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The Cost of Dirty Money (bloomberg.com)
88 points by crunchiebones 38 days ago | hide | past | web | favorite | 64 comments

It's just a list of previous cases of money laundering and the fines to the entities (mostly banks) involved.

Would be nice if for example they mentioned the overall impact of the illegal transactions on the entire systems, or maybe changes or actions that those banks made (other then paying fines).

Basically, I feel like this misses either (or both) the overall, total impact of 'dirty money', the global scale of it, it's effect, etc. (because only the bigger cases that were caught were mentioned, it's interesting to see how big the phenomenal). And also I would like to understand what is being done to stop or prevent other and future instances.

It makes the point that governments "punish" these crimes with the velvet glove on. None of those fines are anywhere close to the point they'd endanger even one yearly profit of these institutions.

Now try being suspected of tax cheating as a smaller company and see how governments punish that (not "convicted" mind you, "suspected", meaning you likely did nothing wrong, and even if you did there's a decent chance it's an accident/lack of knowledge/... rather than outright fraud). Let's see government limit themselves to not endangering even one year's profitability then.

I think it's unreasonable to consider fining a bank based on the yearly profits of the bank. If a bank does hundreds of billions of dollars of transactions globally and several hundred million of those are tainted, the sanctions in question should be based on the tainted transactions, not the annual revenue or profits.

If a small bank does $100M of tainted transactions and a large bank does the same, they should be fined the same, IMO.

Your point about the small company is not an analog in my opinion. If you have $500K in profits and a tax cheating penalty of $1MM, it does not follow that the precedent is that tax penalties are 2x annual profits, but rather that tax penalties are proportionate to the tax cheating. If another company has a tax fraud of 50x the scope and 1000x the profits, their tax fraud fine should be 50x yours, not 1000x yours.

> If a bank does hundreds of billions of dollars of transactions globally and several hundred million of those are tainted, the sanctions in question should be based on the tainted transactions, not the annual revenue or profits

If the penalty is meant to be a deterrent, then it should hurt. Otherwise it will not be a deterrent. You have to consider the bank's annual profit if you want it to hurt.

I believe that the annual profit on that tainted line of business is typically proportional to the size of that line of business, not to the sum of unrelated lines of business and that fines based on the size of fraud/error are appropriate deterrents.

Imagine if See's Candy has a product recall due to malfeasance or NetJets has a crash based on pilot error.

Should any penalties be based on the facts and circumstances of the situation or on the entire profits of Berkshire Hathaway?

depends on your philosophy regarding fines/punishment. personally I think punishments, particularly fines, should be proportional to the damage done to society, not jacked up as high as you feel is necessary to discourage the behavior. I don't think a large bank that does $50mm in illegal transactions did any more harm than a small one that did the same volume.

also, as we see in criminal law, setting huge penalties doesn't work very well if you can only get a few convictions. it just turns into a game of hot potato where everyone still does the illegal thing to stay competitive and some unlucky firm occasionally gets stuck holding the bag.

a free society should strive for reasonable penalties that are consistently enforced.

>I don't think a large bank that does $50mm in illegal transactions did any more harm than a small one that did the same volume.

The large bank can continue to do damage if they are caught, while the small one cannot. Thus they definitely do more harm, and at the very least will be perceived to have effective immunity from the law.

If you only fine thieves proportional to the value of the stolen goods, then all you're doing is saying it's ok to steal so long as you are sufficiently wealthy. (And if you became wealthy through theft... then you've made a legitimate living through damage to society.)

We could also be saying that we (as a society via our laws) try to curtail stealing by setting penalties at a level such that the expected value from thievery is negative.

You don't need the equivalent of capital punishment for stealing and, by extension, don't need to take away all of a caught thief's money, just a sufficient multiple of their stealing to make it unattractive to enter into a career of it.

That is essentially what I'm saying. The complication is that you can't reliably measure EV for certain acts. (E.g., What is the dollar-value loss for murder? How much should you fine someone for doing it?) In this case, to calculate the dollar-value loss for creating a subset of society which is above the rule of law which uses wealth as a barrier to entry... the penalty needs to take that into account.

So the point is not simply that you need to defer thieves from entering a career of it, but that you need also to deter thieves from considering it as a one-time option for when their quarterly earnings are due, and that you need to do so sufficiently well that even a highly skilled thief with a multi-million dollar company salary won't consider it. So either it can't just be fines (asset seizure/prison, maybe for repeat offenders) or those fines must be legitimately severe as measured by the one committing the act.

