money laundering
Exchanges  •  Regulation  •  Exchanges  •  News  •  Regulation

The relationship between big banks and their regulators is pretty dubious, to put it mildly. But expecting federal investigators to give Bitcoin exchanges the same free ride is childishly naive.

When HSBC got caught laundering money for drug dealers and terrorists, it promised regulators it would improve controls.

It didn't.

Senate investigators found the bank had failed to monitor $60 trillion in transactions for money laundering and had a backlog of 17,000 dodgy account alerts which it failed to investigate. Which dwarfs LibertyReserve's alleged laundering of $6 billion.

HSBC shipped $7 billion in actual paper dollars from Mexico back to the US during 2007 and 2008. Because of controls on big cash deposits at US banks, the money had been smuggled into Mexico so HSBC could ship it back to the US.

Mexican and US authorities told the bank that deposits so massive clearly raised red flags that they included drug money. Between 2006 and 2009, HSBC simply did not bother to monitor transactions from Mexico for money laundering and defined the country as low risk.

HSBC was so favored by drug cartels that the organizations began transporting their dollars in cash boxes specially designed to fit through the standard HSBC teller's window.

If dodgy drug dealing isn't against your moral code, what about terrorism? HSBC sent dollars to Saudi and Bangladeshi accounts with known links to al Qaeda. (See the Senate report below.)

It also sent $19.4 billion to accounts linked to Iran ... in breach of the Trading with the Enemy Act.

Most of this wasn't even secret: regulators knew about it and were gently pushing HSBC to clean up its act. The Senate Committee criticized regulators for doing so little:

"yet during the six-year period from 2004 to 2010, OCC officials did not take any formal or informal enforcement action to compel HBUS (HSBC's US arm) to strengthen its AML (anti-money laundering) program, essentially allowing its AML problems to fester."

HSBC was deemed "too big to fail" so a deal was done. It paid a relatively small fine -- $1.9bn -- and promised, again, to improve its processes.

But that doesn't mean that a new bank or exchange in this market can expect to be given the same free ride as HSBC.

Actions this week against Liberty Reserve show that the US takes money laundering seriously ... when it's not carried out by a big bank.

CryptoCurrent's decision to close, and OKPay's decision to stop processing Bitcoin transactions shows that the message is getting through.

If you want to run an exchange which offers alternative coins for dollars, or vice versa, then you'd better get real about regulation.

It might be expensive and it might go against your libertarian beliefs but if you want to stay in business, and out of prison, you need to be talking to the regulators. You need to know who your customers are, or at least have evidence that you've tried hard to find out. Or you need to take your business, and yourself, properly into the shadows.

If you want to launder money -- choose dollars and use a bank. They've been caught before and they're still in business.

But raiding Bitcoin exchanges wins headlines for investigators, which helps them get bigger budgets for more investigations next year.

Bitcoin can stay immune from regulation but only if it stays online only. If you want to transfer it into fiat currency or put its value into a traditional bank account, then it comes under the remit of regulators.

We might not know what future Bitcoin regulation will look like, but we know it is coming fast.

In the late 1990s, hundreds of "internet companies" were launched. Some gloried in being "beyond regulation" ... the sensible ones kept quiet and did their best to obey the law where ever they operated.

In 1998, Amazon.com filed its year-end accounts: it made sales of $253 million for the final quarter, breaking through the $1-billion-a-year barrier after just four years in business.

But Amazon warned in its filing:

"As the international online commerce market continues to grow, competition in this market will likely intensify. In addition, governments in foreign jurisdictions may regulate Internet or other online services in such areas as content, privacy, network security, encryption or distribution. This may affect our ability to conduct business internationally."

Any Bitcoin company could do well to print that out and stick it on the wall. If $1 billion a year was not enough to make Amazon feel safe, then a few million dollars from venture capitalists and the Winklevii should not make alternative coin businesses believe they're beyond the rules.

Bitcoin is the same age as Amazon was in 1998 and worth about the same too.

The industry has a choice.

It can take a similar attitude to the bookseller and start talking to the grown-ups.

Or it can stay online, in its geeky niche, and be ignored by regulators and the police.

The US Senate report is here:
http://www.hsgac.senate.gov/subcommittees/investigations/hearings/us-vulnerabilities-to-money-laundering-drugs-and-terrorist-financing-hsbc-case-history

Amazon's filing document from 1998 is here:
http://media.corporate-ir.net/media_files/irol/97/97664/reports/123198_10k.pdf

Image credit: Flickr

Financial Regulation

There are 9 comments. Press to view.