Drugs, terrorism and shadow banking

March 26, 2010

The trouble with moving big amounts of cash, from a criminal’s point of view, is threefold. It’s bulky, it’s heavy and it smells.

A stash of $1 million in mixed bills weighs around 100 pounds (50 kilos). Specially-trained dogs can sniff out bulk cash in a heartbeat.

All of which helps to explain why drug cartels and financiers of terrorism appear to have been making increasing use of what FBI chief Robert Mueller calls a shadow banking system.

Its features include a legal loophole that allows money launderers to get around the requirement that cash or “monetary instruments” (share certificates, travellers’ cheques, money orders etc.) in excess of $10,000 must be declared on entering or leaving the United States.

It is, however, perfectly legal to carry, say, $50,000 embedded in the magnetic stripes of so-called pre-paid stored-value cards.

They look like a credit or debit card but are not linked to a bank account, can in many cases be loaded anonymously, are not “monetary instruments” under U.S. law, and were labelled “the ideal instrument for large-scale drug trafficking and money-laundering operations” in a 2006 analysis by the National Drug Intelligence Center.

It predicted that drug traffickers, narco-terrorists and other criminals would increasingly rely on stored-value cards — “superior to established methods of money laundering” — because they could be used without fear of documentation, identification, law enforcement suspicion or seizure.

In other words, a shot in the arm of the global money laundering industry, an illicit enterprise that accounts for between 2 and 5 percent of the world’s GDP, according to an estimate by the International Monetary Fund.
The Center’s dark warnings did little to curb the rapid growth of the stored-value card industry — more than $300 billion a year by some estimates.

At a congressional hearing in mid-March, the FBI’s Mueller reported that “recent money laundering investigations have revealed a trend on the part of criminals to use stored-value devices such as pre-paid gift cards and reloadable debit cards in order to move criminal proceeds.

“This has created a shadow banking system…”

The largely unregulated stored-value card industry, he said, made it difficult for law enforcement to spot transaction patterns that can help identify money launderers and financiers of terrorism.


So if the cards are such a threat, why is there no regulation? It is a question two senators, Joseph Lieberman and Susan Collins, asked in a February 16 letter to U.S. Treasury Secretary Timothy Geithner.

The two, respectively the chairman and the ranking member of the Senate’s Committee on Homeland Security and Governmental Affairs, last year authored an amendment to close the stored-value card loophole.

The amendment became part of an act on credit card accountability and disclosure President Barack Obama signed into law on May 22 last year. The amendment stipulated that the Treasury Department work out regulations on the sale, issuance, redemption and international transportation of stored value cards within 270 days.

The deadline lapsed on February 16 and the letter asks for an explanation for the delay in issuing rules. So far, there has been no reply.

It’s not clear whether the delay is due to bureaucratic inertia, overwork in a Treasury Department busy with a deep financial crisis, or, as money laundering expert Charles Intriago put it, “a manifestation of the unhealthy power of big money, financial institutions and their lobbyists.”

Intriago, an anti-money laundering crusader for decades, runs the International Association for Asset Recovery, a company based in Miami.

How much dirty money flows through the stored-value card loophole is anyone’s guess.

“It’s not possible to quantify how much money is moving one way or the other,” Paul Campo, the chief of the Drug Enforcement Administration’s office of financial investigations said in an interview. “But the case of Virtual Money Inc. gives an idea of the potential scale of the problem.”

According to a government indictment that stemmed from a DEA sting operation, drug dealers using pre-paid cards issued by Virtual Money, a company based in Texas, withdrew $7.1 million from automatic teller machines (ATMs) in the Colombian city of Medellin in 2006.

Despite the concern over more sophisticated methods of moving ill-gotten gains, carting cash across borders has not gone out of fashion. In 2009, government agents along the border with Mexico seized $39.2 million in currency, according to official figures. That compares with around $10 million in 2008 and is due to more frequent checks of southbound traffic for cash and guns.

Nearly $40 million in confiscated cash sounds a lot. But it is less than pocket change, in the grand scheme of things. The U.S. Justice Department estimates that drug cartels smuggle $24 billion a year into Mexico, $40 million amounts to 0.16 percent of the estimated total. What about the rest? Nobody can give a breakdown, but tighter regulations surely can’t hurt.


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Drug cartels control a $40 billion industry and every penny has to get laundered.

