From: Robert Hettinga <rah@shipwright.com>
Date: Sat, 14 Nov 1998 14:36:17 +0800
To: cypherpunks@cyberpass.net
Subject: DBS, Privacy, Money Laundering nonsense.
Message-ID: <v04020a0ab272c8825466@[139.167.130.246]>
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Long-time DCSBers will remember Unicorn's talk on money laundering to us a
few years ago...

This more recent rant of his on the Digital Bearer Settlement list is about
the best articulation of his position that I've seen him write.

Cheers,
Bob Hettinga


--- begin forwarded text


From: "Black Unicorn" <unicorn@schloss.li>
To: <tboyle@rosehill.net>, "dbs" <dbs@philodox.com>
Subject: DBS, Privacy, Money Laundering nonsense.
Date: Fri, 13 Nov 1998 22:57:51 -0600
Keywords: dbs
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tboyle@rosehill.net comments:

[...]

> But I simply cannot comprehend the breadth of the agreement
> on this dbs conference, and depth of conviction, that DBS money
> should be designed with the **deliberate objective** of being
> untraceable, for purposes of law enforcement or taxation.

In the case of some DBS advocates you are overstating the matter.  In the
case of others, vastly understating it.

> I have a lot of respect for you guys' intellect but I think
> you're wrong on two fundamental points:
>
> 1.  Rule of law.  Money laundering is a critical piece in
> organized crime. The democratic countries have banking laws.
> Do you think these laws should be followed, or NOT?  (Scurrying
> of feet as all the DBS readers avoid answering.)

Well let's examine this.  The view that all democratic countries have
banking laws really begs the question.  "What are the differences between
said laws."  I can tell you with solid authority, they are many.

I've often repeated this story here and elsewhere.  It's all a matter of
public record.

Set the way-back-machine to just after Reagan has entered office.  Ole Ron
began to crack down on tax evasion and in particular offshore havens.
Taxes would be cut, it was reasoned, but only if loopholes were filled and
evaders rooted out.  (Those of us old enough to remember might even recall
nodding at the sense of it).

This policy was particular hard on certain Caribbean nations.  This was the
time of operation Tradewinds (search for it in the congressional record)
and other IRS black projects where the IRS actually violated local law to
spy on foreign banks even going so far as to drug guards, steal the
briefcases of banking executives, perform unwarranted searches, bribe
foreign officials and all manner of nonsense to root out tax evaders which
might also be U.S. citizens.  For a long while there was a project which
opened and Xeroxed all the incoming mail at JFK which appeared to originate
from offshore havens.  This wasn't in the 50's mind you, but the 80s.  It
was acts like these which prompted the Swiss to strengthen their banking
secrecy during the Second World War.  Just another day in the park in the
U.S.  Just recently this year Mexico nearly indicted several U.S. law
officials for breaking Mexican law during the investigation of several
Mexican banks.  Clearly the practice hasn't abated much in the last 15
years..   (Note also that today all these methods (except for drugging
guards maybe) have their legal equivalents in the United States, which is
in itself a powerful statement).  This continued for some time back when
Ron was at the helm until the United States finally began to threaten to
revoke the U.S. charters of certain banks it considered uncooperative.  At
this point a visitor, unannounced, flew into D.C. and literally dropped by
the White House with no press coverage or fanfare at all in the late
evening.  That visitor was Margaret Thatcher and she proceeded to explain
to Ron over the course of a few hours that if he kept it up many of the
British Protectorates would literally have their economies crippled.

Literally overnight the matter was dropped and the offshore centers left to
quietly continue their business.

So much for democratic countries with universal ideas about banking law, or
the rule of "law and order" in banking regulation.

This is but one example.

So:

Rule of Law - means little in the global-political scheme of things
Democratic Countries Have Banking Laws - none of which are consistent or
consistently applied

Money Laundering is a Key Piece of Organized Crime -

This begs a definition of Money Laundering.  "Concealing the proceeds of a
criminal act" sounds legitimate, but consider that it has been held to
apply to a store clerk who sold food stamps for cash and deposited the
proceeds in his personal (non-anonymous) checking account:  Indicted in
Federal Court for Money Laundering with a maximum possible term of 35
years.  (This is a prosecutorial tactic to get a guilty plea to the basic
theft charge).  Consider also that third parties often take it on the chin
with the wide definition currently applied.  Case in point: Ma and Pa
travel agency innocently accepts a deposit from notorious attorney of drug
dealer.  Their entire holding account is seized including the deposits of
some 700 other potential travelers.  After 7 years of fighting the seizure,
the money is finally returned, without interest.  (Effectively halfing the
value of the funds).  The business is ruined, its reputation in tatters.
Ma and Pa fight it out in bankruptcy, lose their house, most of their
retirement proceeds, etc.  In the process this case sets the precedent that
any amount of illicit funds ($1) deposited in any size account ($500
million) will render the entire account liable to seizure and permit it to
be held in lieu of forfeiture hearings.  That can go on for 7 years or so.
Money which is "laundered" has its title literally revert to the U.S.
Treasury.  This means third parties who innocently accept these funds are
liable for their return, even if they are passed on in the course of
business.  Beginning to seem silly?  Money laundering is an invented
offense.  It's definition in the United States has grown so broad so as to
be laughable, if not so frightening.  Do not think that these are isolated
incidents.

So, money laundering in its commonly understood sense might be key to
organized crime, but what passes for money laundering in the United States
has little to do with it.

Myth:  Money Laundering laws have a serious impact on organized crime.