> The large bank can continue to do damage if they are caught, while the small one cannot.

you might reasonably assume that if you catch a company engaging in one instance of illegal activity, you have only seen the tip of the iceberg and there is much more that you couldn't prove. I would prefer the government not to be setup on this premise, but as I said, this is a philosophical position.

Yeah, but this way the banks will just start splitting into the smaller ones, and the one’s which get caught will be later on hired by the one which didn’t.

I would say that deterrence is a valid goal. Imagine tax fraud. If the revenue office estimates that approximately 10% of tax fraud is caught, then the penalty for tax fraud should be at least 10x the amount of the fraud. Anything less than that makes it +EV to cheat. (Obviously, it's not perfect and relies on estimations, but I do think that mathematically sound deterrence is desirable.)

This of course is still proportional to the fraud (and the societal damage), not to the overall revenues or profits of the taxpayer in question.

I should have elaborated more on my original post. I think creating a negative EV is a reasonable goal, but only under certain conditions.

> If the revenue office estimates that approximately 10% of tax fraud is caught, then the penalty for tax fraud should be at least 10x the amount of the fraud.

this, imo, is the exact situation that creates the game of hot potato. people stop making decisions based solely on EV when the variance gets too high. setting a huge penalty to create -EV may discourage the largest, most forward-looking institutions from engaging in the bad behavior (or at least directing it in a top-down fashion), but most companies and individuals with a shorter time horizon are just going to ignore it. and since everyone does it but almost no one gets caught, it creates an easy way to single out politically useful targets and throw the book at them.

rather than just increasing the penalty to gain ratio, I think it is more productive to ask why it is so hard to enforce these laws in the first place. tax law, for instance, can be so complicated that it is unclear to everyone involved (enforcement, accountants, defense counsel) whether a particular strategy is legal. when wrongdoing is difficult to understand, let alone prove, the government should simplify the laws, not make them more draconian. it wouldn't hurt to spend a little more on enforcement either.

It also only really impacts shareholders.

Sarbanes Oxley demonstrated with clarity how to fix this: pierce the corporate veil and send executives who commit crimes (or allow crimes to be committed under them) to jail.

It's a matter of political will and power, nothing more.

The rules are different for a small institution. If the “Regional Bank and Trust Co” is pervasively laundering money, the principals go to jail.

Gdpr demands more of bigger organisations. Because those organizations have the capability and thus responsibility to make sure gdpr is followed. The same could be asked in this case. The big bank is better equipped to catch dirty transactions. Thus they should maybe be penalised according to size.

Gdpr deals with intangible damages. What is the loss of privacy of 100 millions users worth? It's not really comparable.

> And also I would like to understand what is being done to stop or prevent other and future instances.


thanks for saving me the click.

I find the amount of money in these cases so staggeringly high that I can't imagine that a vast portion of 'those in power' are not complicit in some ways. There is simply no way to mix this amount of money back into the system without lots of people of statute being involved.

Actually given the size of these institutions I find the amounts fined staggeringly low. None of these institutions is remotely in danger of losing even one year's profits because of this.

That's how you should judge this. The "highest fine ever" is $700M on a profit of $13400M (after tax) according to their financial report. Or something like $2k for someone making $100k yearly (again calculated as 4% on after tax).

None of these institutions are in any danger of serious consequences. This is a "1% less hookers at the christmas party" punishment.

Have you worked at a big company, let alone a big bank?

When you have 100k+ employees, it's immensely difficult to keep tabs on every. single. thing. that's happening.

If a bank sees asset flows into the trillions, even $1bn of tainted transactions is less than 0.1%.

Do you or 'those in power' know 99.9% of what happens at your company?

> When you have 100k+ employees, it's immensely difficult to keep tabs on every. single. thing. that's happening.

Tough. You want the big bucks? You gotta solve hard problems. Big companies shouldn't be able to whine or excuse their way out of problems because those problems are hard. If they're too hard to solve, pull an HP and split your company into lots of smaller companies.

Those in power over a business with a trillion dollar asset flow don’t have to know everything personally: they can afford to hire a robust auditing department to make sure they’re in compliance with the law, just as they don’t personally handle every new hire or procurement. That also helps in court: if J. Rogue Banker’s story ends when the company learns of it and immediately alerts the authorities, it’s a lot less likely that the bank is going to get hit with penalties due to the clear lack of organizational approval.

The places which don’t have good auditing teams are gambling that they won’t be fined more than the cost of having one, which is easy to fix.

I'm told that given enough data and fine-grained recording of money flows, AI will "save the day".

