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Money Laundering Is Financial Thoughtcrime

When people hear the term money laundering today, they envision the most evil of acts, in which gangsters process satchels of cash through a fabricated company to show it as business revenue. Words and semantics are very important in this post-9/11 world, and as far as creating a negative connotation, that parlance has been extremely effective.

At its essence, money laundering is the act of concealing money or assets from the state to prevent its loss through taxation, judgment enforcement, or blatant confiscation. However, as the late J. Orlin Grabbe wrote: "Anyone who has studied the evolution of money-laundering statutes in the U.S. and elsewhere will realize that the 'crime' of money laundering boils down to a single, basic prohibited act: Doing something and not telling the government about it."

Protecting one's wealth is interwoven with the history of trade and banking which has existed since the dawn of commerce. Sterling Seagrave's Lords of the Rim describes how some 2,000 years before Christ, merchants in China would hide their wealth from rulers who would simply take it from them and subsequently banish them. This concealment involved moving the wealth and investing it in remote provinces or outside China.

Part myth, part rumor, the plausible tale of Mafia gangsters running huge amounts of cash from extortion, prostitution, gambling and bootleg liquor through existing Laundromats accounts for the phrase money laundering.

Also during this period, Al Capone was convicted in October 1931 for tax evasion, which is what earned the prosecutor's conviction rather than the predicate crimes that generated his illicit income. Capone's episode inspired Meyer Lansky, the mob's accountant, who structured elaborate international and Swiss financial facilities for safely securing money and vowed never to suffer Capone's fate.

Lansky is credited with designing one of the first real laundering techniques, the use of the "loan-back" concept, which disguised allegedly illegal money within "loans" provided by compliant foreign banks. The money could then be justified as revenue and a tax deduction for interest expense obtained in the process.

Without any method of tracking cash or bank activity, Congress passed the Bank Secrecy Act in 1970, heralding the age of transaction reporting, including the Currency Transaction Report (Form 4789), the Report of International Transportation of Currency or Monetary Instruments (Form 4790), and the Report of Foreign Bank and Financial Accounts (Form TD F 90-22.1). In the United States, the Money Laundering Control Act formally made money laundering a federal crime.

Internationally, the elements of the crime of money laundering are set forth in the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances and Convention against Transnational Organized Crime. Also, the Financial Action Task Force on Money Laundering, founded in 1989 on the initiative of the Group of Seven industrialized nations, is an intergovernmental organization whose purpose is to develop policies to combat money laundering and terrorism financing.

From President Roosevelt's 1933 seizure of personal gold to the Nazi confiscation of Jewish wealth to the recent deposit theft at Cyprus banks, asset plundering by governments has a long and colorful tradition. Protecting wealth from oppressive regimes continues to this day.

It's highly political and also a matter of perspective whether protection from confiscation is a justifiable activity. Government access to wealth is at the heart of the issue and it matters not if it's hiding money or cleaning money.

Therefore, the artificial crime of "money laundering" had to be invented, mainly because more direct and traditional methods of enforcing certain laws yielded little result. Think of it as driving without a lightbulb above the license plate being a felony because thieves might drive away in the night. All must participate in illuminating the way to be tracked. More than anything, this is a clear sign of regulatory desperation.

Money laundering has been called the thoughtcrime of finance. Isn't it really just banking with someone's possibly nefarious intentions attached to the act? It's like buying a drive-thru donut in a stolen vehicle. The theft of the vehicle may have been illegal and immoral but the act of purchasing a donut is not. Money laundering is not pre-crime but post-crime. And, it's difficult to identify the victim, other than the bank shareholders that must expend millions of dollars for the proactive compliance required as the state's deputized enforcers.

Moreover, money laundering is guilt by association. If the monetary flows resulting from associated businesses are deemed illegal, then the banking activity is defined as money laundering. But, in the absence of victimless crime laws against drugs, gambling, and prostitution, the majority of banking labeled as money laundering would simply be banking.

According to the International Money Laundering Information Bureau, "Money Laundering is also the world's third-largest industry by value." Apparently, it happens in every country in the world. Well, breathing by humans also happens in every country in the world. If money laundering is actually the third-largest industry in the world then it's either being calculated wrong or it's too easily defined.

