Ever-present in society is the need to conduct economic transactions. In some places, fresh produce and livestock facilitate trade, while in others, coins and paper currency are the means of exchange. Today, however, economic transactions increasingly depend on an exploding digital currency scene. From small business owners to college students, peer-to-peer (P2P) digital payment apps provide the means for any and all economic transactions.
With relatively painless set up and easy-to-use interfaces, peer-to-peer payment networks become increasingly popular. After all, services like Zelle, Venmo and its parent company PayPal all enable the instant transfer of funds from one account to another. Money that once took days to move from one account to another now disburses in a matter of minutes.
However, like many bi-products of the digital age, government regulation has not kept up with the high speed expansion of online payment networks. As a result, digital payment platforms create massive vulnerabilities in global financial systems. In some instances, P2P payment networks enable terrorism financing. In the United States in particular, consumers sacrifice financial security in favor of instantaneous economic transactions. In order to fully understand the destabilizing power of peer-to-peer payment networks, it’s important to first understand its relationship to classic money laundering techniques.
The idea behind money laundering is relatively simple. Criminals and kleptocrats alike must find ways to disguise ill-begotten funds in order to use them openly on the market without arousing suspicion about their origin. Traditional money laundering schemes like the Black Market Peso Exchange allowed drug cartels in Columbia to launder over $5 billion worth of profits from drug sales in the United States every year. In order to convert drug profits from U.S. dollars to pesos the cartel concocted an intricate scheme involving drug money couriers, money launderers, electronics exporters and importers as well as money brokers. All of these actors worked together to enable drug cartel members to openly spend drug profits without any ramifications.
The scheme starts with on-the-ground cartel agents in cities like Miami that have millions of dollars’ worth of profits from illegal drug sales lying around. The agents then purchase millions of dollars’ worth of consumer electronics like laptops and computers under the guides that the products would be exported for sale abroad. The agent would pay for the products in U.S. dollars and then transport the exports to Columbia. The cartel converts their illicit U.S. dollars into pesos via offloading electronic products. The Columbian electronics importers pay the cartel for the products in pesos and in doing so avoid excessive currency conversion fees. The cartel manages to cleanse its profits of a criminal past and can now freely spend pesos on the free market. Electronic importers are just one example of industries used to launder U.S. dollars into Columbian pesos. The cartel also dealt with cigarettes, liquor, and dishwasher importers.
The Black Market Peso Exchange represents just one of many run-of-the-mill money laundering schemes. Money laundering remains necessary for the continuation of criminal activity everywhere and so methods constantly evolve to stay ahead of law enforcement. Unlike money laundering of the old world order, today’s digital economy allows criminals to move money legally via thousands of small cash transfers rather than huge lump sums. Peer-to-peer payment providers enable widespread money laundering due to their relatively lax account creation requirements and lightning fast payment transfers.
Although companies like PayPal explicitly forbid the use of its services for illegal financial transactions, in reality, the company has few means of enforcing such rules. This enforcement failure allows terrorist groups to move money in and out of countries in order to finance attacks. Consider the case of Mohamed Elshinawy, an American citizen who in 2015 was convicted of assisting ISIS coordinate a terrorist attack in the United States. Although the FBI arrested Elshinawy before the attack came to fruition, his ability to procure funding from ISIS via eBay and its payment partner PayPal speaks to the vulnerabilities of online payment methods.
According to the FBI report, Elshinawy pretended to sell computer printers on eBay and, in return, received funds from ISIS for “operational purposes” via PayPal. Law enforcement intercepted Elshinawy before he could execute an attack, however, his experience points to glaring flaws in the digital financial system primarily the ways in which it promotes anonymity and reduces accountability. Elshinawy’s experience using PayPal is not a unique and similar terrorism financing schemes have been uncovered in places like Indonesia in 2017.
Despite acknowledging the growing threat posed by digital asset exchange platforms in the documents like the“National Strategy for Combating Terrorist and Other-Illicit Financing” the government has done little to stop the expansion of digital payment platforms. Social norms broaden P2P range and visibility as consumers increasingly turn to apps like Venmo and PayPal for every day transactions. It then becomes more difficult for law enforcement and financial regulators to identify and uncover illegal activities.
In short, if terrorism financing is the needle in a haystack, P2P platforms quadruple the size of the haystack. Even more alarming is the fact that there are no signs of digital payment trends slowing down. In 2020 alone the use of Venmo has increased by 52% compared to the same time last year. The coronavirus pandemic will only increase consumer dependency on digital payments as individuals and businesses seek contactless payment methods.