Posted by Story_Burn | Report as abusive

I don’t know what you’re talking about, I still keep dirty money under my mattress

Posted by sabkhan | Report as abusive

Do you think that WALL STREET and the government could be involved; hmmmm?
-Na, couldn’t be; we have such ethical and moral up-standing politicions and CEOs running our counrties.
I just can’t figure out how the drugs get into the US and Canada and have all that money cleaned with out them finding out who’s doing it. Oh well.

Posted by jfz50 | Report as abusive

So if Congressman Jefferson had $90,000.00 in ‘gift cards’ in his freezer he’d have been ok? HAAAAA!!!!!!!!!!!!!!

Posted by bddd | Report as abusive

Sounds like we got ourselves a death match here: zombie banks vs. shadow banks. Sniffer dogs for all !

Posted by HBC | Report as abusive

How long before the Cartels conclude that the US Dollar is worthless and on the slide and thus declare Prepaid Cards (credit chits) the only acceptable currency when you want drugs? Once Addicts start popping down Walmart and Kmart to launder their wages directly into hundred dollar Prepaids, Walmart and Kmart become fronts for money laundering and Black Markets, it becomes an exchange of Cards.

Posted by yellowdingo | Report as abusive

Prepaids….the new legal tender!

Posted by plubber | Report as abusive

Maybe when the bankers see one of the internationally recognized leading innovators of their generation with a patent that which permanently fixes this problem in front of 399 park avenue with a sign that says,

“will suck your … for food”,

then they’ll start supporting US Small Business again.

After of course, they are serviced.

Posted by jimigenius | Report as abusive

Many times when credit cards are stolen the first stop for the thieves is a local store where they will max-out (run the credit tab to the limit) on the card(s) they have stolen.

Posted by cranston | Report as abusive

“It is, however, perfectly legal to carry, say, $50,000 embedded in the magnetic stripes of so-called pre-paid stored-value cards.”

That’s quite a big ‘say’, can one buy junk food and get better gift cards with it ?

Posted by Ghandiolfini | Report as abusive

Good for them! They are no different than the banks and corporations of the world.
They look for a loophole and benefit from it.
Isn’t this called free market?

Posted by Anna123 | Report as abusive

Geithner doesn’t care about the law. He represents the big banks – not the american people. That he has not been fired yet speaks volumes about this administration.

Posted by bigkirb1 | Report as abusive

Notice the “pay as you go” disposable phones are sold at the same stores. They could just package the cards and the phones together and call it “iDeal”.

Posted by Freakishlysmart | Report as abusive

Sounds like an updated version of Western Union.

Since these transactions are not linked to any bank account, the issuing party (companies like Virtual Money) will get tagged with reporting limits when a transaction to load up or withdraw occurs.

Posted by rror | Report as abusive

I’m certain that the people carrying excess stored value cards will be happy to declare it at CBP checkpoints…Most all of them are ideal, upstanding citizens.

The article makes it sound like border crossing with cash, etc, in excess of $10,000 is prohibited.

It is perfectly legal to enter or exit the United States with more than $10,000 in currency or equivalent, it just needs to be declared. Currently, it’s legal to enter or exit the country with $100,000 in stored value cards without declaration.

Posted by RmanB17499 | Report as abusive

Don’t forget those hedge funds and all those financial LLCs that are accountable to no regulatory authority yet seamlessly shift millions and even billions of dollars around the world without having to account for it. All with the approval of Congress and regulatory bodies.

Posted by Anonmucker | Report as abusive

Hey, when Emmanuel and Geithner became part of the Obama administration that should have told everyone all they needed to know. But here’s the thing..They and the bunch that they represent fold when we step away from the use of “Federal Reserve Notes” and other “modern” banking instruments. We do that by using local scrip, local credit unions, possibly Sharia-style banking if we use banks at all. We can do that. Step away from this crooked table, change the game, and they and the freaky elected officials who support these heists fold with them. How about that !!

Posted by gramps | Report as abusive

Thank God for The Shadow Economy and the Shadow Banking System!

We pretty much had the same set of issues when I was the CEO at HushMail. Of course, scammers and crooks would use the encrypted email service to hide their tracks and we responded to about 125 government subpoenas per week (the inboxes were encrypted, however). Political dissidents in Tibet, asylum seekers, protected witnesses, etc were also the users of HushMail so I felt good about providing a liberating service to many around the world.