This is increasingly nonsense.  The United States spends close to
$22,000.00 to seize $1.00 of illicit funds.  Money Laundering today is
extremely sophisticated and enforcement doesn't catch the drug dealers, it
catches professional money launderers.  Today if you are a drug lord you
drop $30 million in cash with a professional launderer who cuts you a
"clean" check for 85% of that figure or so on the spot and takes the risk
of laundering the funds on his own.

Myth: Money Laundering can be detected accurately and effectively and leads
to drug and organized crime convictions.

Nonsense.  Assume for sake of argument that you could detect 99% of
fraudulent transactions with the measures in place (entirely impossible)
and that your false positive rate was only 1% (also entirely impossible).
SWIFT alone processes $2 trillion per day.  That's on the order of $600
trillion per year, just in SWIFT.  (Add another $1.3 billion for CHIPS and
$989 million for Fedwire daily.  Oh, don't forget the foreign exchange
markets, oh and NYSE, oh and NASDAQ, oh and international letters of
credit, oh and...)  The most sinister estimates of the global criminal
economy (primarily drug money) run around $400 billion per year.  Your
false positives will identify $6 trillion in naughty funds that are
actually pure just in SWIFT.  Your correct hits will identify $396 billion
in naughty funds in all systems worldwide.  In this example you will have
15 times as many false hits as correct hits ignoring the lionshare of world
financial systems.  This is under the very best of circumstances.  It's a
losing game..  It's a game only the mathematically challenged or
politically motivated will play.  In fact, money laundering is a tack on
offense that is brought to bear after an arrest on other charges has been
made.  The number of cases that originate with a money laundering
investigation is vanishingly small.

The payment system today eats up over 1.5% of the GNP primarily because of
nonsense regulations like CTR's and other transaction reporting
requirements which can cost up to $15 per transaction and (as we see above)
have little if any effect on professional money laundering.  Given these
numbers the degree of "fraud" in the world financial system is far better
than in the credit card system, which has pretty much reached equilibrium.
(Fraud accounts for about 5% of credit card costs.  Customer service
accounts for about 15%).

> There is a certain logic in the notion of having a legislative
> process and laws.  Our laws in the U.S. weren't written by
> angels up in heaven, but they are better than some other places.

In the case of money laundering regulation I should say almost _no_ other
places.

> If DBS participants advocate that money laundering laws are
> not to be followed, I'm sorry but YOU GUYS have the burden
> of logically arguing your position.  So shut up and quit
> raggin' on *me* about it.

I would just like to see them applied with rationality.  It's fairly clear
that that's too much to ask of the United States.  Interestingly enough
it's typically multi-party systems of government that have a balanced
approach to money laundering.  Perhaps this is because grandstanding with
things like "the war on drugs" isn't as effective outside of a two party
system.  Sheds new light on your comment about democracies and banking
regulations.

Some jurisdictions get along quite well without the nonsense perpetrated in
the United States.  Like Switzerland.  Switzerland has one of the nicest
things in a cash economy I have seen.  A freely circulated 1000CHF note.
It's worth about $750.  (The United States phased out $500 bills long ago
to deal with laundering).  In Switzerland you can drop a 1000CHF note at a
restaurant and no one bats an eye.  In the U.S. you cant take a cab home
from the International Terminal unless you have something smaller than a
$50.  Somehow Switzerland has manage to survive without looting in the
streets and rampant crime.  Luxembourg is in a similar situation.

I tried to purchase a car some years ago outside of D.C. with cash.
Completely legitimate transaction.  No interest nonsense for me to worry
about.  No waiting for the car while the check clears.  Simple.  Right?
The dealership called the police, convinced they were striking a blow
against drug dealers.

It's really gone too far.

> 2.  Practicality.   Without at least a fig leaf of cooperation
> with banking authorities and other police, DBS will not be
> permitted.  Transactions denominated in DBS won't be enforceable
> in courts, and fraud won't be a crime.  Reporting fraud in DBS
> deal would be like reporting a fraud in purchase of heroin.

Practicality?

Of course any student of political science will understand that where
government enforcement of contracts fails or falls short, organized crime
tends to move in.  Reporting fraud in the purchase of heroin to the right
enforcement cartel tends to be much more effective in rendering results
than U.S. courts I'd wager.  Clearly, the United States would not benefit
by forcing DBS underground.  Several jurisdictions will permit DBS and
enforce it.  (I'm involved in the legislative process for one such law in a
European jurisdiction now).  If you believe that DBS should be outlawed
then you must agree that cash should be outlawed.  There is effectively no
difference but velocity.

> The principal reason for failure of electronic money, other
> than cards used in physical establishments, is you can't trust
> the seller to send you the goods.  That's why everybody is
> using credit cards, and bearing the 2-3% charge for "insurance".
>
> You guys seem to think untraceable DBS will be accepted, if
> only a good enough encryption algorithm can be found????

1% of the GNP.  Instant 1% growth for changing a system of clearing.  Think
about that for awhile.

> I think your ideas have a fatal, logical weakness.  Without
> any practical means to verify who got your money, or even
> a legal *right* to enforce a contract, what good is dbs?
> It's not even money.  It's more like a coupon or something.

What you are missing is that all your arguments apply equally to cash.  Why
is cash used if this is so?  Prove to me that you just gave me six $100
bills.  You are, "without any practical means to verify who got your money
or even a legal *right* to enforce a contract" if the transaction is larger
than $500.

If only we could be rid of this pesky cash would could eliminate organized
crime forever.

--- end forwarded text


-----------------
Robert A. Hettinga <mailto: rah@philodox.com>
Philodox Financial Technology Evangelism <http://www.philodox.com/>
44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'