From: World Politics Review
By Catherine Cheney
Last week, operators of the Liberty Reserve currency exchange were indicted for laundering $6 billion.
Liberty Reserve was part of a growing industry of online payment systems that allow illegal enterprises, from child pornography to weapons trafficking, to move money within an unregulated system, creating a hub for criminal conduct that is both centralized and global.
Explaining that the indictment will serve as a temporary blow to money launderers and others moving money on the boundary of legality, Gurpreet Dhillon, a professor of information security at Virginia Commonwealth University’s School of Business, told Trend Lines that digital currencies are here to stay.
Given this, he said, the “options are to proactively regulate them, or let the Wild West define its own norms.”
“The law has yet to catch up to the technology,” added Tom Kellermann, vice president of cyber security at Trend Micro USA.
“The underground economy of the world is now cyber savvy,” he said, explaining that “now that money is truly digital, moving and storing it is no longer monopolized by the financial sector.”
“The financial sector should be very concerned with the explosive growth of these anonymous payment systems,” he continued. He said it was time for regulators and financial institutions to “wake up” and revisit anti-money-laundering efforts.
For Dhillon, the Liberty Reserve story reveals the lack of governance in digital currency, the lack of conformity among international banking regulations and the lack of coordination among international financial institutions.
“At a rather simple level Liberty Reserve was nothing more than an online payment system with rather lax governance mechanisms,” he said. “The ill-defined controls were partly intentional.” He noted that Liberty Reserve’s founder, Arthur Budovsky, had previously been convicted on a similar charge for seeking to provide financial transactions outside the reach of law enforcement.
“The intention of . . . Budovsky to set up the business in Costa Rica, which does not have an extradition treaty with the U.S., was a means to circumvent the law,” he continued. “This is because governments around the world have been rather worried about the proliferation and use of digital currencies.”
Kellermann said that for him the main lesson of the Liberty Reserve story is that the time has come for anonymous payment systems to adopt the principles of the Financial Action Task Force on Money Laundering.
Online payment schemes differ from other examples of black market currency transfers because it is far easier to launder money online, Kellermann said.
And such payment systems have proliferated in part because of the rather liberal limits of transactions, Dhillon added, as well as because of the “key characteristic” of anonymity for transactions involving illicit products and services such as drugs and pirated software.
Kellermann said anonymous online payment schemes are a $100 billion industry, adding that most proceeds from organized cybercrime are laundered in these systems.
Dhillon said most states in the United States regulate online payments. But both experts agreed that the current laws do not go far enough.
“There are concerns of regulatory interpretations and jurisdictional inconsistencies with respect to governance and enforcement,” said Dhillon.
Kellermann emphasized the importance of verifying the identity of customers and cooperating with law enforcement, saying that “in addition we should promulgate an electronic forfeiture law globally to seize [companies’] assets when they are not compliant.”
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