Fall 2008 - #15. M-Payment: A Threat to Anti-Money Laundering.

Author:by H. Paul Leyva, J.D.

Vermont Bar Journal


Fall 2008 - #15.

M-Payment: A Threat to Anti-Money Laundering

The Vermont Bar Journal #175, Volume 34, No. 3 FALL 2008

M-Payment: A Threat to Anti-Money Launderingby H. Paul Leyva, J.D. " . . . there are already indications that money launderers and those that finance terrorism will avail themselves of the new m-payment systems." -INCSR, March, 2008(fn1) NEW YORK, NY-Brittany has never filed an income tax return to report her $200,000.00+ income as a high-class call girl. To continue to hide her illegal profits from the IRS and law enforcement, Brittany added an m-payment function to her mobile phones and PDA. With the m- payment feature in place, she now lives virtually cash-free. For example, Brittany asks her clients for the "e," (street slang for electronic mobile payment, or epay).(fn2) "E" is a text message-like transfer of funds from a client's mobile phone m- account to the m-account contained in Brittany's phone. After hours, Brittany's Blackberry now functions as a debit card for all of her spending needs: shopping at Nordstrom's to buy that designer purse, sending a car payment for her new Mercedes-Benz via text message, and clubbing all night with her friends.

Today, Brittany earned $800 for her services. Before m-payment technology, she had no other choice but to make suspicious daily cash deposits into her bank accounts. With the advent of m- payment, she no longer worries about anyone tracing her bank activity. As a safety precaution, Brittany destroys the SIM memory cards from her phones and PDA devices at the end of each week and replaces them with new ones. As a result, if she ever gets arrested for her activities, no digital evidence of her occupation, income, or lifestyle remains.

LOGAN SQUARE, CHICAGO, IL- Alex, an accountant by day and drug user by night, uses his PC to transfer $400 from his personal checking account to his mobile phone's m-payment account. Alex is in need of Ecstasy from his dealer. Per their standing arrangement, buyer and supplier meet at the local café on the corner of California Avenue and Logan Square Boulevard. As usual, the dealer has cleverly hidden the Ecstasy in an empty transfers the "e" via text message to the supplier's mobile phone. When the transaction is complete, Alex slips away to plan his evening.

As the dealer enjoys his latte, he uses his mobile phone to text the funds to a bank in the Cayman Islands, where the deposit will easily get lost in the multitude of other small value transfers. Once the transaction is complete, the supplier gasps a sigh of relief because he knows he is safe. If a rival gang member tries to steal the cash, he will find no trace of the money. Similarly, if the police tried to apprehend him, by pressing the "Delete Transaction History" function on his cell phone-evidence-erasing software that he downloaded from the net-all incriminating evidence is gone. With no evidence of his crime, the authorities would be forced to let the dealer go.(fn3)

NAIROBI, KENYA-International Press: August 7th. On the anniversary of the suicide bomb that killed more than two hundred people at the U.S. Embassy in Nairobi, yet another suicide bomber kills fifty-eight people near the rebuilt U.S. Embassy in Kenya.(fn4) At this point, the authorities are unable to determine the identity of the terrorist or group responsible for this attack, but many believe it to be the work of Al Qaeda. The FBI officer-in-charge and top Kenyan Security officials admit that they found the remains of a pre-paid m-payment mobile phone within the wreckage; however, since these devices are unregistered, the phone could have been purchased anywhere and by anyone. In Kenya as well as in many other parts of Africa, the use of mobile phones and m-payment technology as miniature banking devices is commonplace. Critics have reiterated that m-payment technology makes it easier for terrorists to send and receive transfers of funds via text message transmission.

These scenarios exemplify the warnings issued in the March 2008 International Narcotics Control Strategy Report (INCSR) entitled "Mobile Payments: A Growing Threat," which describes the potential exploitation of m-payment technology by money launderers, criminals, and terrorists.

What is m-payment? How does it work? Does it already exist in other countries? How can money launderers, criminals, and terrorists exploit this technology to hide their illicit activities? Most importantly, what steps can the United States and other countries take to curtail the potential abuses of m-payment? I.

"Some of the most innovative are electronic payment products which include mobile payments or m- payments . . . Driven by a remarkable convergence of the financial and telecommunications sectors, the rapid global growth of m-payments demands particular attention. M- payments can take many forms but are commonly point of sale payments made through a mobile device such as a cellular phone, a smart phone, or a personal digital assistant (PDA)."

-INCSR, March, 2008

The Virtual Wallet

M-payment (mobile payment) is synonymous with the terms m-commerce, m-accounts, m-wallet, m-banking, e- money, or digital cash. For the sake of this article, the more widely accepted term "m-payment" will be used. The best way to envision this relatively exciting technology is to imagine a time in which your mobile phone or PDA will act like a wallet.(fn5) Furthermore, it will be a wallet that not only allows you to withdraw money from it to pay for goods and services, but also enables you to deposit money into it-thus making this monetary device even more flexible and useful than a credit card. The widespread adoption of m-payment could eliminate the need to carry cash, visit an ATM machine...

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