Always make sure you have plausible deniability.

“Dirty” money is such an expansive term that encapsulates huge sums and many distinctly different schemes. The Guardian actually stated that the influx of cash from crime syndicates propped up the banks and significantly contributed to some banks financial health—- thus helping during the economic crisis. This money is part of the economy and it is hard to entirely crack doen on it less risking unforeseen issues.


I'd keep in mind three things.

First, the direct consequence of tightening controls on payments to prevent money laundering is that you are tightening the control of government on anything happening in a society. I don't think any libertarian leaning people at least should be ok with this level of control. Like how would cannabis would have ever been legalised if a parallel, illegal market didn't exist to the point that the consensus moved toward legalisation.

Second, as a private company, how to you go about ensuring that every single one of your customers is legit. Any paper you are given can be forged. Any explanation can be made up. You don't have police investigation powers. A car salesman has no way to check that you are not buying a car with profits from a ponzi scheme. Banks are becoming increasingly invasive in term of questions and documents they require, but this is an impossible task. Even auditors don't spot fraud every time (see Patisserie Valerie in the UK for a recent example).

Third, in a 200,000 employees organisation, how do you ensure that every single one of your employees is honnest. At that scale it is just statistically impossible to not have a fraud somewhere. So how do these calls to bankrupt the company with fines if anything wrong happens (that I read in other comments) makes sense?

It's easy. The same 1% rule applies here, in the sense that most of your customers never have seen the sort of money that laundering would involve. But of course, banks are tripping over themselves to make their short list of richest customers happy, when these are the shortlist that need the most scrutiny. It's a case of perverse incentives.

If you make a deposit of $10,000 in cash that's considered suspicious money laundering. That's one third of the median US salary. I would hardly consider that kind of surveillance to be limited to the 1%.

Agreed. Regulating “dirty money” is equivalent to regulating speech, and is therefore unconstitutional.

The parallels are strong:

- Lazily creates an appearance of addressing a problem by going after a sometimes-associated activity

- Collateral damage to activities that aren't necessarily wrong, but that upset some group

- Only affects the little guy (to the major players, it's just a cost of doing business)

- Creates a purportedly-neutral cover on what is essentially political persecution

- Based on the God delusion that assumes some ambient authority is capable of passing correct judgment on every situation

Don't forget:

- Rationalizes the creation of a massive bureaucracy to control (and centralize) what beforehand was considered normal and local in scope.

- Rationalizes universal surveillance by unaccountable individuals in federal bureaucracies against the entire population. This can and has been abused in the case of bank disclosures required by anti-money laundering laws: https://www.msn.com/en-us/news/politics/us-arrests-treasury-...

(Note that the so-called "suspicious activity reports" she leaked were merely transactions that met some criteria like being above a threshold amount).

This brings to mind an article, "Money Laundering is Financial Thoughtcrime." [0]

[0] https://www.americanbanker.com/opinion/money-laundering-is-f...

Assuming you're not being sarcastic: Hear Hear.

No I'm not being sarcastic, I'm amazed that Americans put up with the level of government intrusion in our financial lives.

Having worked at a payments company and helped evaluate anti-money laundering (AML) software with ex-commercial bank compliance people, I should not have been surprised but still was of how manual and subjective the entire AML investigative process is.

At a high level, it's just a bunch of business rules that trigger a massive number of alerts that you then have analyst review one by one (and clear 99%+) without any more action. When you do come across something, you file a Suspicious Activities Report (SAR) to the gov't among other things.

Very clear to me there's a market for a SaaS with some AI/ML/automation capability to reduce false positives and more easily investigate cases. The bar is very low.

It's insane how small those fines are as a percentage of the amount laundered. There really doesn't seem to be any reason a bank should even bother, or at the very least, look the other way. And rarely do people ever go to jail over this sort of thing.

And these are only the ones we know about.

Planet Money had a great podcast on this topic. https://www.npr.org/templates/transcript/transcript.php?stor...

One thing to keep in mind is that this story is from Bloomberg, who came up with "The Big Hack" story that proved to be completely unsubstantiated, and yet has never been retracted.

The graphics would have been a lot more fun if there was some sort of gauge or running totals of the cumulative amount of fraud versus the cumulative fines and prison time.

From a political standpoint, I don't understand how the world is still tolerating such thing, and why it's not part of the public debate. I can understand why it exists, but I'm a little worried to see how widespread and out of control this has become.