In his Rolling Stone article "Gangster Bankers: Too Big to Jail," Matt Taibbi mocks the anti-money-laundering regime as being hypocritical because large commercial banks like HSBC receive a light slap on the wrist and the blind-eye treatment as smaller fish are routinely scooped up in the net. Taibbi correctly distinguishes between an arrestable class and an unarrestable class. However, he misses the point of the law's arbitrariness in the first place. Thank you for the analysis, Mr. Taibbi, but dispensing enforcement of an immoral law more evenly is not a solution for justice.

Even as the money-laundering laws are said to exist for the fight against terrorism or drugs or gambling, the cashless utopia is simultaneously being thrust upon us as the monetary architecture of the future. Expect ever more increasing thoughtcrime enforcement as the international money flow tightens

Jon Matonis is an e-money researcher and crypto economist focused on expanding the circulation of nonpolitical digital currencies. His career has included senior posts at Sumitomo Bank, Visa, VeriSign, and Hushmail. Currently, he serves on the board of the Bitcoin Foundation. Follow him on Twitter @jonmatonis.


(19) Comments



Comments (19)
Oh boy! We develop a software to read the law and then read indictments. We try to find where there is no crime. Grey area. This business (the grey area that Congress did NOT proscribe) we exploit. We make a TON of money. Do we want to tell the world about it? Hell no! To many of you this is money laundering, even though the actions are NOT been made illegal. Maybe immoral, unethical, but there is NO statute prohibiting it. Should we be transparent so other can compete and saturate our market?

What about the states that have made the Marihuana sales legal? Now, the banks, because they are federally funded, do not want your business due to the money laundering "implications". What now?

Worst: Chief of Police (not a regular cop, but a COP) (hereinafter referred to Johnson) gets an (electronic) direct deposit into his bank account at Bank X. His direct deposit comes from the State or the Feds, so is completely clean (read laundered). Johnson now goes to the bank and withdraws $100 (with serial number 123). With this $100 he hires Wendy, an escort (=prostitute). The now CLEAN money ($100) he hands over to the escort in exchange for a little loving. Wendy brings a friend, Amber, unbeknownst to him, but he doesn't have more cash. He desperately wants a menage a trois. He's never had one.
Amber mentions she banks at Bank X. He thinks perfect! He gets his Bank X app and does an INTRABANK transfer for $100 to Amber's account.
For the next hour, he is in HEAVEN. Girls are done and he is happy like a pig in sh*t.
Now, Wendy takes that same $100 bill (serial # 123) to Bank X and deposits it into her account. That same $100 bill that that Bank X gave to Johnson less than 24 hours ago. That SAME $100 that was part of a direct deposit from the State or Feds.
Wendy would get charged with Money Laundering even though it is the SAME $100 bill the State or Feds paid Johnson with.
Amber would ALSO get charged with Money Laundering even though she NEVER deposited anything into her account. Johnson did. She NEVER saw the money. The money NEVER left Bank X. It just went from "one column to the next" an Excel spreadsheet cell movement. (in a matter of speaking for the religious fanatics).

Now, WHERE is the logic in this?

By the way, this REALLY happened: See the video here:

An even worst scenario: The government confiscates a bunch of cash. The owner gets charged with money laundering, because of ill-gotten gains etc etc. This SAME money the government deems illegal, it WILL keep for itself and use it. Are you SH*TTING me? If it was so bad, why not burn it?
Posted by Ethanhunt | Thursday, April 02 2015 at 5:39AM ET
Jon Matonis-Pls tell me what is ridiculous about it-- Organised crimes are the main generators of illegal money--If these criminals are not able to put a mask on their illicit funds ,they wont be able to use it and generate more profits---if crimes shrink -there wont be muich illegitimate funds to launder -
-what is the relevance of roads and phones??Thousand of years back there were no phones yet money was launderd--today it has taken a more sophisticated form
Posted by Zaidi abbas | Monday, May 20 2013 at 1:46PM ET
@Zaidiabbas, That is a ridiculous notion and also fails to account for non-monetary rewards of crime. Money laundering and crime are no more twins than are money laundering and roads (or money laundering and phones). Control all the roads and control all the phone calls -- and crime will shrink. Of course.
Posted by Jon Matonis, The Monetary Future | Saturday, May 18 2013 at 8:06AM ET
Money laubdering and crimes are twins---one can not survive without the other---check the money laundering -crime will shrink--let there b no crime ,money laubdering will not bve required
Posted by Zaidi abbas | Wednesday, May 15 2013 at 9:03AM ET
The point is
1) Invent a new crime making something legal before illegal now.
2) Await some entities deliver the now illegal good or service to the old clients, they will become rich and powerful
3) Justify money laundering laws with fighting a "War on drugs", "War on Terror", "War on nasty thing of choice".
4) Give big, powerful institutions (TBTF) an unlimited amount of "Get out of jail" card when they are caught
5) On others, common people, use as much violence as possible, "because they are criminals and deserve it"

