Follow the money, stupid

The Federal Reserve commissioned me to research and write a paper on fraud, risk and nonbank payment systems. I found that phishing is facilitated by payment systems like eGold and Western Union which make the recovery of stolen funds more difficult. Traditional payment systems like cheques and credit card payments are revocable; cheques can bounce and credit card charges can be charged back. However some modern systems provide irrevocability without charging an appropriate risk premium, and this attracts the bad guys. (After I submitted the paper, and before it was presented on Friday, eGold was indicted.)

I also became convinced that the financial market controls used to fight fraud, money laundering and terrorist finance have become unbalanced as they have been beefed up post-9/11. The modern obsession with ‘identity’ – of asking even poor people living in huts in Africa for an ID document and two utility bills before they can open a bank account – is not only ridiculous and often discriminatory. It’s led banks and regulators to take their eye off the ball, and to replace risk reduction with due diligence.

In real life, following the money is just as important as following the man. It’s time for the system to be rebalanced.

9 thoughts on “Follow the money, stupid

  1. Dear Ross,

    Your paper is an interesting read and I thank you for publishing it to the public. Since I am in what you call the non banked online currency industy, (we call it the DGC industry) i.e. digital gold and silver currencies I have particular experience with the issues brought forth in your paper.

    However, you have made one major ommission and I feel it does need to be brought to your attention.

    Namely that I and the people in our industry which does include and its principals do not so much fear criminals and criminal activity as that can be dealt with easy enough if left alone to deal with it, but our concerns and real fear are of the US Federal and State governments.

    The real risks are of the federal reserve itself and their various policing agencies sneaking around to kick in the doors of the company owners in the middle of the night to protect their currency monopoly under the guise of bogey men like child porn and terrorism. In fact, the company owners are being blamed and in some cases criminal charges have been brought for the fraud perpetuated by third parties.

    So while you address the problems and realities well enough, you make no mention of the operating environment we find ourselves in.

    It may be news to you that now 7 companies have had their doors kicked in within the last two years. This is a large number in such a small industry.

    It begs the question: Who are the real criminals at work here?

    The governments lack of understanding of our industy is causing many problems for many otherwise good people and it has been really incredibly sad to watch our industry be destroyed like this.

    The e-gold situation is just one of many examples of an overreaching government out of control who can barely understand the markets they are attacking in lieu of trying to find a way to regulate them which in all reality is not even needed at all. What they need to do is step back and let us compete with the private Federal Reserve openly and that alone will improve the dollar and the crime rates will improve as a result.

    Since there has been no effort to date to create a fair and reasonable dialougue in a neutral environment to improve the situation across the industy and help the governmnet understand what they are doing, we now find ourselves in something akin to a wild west environment where good people with brains and talent are leaving the country in fear for their lives and futures. They are uprooting wives, children and homes and running off to Galt’s Gulch in hopes of being able to operate a reasonable company in a free market.

    The governmnet is destrying our industry and it needs to STOP NOW and start thinking clearly. We cannot fight crime and fraud if we are constantly being forced to jockey around just to stay out of jail, comply with overreaching regulations that dont even apply to our businesses in any real way and constantly are having our funds confiscated with no apparent look to actual law.

    I myself have lost over $100,000 USD in the last year. Not by fraud or crime no. I lost it by being a customer of companies who the government has decided to attack and confiscate. I have no recourse.

    In some instances, the government has just confiscated entire companies and not even bothered to press charges.

    That is theft. They are not setting a good example to the people.

    So while your paper is valid on its face, it fails to address the real issues we face in the actual marketplace.

    I understand that the government might not like it if they spent their money and got back a paper that attacked them. I forgive you.

    In short, the federal government has become lawless and they are destroying the US Dollar and particularly destroying our efforts to create currencies that will help the people survive the coming collapse of the US Dollar.

    it is my opinion that gold is now a crime and our industry is becoming victim to this crime.

    Best regards,

    Always Anonymous.

  2. All very true Ross, although somebody who didn’t know you might assume, from reading the above, that you believe that banks and regulators have the same goals regarding fraud.

    It’s become increasingly apparent that, for banks, a risk transferred is a risk reduced (a cornerstone of C&P) and, if a bank can use “due diligence” to transfer risk cheaper than the cost of actually reducing it, that’s what it’ll do.

  3. Dear Always,

    Ross said “I found that phishing is facilitated by payment systems like eGold and Western Union which make the recovery of stolen funds more difficult”.

    You are trying to shift the discussion away from this issue. And you haven’t presented a single argument why you think the US governmnt was wrong, except the rather subjective and irrelevant claim that you have lost money.

  4. Sorry Ross, having begun reading your paper I see that you explicitly mention externalisation of risk on page one! Perhaps I should have written “…somebody who hadn’t read your paper might assume…” Mea Culpa.

  5. It’s a rare document that doesn’t benefit from either a date or a version number. (I mean in the doc, rather than in the URL.)

    The term FATF is expanded on page 10, not page 1 where first used.

  6. Your remark about everyone requiring ID and utility bills reminds me that in the past, a thumbprint used to be used as authentication for transactions on a bank account (I believe this happened in India). I believe that the person’s workplace was used for an address, as many labourers were illiterate at the time. (The downside of this was that people used to cut the thumbs off dead people to access their bank accounts). Perhaps this might be a more sensible model to use in the developing world.

  7. @veritas

    “The downside of this was that people used to cut the thumbs off dead people to access their bank accounts”

    Yes and when that stopped working they used to take the whole corpse into the post office in a wheel chair and tell the counter person that ‘Granny was unwell’ and had to be helped.

    THe whole scam came to light in one post office in South Africa when the counter staff became suspicious and the bungeling crooks left the corpse on the floor…

    (I wish I could find the Private Eye the artical was reproduced in but the reported remarks of the post master did make me laugh).

  8. as much as I appreciate your taking a close look at e-money your statements about paypal are not reflecting my experience.
    paypal is full of major faults and had to correct its user agreements so often that checking it daily shows a change almost daily. they spend a lot of money in publicity which is not reflected in their user agreement and it seems marketing and legal department chase each other around since years.
    I also miss the mentioning of the problem that knowledge of the associated email account permits buying with this email address on several “world merchant” accounts of paypal without that the defrauded owners of the money ever received their money back.

  9. @Always,

    The ethical issue here is that irrevocable financial transactions are the BASIS of fraud. There is no reason for any electronic transaction to be irrevocable, given the relative instability, complexity, and potential inauthenticity of online transactions. And the real criminal is you, if you don’t understand that.

    Any transaction that is mutually beneficial to both parties would have no NEED to deliberately avoid revocability. Don’t try to collude the issue with exaggerated anti-government FUD–if you’re benefitting from that irrevocability, and you know why your customers are choosing your service as an irrevocable one, then you are a malicious abettor and need to be punished all the same.

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