets across the country, around the world, or in secret offshore bank accounts.

A single digital value Smurf (DVS) could have multiple accounts m-payment-open accounts with multiple service providers, such as M-payment accounts, Internet payment system, and pre-paid phones. Other Means "could include renting of other phones, or the use of false identities to open more accounts. The number of m-payment accounts that a single DVS was able to establish is unlimited. Shall use the same example as above, but with different DVS ten different m-payment accounts could probably the Wash the same amount of money that it Take Ten to reach different Smurfs.

Other effects: facilitation of tax evasion by small enterprises

M-payment technology can facilitate tax evasion. to have three billion people around the world, mobile phones, but only to have one billion bank accounts, Association for the GSM. BearingPoint, a large management and technology consulting firm estimates that without a bank account in the marketplace United States alone at 510 billion U.S. dollars in 2006.

The basic rule in small business accounting is that all financial transactions of a business run current account made by the banks. For example, if a sole proprietorship, a partnership or a corporation business Relationship, he does so with the help of a business checking account. As required by law to employ the banks Know Your Customer (KYC) protocols by requesting identification of new customers with proof of business entity (assumed name registration, Business License or Articles of Association).

With an M-payment account, however, a small company Owners on their activities virtually under the radar. Instead of business deposits, the company can send an e-payments. In addition, instead of by the Settlement expenses their business checking account, can the company payments via M-Payment. Without a paper trail, it could easily work around without bank small business income tax filing requirements to rob the U.S. Treasury of billions of dollars in tax revenue.

And creative thinking will provide much needed work to maintain the benefits NPMs [New Payment Methods], including m-payments, while at the same time preventing exploitation and abuse by money launderers and terrorist financiers while protecting the privacy of users and the integrity of the global financial system. "

-INCSR, March 2008

M-payment is revolutionary-especially because of the convenience. This technology is literally the way consumers pay for goods and services, the way they compensate are, how they save money, how they spend it, and the way they send money to family and friends abroad. This service will bring new industries and new opportunities. M-payment is also radical because it moves the last piece of the puzzle that our financial world present themselves in a cashless society.

With the convenience, the m-payment offering, however, comes the potential for criminal misuse. M-payment technology, they unchecked, can be exploited by money launderers and terrorists. At present The United States is ill prepared to handle the dark side of the M-Payment. Since the INCSR acknowledged, "The United States has some of the precautions against misuse of m-payments. "Furthermore, the report warns also that the Swiss Federal Office for reporting to the provider of prepaid cards is the currency to decide Transaction Report (CTR). A must for all CTR cash transactions in excess of $ 10,000 be submitted per day. However, the CTR can be filed until days after the transaction occurred there fifteen, what terrorists and criminals to disappear enough time. Although almost all U.S. m-payment service providers are registered as Money Services Businesses (MSB) with the Financial Crimes Enforcement Network (FinCEN), the regulations no special provisions for them.

New legislation is needed to regulate m-Payment Service Provider. The Legislation may include requirements that service providers monitor the accounts to improve reporting of suspicious activities require maximum transaction limits (Z. B. $ 1,000.00 per day), require the registration of prepaid mobile phones with mobile payment, and the development of new m-payment special software to detect suspicious activity.

With m-payment is expected to grow to 52 percent by the year 2011, there is enough time to introduce the necessary safeguards and regulations, the threat to anti-money laundering.

H. Paul Leyva, JD, Certified Anti-Money Laundering Consultant (CAMC) and a Student at Thomas Jefferson School of Law, Walter H. & Dorothy B. Diamond, Masters of Law (LL.M), International Tax Program. Per the request of the dealer was this article, published without footnotes or references. The original text of this report with all the footnotes and references is available upon request.

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