Take On Payments, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Take on Payments and look forward to collaborating with you.

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October 31, 2011

Cash, check, or charge: Paying for illegal activities

In the past few years, as metal commodity prices have climbed, metal theft has become increasingly common. While theft of copper from electrical wire and air conditioning units appears to be the favorite metal heist these days, amazingly, some thieves are also targeting such metal-carrying items as manhole covers and railroad track. In fact, just last month, thieves stole a two-ton historic bell in San Francisco. By now you are probably asking yourself, what does this particular crime have to do with payments?

Well, interestingly, in an effort to crack down on the growing problem of metal theft, the state of Louisiana recently passed a bill limiting the use of cash. I discovered the bill through a recent headline on the Drudge Report: "Law bans cash transactions—for secondhand goods." Clicking the headline led me to this news story about House Bill No. 195. Among the bill's many provisions, number 1864.3 states that "a secondhand dealer shall not enter into any cash transactions in payment for the purchase of junk or used or secondhand property. Payment shall be made in the form of check, electronic transfers, or money order issued to the seller…and made payable to the name and address of the seller."

The intent of Louisiana lawmakers is to assist law enforcement by creating a trail of payment transactions between dealers, such as scrap metal recyclers. Such a trail does not currently exist for cash transactions. If history tells us anything, it tells us that the right side won't be able to stay a step ahead of criminals for long. Restrictions on cash transactions will inevitably force criminals to figure out something else they can use to hide their activities. The question is, what form will that something else take?

Risk of cash payments
In the past, this blog examined some of the risks associated with merchants who accept cash for payments. These risks include robbery, employee theft, and counterfeit currency. The recent legislation in Louisiana addresses a very different cash-related risk—the anonymity it provides to criminals. This anonymity makes cash the ideal payment for all parties involved in illicit activities such as prostitution, drug trafficking, illegal gambling, and stolen goods sales. It has proven to be difficult enough for law enforcement to catch those engaged in these activities unless they are caught in the act. Transacting for these goods and services in cash makes it even more difficult to catch them.

While Louisiana's very limited restriction of cash usage to fight crime is new to the United States, other countries have already implemented such policies. In Mexico, organized crime and drug trafficking prompted officials to adopt measures that set limits on cash transactions for real estate and luxury good items. In Italy, tax evasion led to the government banning any cash transactions exceeding 5,000 euros. Tax evasion also prompted the Greek government to ban person-to-business and business-to-business cash transactions over 1,500 euros.

Potential impacts of restricting cash payments The implications of payment restrictions are many, including additional costs and hardships for parties engaging in legitimate cash transactions. Further, such restrictions could lead criminals to the use of alternative currencies, such as Bitcoin and Liberty Reserve, which are digital currency payment systems that use digital "coins" or tokens to represent monetary values. Unlike traditional currency, these alternative currencies are generally not backed by an asset or central bank, and their value is driven through exchanges that allow people to buy and sell the digital coin. Unfortunately, like cash, these currencies provide anonymity, so people engaged in illicit activities can escape detection by using them as mediums of exchange. In fact, a recent report detailed the use of Bitcoins for purchasing illegal drugs on an underground website. (This report even prompted two U.S. senators to request that federal officials crack down on Bitcoin.)

It will be interesting to monitor efforts to restrict the use of cash and the effectiveness of these efforts in combating criminal activity. And as criminals look to circumvent restrictions on cash usage around the globe, will the use of alternative currencies gain popularity in the criminal world?

By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

October 31, 2011 | Permalink


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A payment system should deliver privacy, not anonymity.

By the way, we have the same problem in the UK.


Posted by: twitter.com/dgwbirch | November 3, 2011 at 03:46 AM

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