Or just "create the problem", "find a not working solution to the problem you created that give you much more power and money"
Posted by painlord2k | Tuesday, May 14 2013 at 8:18AM ET
Avery well articulated and argued article--Money laundering and crime are twins -these are interdependent--If criminal money is not generated ,there wont be any need for money laundering -so it is a post crime event--money laubdering puts a cloak on the illegality and make the illegal money look like clean
Posted by Zaidi abbas | Tuesday, May 14 2013 at 4:52AM ET
To seriously oppose the money laundering laws, I think one has to be pretty far removed from the consequences of the crimes associated with the practice. I'm sitting about twenty minutes away from East St. Louis, a city that has been profoundly impacted by crime. I doubt that anyone who spent a month walking the streets of that city (or any other place like it) would argue that the money laundering is an abstract "thought crime." If our bankers are going to open their doors to those who make money by any means necessary, they will likely pay a very high price at some point down the road.
Posted by teknoscribe | Monday, May 13 2013 at 10:13PM ET
I think everyone wants to protect his/her money. But you can protect it from some one as long as it's legal. But greed just doesn't let some people show how much they earn (if they really earn) and they try to hide their money. The US is always to different - some people use no credit check loans to stay afloat while others make so much money so they don't even know where to spend it. In any case, money laundering is a crime and it's one of those things which slows our economy and help the corruption to save its place in the society.
Posted by Christina8 | Monday, May 13 2013 at 6:19AM ET
This would seem to be a difference of values. Those of us who have nothing to hide in our movement of funds do not take offense to money laundering laws, and find the benefit of a safer society well worth the cost.

Applying social economics, it is clear that the corollary is that those that oppose money laundering laws find the cost to exceed the benefit, where the benefit is societal protection from drugs, the crime that results from their misuse, terrorism, and facilitation of trade with our enemies. It seems abundantly clear that the cost to those who oppose money laundering laws must be very high, and thus, they have much to hide. If their argument is that government has no right to poke their nose in their business, then that precludes logical discourse. Its not about government, its about is People.
Posted by | Thursday, May 09 2013 at 8:53AM ET
@CharlesSmith, It's more about the type of society that we choose to live in. Financial surveillance is only one part of the overall "surveillance family."

The thinking would be the same for digital/email surveillance and voice/telephone surveillance, because potential criminals and terrorists are involved with emails and telephone calls. The crimes that you refer to still existed prior to the establishment of money laundering laws, so the laws do not address a new crime. Also, the "cost" that you refer to unjustly increases the cost across the entire spectrum, not just the targeted activity.

Email surveillance, telephone surveillance, financial surveillance, and biological/health surveillance (coming soon) are all part of the larger surveillance family.
Posted by Jon Matonis, The Monetary Future | Thursday, May 09 2013 at 2:35AM ET
I agree with the article premise also. At first, federal government power was limited to providing defense from external enemies. Then it gained power to allocate land rights, pay social security and pensions, control the court system, control imports and exports etc etc. Now it wants to regulate firearms, dig through everyone's finances, spy on citizens, many other power grabs; all for our protection and benefit of course.

Of course it's hard to argue that drug money should be allowed to circulate. But the question is who gets the power to do what. I don't trust the government (or any central organization) with the power to confiscate assets. Not that I am pro-crime but it is just too much power for any human being to have.

Don't let them manipulate you into thinking that if they just get a little more power, they will fix everything. History shows that never works.
Posted by zveda | Wednesday, May 08 2013 at 8:53PM ET
I totally support John Matonis arguments.
The real reason the US government started writing "Anti-money laundering laws" is not because it damage the economy but because it had need of money.
In fact the law was written in the 1970 (fourty years after Mayer Lansky), with the Gold Standard working, when they were already in trouble with too much money printing and needed a way to find more money.