What people fail to realize is that financial privacy is just as fundamental as communication/email privacy. Look at the Jews under Hitler that sought to protect their generational wealth. It is a core right (and not to be taken lightly). It matters not that other miscreants use a particular service, because laying the rails of the infrastructure benefits society for the good as well. Today, scammers and crooks use the telephones and mail, but we don’t blame the phone companies or the US Post Office. Furthermore, the underground economy is full of people using Helicopter Ben’s Federal Reserve notes but society doesn’t blame the Fed for providing paper $100 bills to the kidnappers, drug dealers, organized crime, and pedophiles.

Anonymous, untraceable digital cash is a fundamental right of financial privacy. RESIST DIGITAL MONEY ….. unless it’s anonymous.


Posted by matonis | Report as abusive

I can see the headline now: “President declares WAR on Shadow Banking”…what bullsh*t Plain and simple, gov. to much control. Don’t fold, stand up for freedom and privacy demand DIGITAL GOLD CURRENCY. Paper is poverty.

Mark Herpel

Posted by DGCmagazine | Report as abusive

Its a brilliant article , bravo that there are journalists like you.

Posted by Ismailtaimur | Report as abusive

Anonmucker, that is such a simple and accurate observation.

There’s a Kind of a Hush.

Posted by Ghandiolfini | Report as abusive

so does that mean that travellers to the US now have to have all their cards checked. what if I deposited $1,000,000 into my visa card, then accessed it offshore – how would the airport security know…..will visitors have to bring up to date credit card statements with them – this is all so stupid, America doesn’t stand a chance against the drug lords. they are much smarter than the US government and have more money

Posted by willthisnamedo | Report as abusive

…and the oil dealers are smarter than the arms dealers who are smarter than the human traffickers who are smarter than the pimps who are smarter than the warlords…

Posted by Ghandiolfini | Report as abusive

Why not stop everyone from traveling, install cameras in everyone’s home, embed us all with a chip while you are at it? The stupid rules and laws do nothing to stop criminals or terrorists, they merely make it easier for the governments to control the people! With the sophisticated science that is available, why not directly go after the terrorists or drug dealers… oh yeah! you’re trying that in the Middle east and S. America.. easy isn’t it?

Far easier to make our lives miserable!

Posted by laeticus | Report as abusive

The root of the drug problem is the demand for drugs. Attack the drug use / addiction problem and reduce demand.

Posted by TLWiz | Report as abusive

To that end, the only question the FBI and the rest of the US intelligence agencies need to answer is, as to how was Saddam able to accumulate over a billion dollars in cash, US $100 brand new notes.All secretly packed in cheap metal cases with not even the US Treasury having any records. The penny-ante two bit drug smugglers may be a problem, but like these too big to fall shyster banks, and more then half of Wall street manipulating the fundamentally flawed economics with impunity. How about US Agencies like the CIA, DOD, State Department and others side stepping all accountability and shifting billions for pet projects of the politicians and covert actions.
Not to mention the private entity the Federal Reserve under the tutelage of the god father the Chairman using, abusing, misappropriating the taxpayers money with no transparency, amenability, without any rules regulations, all done in secret and with impunity.

Money laundering within the Govt. system itself is a much bigger issue and problems then the drug dealers etc. Ponzi schemes like what Madoff and others operated, the speculation of oil, gas, water, food and price fixing is to up hold the fundamentally flawed economic system. Plus the US Federal Deficit of some $10 trillion during 8 years of Bush totally incompetent MBA Presidency and US debt of over $14 trillion to the Chinese, Arabs and others is a much bigger issue and problem.

All this while the middlemen shyster bankers rob the country and the people blind.

Posted by wineo339 | Report as abusive

[…] Beautiful Laundrettes Posted by Thomas L. Knapp on Apr 6, 2010 in Commentary • No comments In a recent op-ed, Bernd Debusmann laments a “loophole” in US “money laundering” […]

Posted by Our Beautiful Laundrettes | Report as abusive

[…] […]

Posted by Banking | Mozilist | Report as abusive


I see this type of transaction from time to time back when I work in the hotel indsutry. A person would come in trying to use a prepaid credit card. They wouild give me this hole story about how they travel on business and how theuir boss pass them in these cards. Sound fishy. Once I would say We dont accept them he would come back and ask to pay straight cash. once I say I need an ID they would disaspear.

Posted by EMPRO | Report as abusive