I just fear this has the potential to influence and topple governments (even the "solid" ones). People complain about money in politics, but when I see this, I see unchecked capitalism slowly obsoleting governments, because financial power is not under the control of institutions anymore. Money flies, there and there, and governments seem to be completely clueless and unable to work on fighting it.

Worse, citizens don't even seem to pay attention. Money is truly invisible.

To try and give you a partial answer, you may want to consider the fact that money is essentially equivalent to freedom.

Giving governments absolute oversight of the flow of money and of a detailed accounting of who owns what is therefore equivalent to implementing a planet-scale fine-grained surveillance state. Yay.

Is that a world you'd want to live in?

Or more interestingly, if you're a government official that also happens to be a half decent human being (I'm told they do exist), wouldn't you carefully consider how much control you'd like a government to have over so-called "dirty money" vs having every single penny a citizen spends/owns recorded in a database?

Or if you even want to be milder about it, where do you draw the line between total government control of money flows and privacy?

This whole conversation around "dirty money" is the exact same old "won't you think of the children" bogeyman that's being bandied about every time the government wants to restrict freedoms and uses basic citizen's cowardice to entice them to make the trade of less freedom for more security.

[edit]: by the way, you are very correct when you say that citizens aren't paying attention. With increased fine-grained control of money, one of their absolute basic freedoms is being not just eroded, but plain old erased.

And no one is talking about it or debating it. Find me one mainstream politician in the anglo sphere that even has this problem on his radar.

Money is also power. And having some people with thousands of times the power as others also erodes freedoms. Perhaps those with the most power should be faced with the most scrutiny? This isn't about some global authoritarianism, but an attempt to mitigate oligarchy, and should only affect those who already have far more freedom then the majority of the population combined.

You're just serving the libertarian agenda, and I'm having none of it.

Money is not freedom. Money is a tool to trade goods. I was talking about how a minority of fraudsters are hiding their money to not be taxed, and to escape scrutiny, and you're arguing for less government.

>You're just serving the libertarian agenda, and I'm having none of it

You appear to be operating on faith (smells libertarian therefore it's bad) rather than arguments, I guess having a conversation is pointless.

Another thing: there is a vast difference between hiding money to avoid the taxman (something that falls under the "civil disobedience" category, especially when said taxman is exerting unchecked power) and hiding money that was earned committing crimes that actually hurt people (slave trafficking, dictators, etc...).

But the standard discourse served to the unwashed masses is more than happily co-mingling the two issues because it once again is very useful in scaring the flock straight.

> there is a vast difference between

Both are illegal.

You're trying to equate a major crime with civil disobedience. Big financial interests are far from the public interest, so I can't follow your argument of civil disobedience.

> taxman is exerting unchecked power

There are so many who argue about money corrupting politics, inequality rising, but I'm not trying to have this argument with you. I just want to tell you that you're exposing yourself as defending big financial interests, against the public interests.

I've already had some back and forth with people like you who try to defend the act of evading taxes, and I can warn you: you will never convince me. Let's agree to disagree.

>I've already had some back and forth with people like you who try to defend the act of evading taxes, and I can warn you: you will never convince me. Let's agree to disagree.

If your debating strategy is to self-proclaim as close-minded and incapable of intelligent conversation, far be it from me to try and stop you :)

And anyways, at some point, if you dig deep enough in people's politics, you always hit the same bedrock: either you're a collectivist and essentially an enemy of individual freedom, or you always give priority to individual freedom before that of the group.

I suspect it's a genetic thing, and you are correct: trying to change one's genetic makeup is pointless via argumentation is basically pointless. Born a sheep, always a sheep.

If you really think that things are so black and white, then so be it, don't need to tell people they're sheeps.

from somekind of "Free Market" standpoint, how can there even be "dirty" money? isn't money just money?

I sense some kind of double standard

A totally free market would be one without any regulations or laws, that can't have "dirty" money.

But nearly all actual markets have some kind of regulation, and thus the potential for dirty money.

> But nearly all actual markets have some kind of regulation, and thus the potential for dirty money.

It is possible to have a wide variety of regulations without having monetary ones. Money is fungible. If you dump mercury in the river, you get fined or put in jail. It doesn't matter if the money you have to pay the fine with is the profit from the dumping or not, it only matters that it would bite enough to prevent anyone from doing it to begin with.

In particular, you don't need banks to investigate customers or know anything about them, and asking them to causes all kinds of otherwise avoidable problems. The people who should be investigating criminals are law enforcement, not corporations. And if the criminals use banks, well, then you can go to the banks and seize their money etc., after you've proven their crimes to the satisfaction of a judge. Instead of having Paypal do it preemptively because it's easier to screw over many innocent small businesses than deal with regulators when 2% of them cause problems.