In Italy, in the last few years, we had this "commercial" on state TV where they propagandize about "if all paid taxes, the services would work well and taxes would be lower". Propaganda!!!!
In the 1970, in Italy, taxes were 25% of the GDP, now they are 50% of the GDP. And government debts (all of it) is 130% of the GDP against, maybe 20% in the 1970.

They crave money, whatever the source, like addicts. And they give a shit how they obtain it.
Posted by painlord2k | Wednesday, May 08 2013 at 7:27AM ET
Money laundering is part and parcel to drug trafficking, illegal trade with our enemies, and international terrorism. It is crime, and it harms all of society. Saying that it is just a thought crime is to condone the financing of activities which harm each of us, the people. Enforcing money laundering laws increases the cost of these crimes, as it makes it more difficult. The as any student of social economics knows, anytime you increase the cost of something, there is less supplied. Money laundering laws make these crimes less prevalent.
Posted by | Tuesday, May 07 2013 at 2:04PM ET
This is a totally specious argument. Giving tax evasion a euphemistic label like "protecting one's wealth" is hardly the basis for a serious discussion. If you indiscriminately equate "governments" with "oppressive regimes", I'm pretty sure you will find that ALL laws are onerous---except, perhaps, for the laws that prevent someone from stealing "your" money as you walk down the street.
Posted by TJR Easton | Tuesday, May 07 2013 at 1:42PM ET
The actual crime is the crime. Are you suggesting that without money, the crime would not exist? What if the gain was sexual favors or some other non-monetary reward? The fact that full financial transparency is nearly in place will be utilized in an aggressive manner by any presiding regime (in any country), quite possibly against political opponents too. You only have to read history to understand that. A free society would not violate financial privacy in that manner precisely because of the massive opportunity for abuse that it opens up.

I support voluntary financial transparency.
Posted by Jon Matonis, The Monetary Future | Tuesday, May 07 2013 at 1:37PM ET
So your contention is that we "made it a crime" for reasons that do no stand up to scrutiny? In our increasingly convoluted international financial system, are you of the opinion that this particular 'thoughtcrime' is irrelevant? If you are within the rules and regulations surrounding your fiscal behavior, you have nothing to worry about. If you are a crack dealer (or an offshore leveraged buyout vulture - this is not about blue collar/white collar) and have to deliberately hide the source of your money because the money itself is evidence of a crime... I fail to see how your story makes a lot of sense. It is a crime, because it absolutely should be a crime.

Although to be fair, in this age of burgeoning crypto-currencies, I could easily support a thesis on the theme of money laundering laws being increasingly worthless. The intent underlying the law, however, remains relevant.
Posted by callmebeerbaron | Tuesday, May 07 2013 at 1:27PM ET
Any person or institution knowingly assisting a drug ring in laundering their money should get the same treatment as the people making and selling the drugs. Without the money laundering the drug cartels or whatever would choke on cash. Anything a bank is holding that represents laundered funds should be confiscated just as the cars, houses, drugs, cash and hopefully freedom of the perpetrators. This article sounds like the throw up the hands and give up attitude that is wrecking the country.
Posted by Bill S | Tuesday, May 07 2013 at 1:14PM ET
@callmebeerbaron Certainly, society can make anything a crime. My point with the metaphor was that buying the donut would not have been previously against the law, whereas verbally assaulting donut employee has always been against the law.
Posted by Jon Matonis, The Monetary Future | Tuesday, May 07 2013 at 12:54PM ET
Disingenuous. It is not 'thoughtcrime', it is 'actual crime'. In this case is the deliberate obfuscation of the source of money by channeling through any number of intermediaries, in violation of the laws governing the transfer of stores of value in a given set of circumstances. A law.

The other side of that argument would be Bitcoin (wiki it). Nothing regulated there, therefore no potential crime regardless of the source of the finances. But your example, "It's like buying a drive-thru donut in a stolen vehicle" is not accurate. The metaphor would be more accurate as "It's like verbally assaulting a drive-thru donut employee in a stolen vehicle." Both parts are against the law.
Posted by callmebeerbaron | Tuesday, May 07 2013 at 12:46PM ET
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