[Dave Birch] Forum friend Jon Matonis drew my attention to a report called “Shadowy Figures: Tracking Illicit Financial Transactions in the Murky World of Digital Currencies, Peer-to-Peer Networks and Mobile Device Payments” [PDF] from the James A. Baker III Institute for Public Policy and the Center for Technology Innovation at Brookings. I couldn’t help but notice this paragraph:
It is statistically inevitable that some fraction of the more than 300 million transactions performed using M-PESA in 2010, and of the much larger number of transactions that will be performed in 2011 and future years, will not be legitimate. And some fraction of those, in turn, may involve payments that bear on American national security or law enforcement concerns.
Is this real or is it just scaremongering about new technology? I’ve no figures to hand, but I’m fairly certain that 99.99% of the illicit activity in Kenya involves cash (such as being shaken down by the police there, which happened to a colleague of mine earlier this year).
About 100 Narok County council employees have been sent on a one month compulsory leave after they protested the introduction of an electronic revenue collection system at the Maasai Mara Reserve… the employees were opposing the introduction of the e-ticketing at the reserve “to reduce the rampant corruption”. “The electronic ticketing system installed at the gates will deny the clerks the opportunity to handle solid cash, which they have been stealing from the council for many years,” [a council spokesman] added.
Therefore, any public policy aimed at improving the life of the average Kenyan ought to have cash reduction at its centre. I’m looking forward to seeing evidence to the contrary, but I think that the bad guys’ medium of choice is the greenback. I’m sure, for example, that Democrat Congressman William Jefferson of Louisiana would not have used M-PESA had it been available in the US.
A former US congressman famously caught with $90,000 (£54,000) in cash in his freezer, has been sentenced to 13 years for bribery and money laundering. William Jefferson, a Louisiana Democrat who served for nearly 20 years, was convicted in August of taking hundreds of thousands of dollars in bribes
So let’s keep things in perspective. If you want to cut down on bribery, tax evasion and money laundering, then you need to cut down on cash. I’m not so stupid as to imagine that eliminating cash would eliminate crime, but it would at least raise the cost of it somewhat and perhaps tilt the balance in one or two places. If Congressman Jefferson had known that all of his money transfers were being recorded by AT&T, Wells Fargo or Walmoney, it may have swayed his judgement. The report goes on to say that
Given the rate of change of the digital landscape, any set of solutions constructed based on a single snapshot in time will quickly become obsolete. However, by creating the collaborations, regulatory frameworks, and technologies that reflect today’s more fluid and diverse financial transaction environment, government and industry will be better positioned to address illicit transactions today and to adapt to address those of the future.
Indeed, and it’s much too early in the evolution of mobile payments to say what any collaborations, technologies or regulatory frameworks will end up like. So let’s focus on the big picture for the time being: end the cash menace now, and worry about mobile later. Let mobile technology make life better for people.
And the new technology pits mobile operators against banks for the same customers. Working with Equity Bank in Kenya, Safaricom has launched an account called “M-KESHO,” explicitly for mobile savings, but it’s met with less success. Less than 5 percent of M-PESA users have adopted it. The account bears interest and starts a credit history; it also comes with high fees for deposits and withdrawals.
That’s, I think, a really important observation. When banks get involved in things, the costs go up. Banks are heavily regulated organisations that have an important function in the economy, although it’s no transparently obvious that payments are one of them. But one of the reason why banks’ costs are high is that they have to “police” the system. The cost of Know-Your-Customer (KYC), Anti-Money Laundering (AML) and Anti Terrorist Financing (ATF) rules and regulations is very high, and the higher you make it the more unaffordable the services become for the less well-off in society. And, just as an aside, the figures seem to show that the stringent KYC/AML procedures that waste everyone’s time and money are not really effective in stemming the flow of criminal cash.
Last year, the D.E.A. seized about $1 billion in cash and drug assets, while Mexico seized an estimated $26 million in money laundering investigations, a tiny fraction of the estimated $18 billion to $39 billion in drug money that flows between the countries each year.
So, in essence, for a massive expenditure and huge drain on the economy, KYC/AML has made to all intents and purposes no difference: it’s just become a minor tax on criminal activity. It isn’t only e-payments nutters like me who think like this, incidentally. Michael Levi, the respected Professor of Criminology at the University of Wales is blunt.
It is difficult, even with hindsight, to work out when and how the view developed that attacking the money trail was a key element in the fight against terrorism.
Look: there is no evidence that KYC/AML/ATF has achieved anything at all in this area. The sums that terrorists require are so small, and the “black” economy so large, that here is no chance of stopping terrorism this way and the the criminals can get round them easily, but by excluding the poor from financial services the harm that over-strict regulations cause is tremendous. We need a concentrated policy effort to get cash out of their lives, and putting up barriers to mobile money shouldn’t be part of them.
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