If banks don't need to be concerned with criminal activity by their patrons, does the same apply to pawn shops? Casinos? Scrap metal dealers?

None of those things are law enforcement agencies. And a casino is just a type of bank here.

Though the others may have their own reasons to want to know who their customers are, since a lot of property isn't as fungible as money and possession of stolen property is a crime in most places.

Notice how nobody even suggests for things to work that way in other cases where the business is accepting money rather than goods, e.g. businesses that sell sandwiches or jeans or flatware should hardly be under these types of KYC requirements.

If you can buy $1000 worth of apparel without identifying yourself, why can't you have a bank account with $1000 in it?

You don't seem to be engaging with my point; perhaps I didn't make it clear.

There are other businesses besides banks, of which I gave some examples, that attract criminal activity. We don't say "they may have their own reasons" to scrutinize their customers and leave it at that, because self-interest doesn't cure the problem. If you don't regulate scrap metal dealers, then the profit motive will lead them to cheerfully take material stripped by thieves, which encourages destruction and theft. Similarly with pawn shops.

The profit motive is exactly why such regulations are useless. The dealer will harass every honest customer in case one of them are the type to report them for not checking, and then pay pennies on the dollar for the copper pipes ripped out of a building which they know were stolen because both parties to the transaction are aware they're profiting from participating in criminal activity.

And the dealer may not even need to be in on it. If the thief lies and says the material was found in a dumpster at a construction site, or that it has been collecting dust in their basement for twenty years, and there isn't any way to trace a generic pile of metal back to where it actually came from, what does it matter that you take their name?

Which is why cities like Detroit are full of buildings that have had their pipes stripped out. The deterrent isn't the scrap metal dealers, it's that the thief goes to jail if caught in the act, so it only happens in places where people reach a level of desperation that isn't present in most other places.

And regulating pawn shops is even sillier, because the thief could just sell the stolen goods on Craigslist or at a swap meet or a hundred other alternatives.

These types of criminals are most commonly caught directly by the victims -- because they're the ones with the best incentive to actually do the catching. The people with the second best incentive are law enforcement. Deputizing disinterested third parties, much less ones with an active conflict of interest, is largely useless and generally does more harm than good.

Aren't bits just bits? Yet some arrangements of bits are illegal.

Fines are minuscule relative to the transaction amounts, and no jail time for execs. I'm shocked, SHOCKED, that this has had no effect.

I'll stand and take my downvotes like an adult, because everyone loves to hate on misapplied tech, but this is exactly the use case blockchain currency would be most useful for. Anyone can audit the complete trail of funds from source to holding to destination.

The challenge would be to get banks on board, because they're making so much off this ill gotten flow. Once there, their profit (interest and fees) would also be transparent to everyone, another reason they'd hate this scheme. But it would be good for taxpayers, governments, and honest bank consumers.

I think the main pushback you're going to get here is that the next step isn't a purely decentralized use case.

There are around a dozen or two banks that, if they were to come together, could have a centralized database that better tracked flows of money all around the world.

Note still that the scope of implementing, auditing, securing, and getting banks to reveal things that they likely consider very proprietary is already a monumental ask.

Still, I'd say the better argument here is that there should be a superior way for information to be shared in a more centralized manner.

Once that is done. Then maybe we can think about using a blockchain and decentralizing it.

The cases you see at Bloomberg are well evidence, lack of tech is not a problem here.

It's a bit like CCTV - the crimes were recorded Blockchain or not.

But they were not prevented, and Blockchain isn't going to help with that.

> The cases you see at Bloomberg are well evidence, lack of tech is not a problem here.

From TFA "From about 2007 until 2012, Banamex USA, a Citi subsidiary, processed more than $8.8 billion in transactions with almost no oversight.".

> The cases you see at Bloomberg are well evidence > the crimes were recorded Blockchain or not

imglorp suggested "Anyone can audit the complete trail of funds from source to holding to destination.". Was this evidence you mention publically auditable (i.e. what imglorp's suggesting would help)?

> Blockchain isn't going to help with that

It's at least plausible that a publically auditable log would have helped spot these issues.

I'd upvote you for mentioning blockchain, but downvote you for how you'd like to use them for giving more control to central authorities, so I won't do anything.

However, thank god, second gen. blockchain tech has ZKP which should keep us out of the clutches of governments for a tiny little while longer.

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