Bernd Debusmann

The trouble with moving big amounts of cash, from a criminal’s point of view, is threefold. It’s bulky, it’s heavy and it smells.

A stash of $1 million in mixed bills weighs around 100 pounds (50 kilos). Specially-trained dogs can sniff out bulk cash in a heartbeat.

All of which helps to explain why drug cartels and financiers of terrorism appear to have been making increasing use of what FBI chief Robert Mueller calls a shadow banking system.

Its features include a legal loophole that allows money launderers to get around the requirement that cash or “monetary instruments” (share certificates, travellers’ cheques, money orders etc.) in excess of $10,000 must be declared on entering or leaving the United States.

It is, however, perfectly legal to carry, say, $50,000 embedded in the magnetic stripes of so-called pre-paid stored-value cards.

They look like a credit or debit card but are not linked to a bank account, can in many cases be loaded anonymously, are not “monetary instruments” under U.S. law, and were labelled “the ideal instrument for large-scale drug trafficking and money-laundering operations” in a 2006 analysis by the National Drug Intelligence Center.

It predicted that drug traffickers, narco-terrorists and other criminals would increasingly rely on stored-value cards — “superior to established methods of money laundering” — because they could be used without fear of documentation, identification, law enforcement suspicion or seizure.

In other words, a shot in the arm of the global money laundering industry, an illicit enterprise that accounts for between 2 and 5 percent of the world’s GDP, according to an estimate by the International Monetary Fund.
The Center’s dark warnings did little to curb the rapid growth of the stored-value card industry — more than $300 billion a year by some estimates.

At a congressional hearing in mid-March, the FBI’s Mueller reported that “recent money laundering investigations have revealed a trend on the part of criminals to use stored-value devices such as pre-paid gift cards and reloadable debit cards in order to move criminal proceeds.

“This has created a shadow banking system…”

The largely unregulated stored-value card industry, he said, made it difficult for law enforcement to spot transaction patterns that can help identify money launderers and financiers of terrorism.

A QUESTION TO TIM GEITHNER

So if the cards are such a threat, why is there no regulation? It is a question two senators, Joseph Lieberman and Susan Collins, asked in a February 16 letter to U.S. Treasury Secretary Timothy Geithner.

The two, respectively the chairman and the ranking member of the Senate’s Committee on Homeland Security and Governmental Affairs, last year authored an amendment to close the stored-value card loophole.

The amendment became part of an act on credit card accountability and disclosure President Barack Obama signed into law on May 22 last year. The amendment stipulated that the Treasury Department work out regulations on the sale, issuance, redemption and international transportation of stored value cards within 270 days.

The deadline lapsed on February 16 and the letter asks for an explanation for the delay in issuing rules. So far, there has been no reply.

It’s not clear whether the delay is due to bureaucratic inertia, overwork in a Treasury Department busy with a deep financial crisis, or, as money laundering expert Charles Intriago put it, “a manifestation of the unhealthy power of big money, financial institutions and their lobbyists.”

Intriago, an anti-money laundering crusader for decades, runs the International Association for Asset Recovery, a company based in Miami.

How much dirty money flows through the stored-value card loophole is anyone’s guess.

“It’s not possible to quantify how much money is moving one way or the other,” Paul Campo, the chief of the Drug Enforcement Administration’s office of financial investigations said in an interview. “But the case of Virtual Money Inc. gives an idea of the potential scale of the problem.”

According to a government indictment that stemmed from a DEA sting operation, drug dealers using pre-paid cards issued by Virtual Money, a company based in Texas, withdrew $7.1 million from automatic teller machines (ATMs) in the Colombian city of Medellin in 2006.

Despite the concern over more sophisticated methods of moving ill-gotten gains, carting cash across borders has not gone out of fashion. In 2009, government agents along the border with Mexico seized $39.2 million in currency, according to official figures. That compares with around $10 million in 2008 and is due to more frequent checks of southbound traffic for cash and guns.

Nearly $40 million in confiscated cash sounds a lot. But it is less than pocket change, in the grand scheme of things. The U.S. Justice Department estimates that drug cartels smuggle $24 billion a year into Mexico, $40 million amounts to 0.16 percent of the estimated total. What about the rest? Nobody can give a breakdown, but tighter regulations surely can’t hurt.

In a long report on the war in Afghanistan for the U.S. Senate’s Committee on Foreign Relations last summer, one sentence stood out: “If we don’t get a handle on the money, we will lose this war to corruption.”

The money in this context meant the funds, from multiple illicit sources, that finance the Taliban who are fighting the United States and its allies in a war that is now in its ninth year. Dirty money is greasing corruption on a scale so monumental that Afghanistan ranks 179 (out of 180) on the latest index compiled by Transparency International, a watchdog group based in Berlin.

Part of the reason for the country’s dismal standing: for much of the war the U.S. military ignored the booming drug trade (Afghanistan accounts for around 90 percent of the world’s opium, the raw material for heroin) and the drug money flowing to the insurgents, estimated at up to $400 million a year. Add kickbacks contractors pay directly to the Taliban to avoid having their projects blown up or their workers kidnapped, add money diverted from development funds and soon you talk about serious money.

“There is a realization now that the best way to stop the conflict is to cut the flow of money,” Gary Haff, the chief financial investigator with the U.S. Drug Enforcement Administration (DEA) told a conference of anti-money laundering experts in Hollywood, Florida, this week. “We need to identify and disrupt the financial infrastructure that supports the Taliban and al-Qaeda.”

That falls under the heading of better late than never and is easier said than done. An important new weapon in the assault on the financial infrastructure was only deployed last summer, initially with a skeleton staff. It is now growing rapidly and by the end of the year, according to Haff, the DEA alone will have 85 agents in the new unit, the Afghan Threat Finance Cell (ATFC), working alongside financial specialists from the Departments of Defense, Treasury and Justice.

That is a big step forward from the days, earlier in the war, when planes were loaded with bales of opium at the Kabul airport in full view of U.S. troops manning the perimeter. It is also a long way from the days when military commanders argued that neither going after the drug lords nor trying to deny financing to the enemy was part of their brief.

MISSION IMPOSSIBLE?

It is now one of the pillars of the counter-insurgency strategy but how successful it can be is an open question. “Is it possible to slow the flow of drug money to the insurgency, particularly in a country where most transactions are conducted in cash and hidden behind an ancient and secretive money transfer system?” the Senate Committee report wondered.

The money transfer system in question, known as hawala, goes back to the 8th century and is as ideally suited for moving illicit money as Afghanistan’s craggy mountains are suited for guerrilla warfare. Entirely based on trust, it is a remittance system that has been defined as “money transfer without money movement” by Interpol, the international police agency.

How does it work? A customer in one country (or city) gives money to a hawala dealer who charges a small commission and instructs a hawaladeer in another country (or city) to give an equal amount of money to a  recipient on the strength of a identification number or password. The transaction leaves no paper trail and is invariably faster than a wire transfer through a bank.

In Afghanistan, a country of 28 million people, there are only 17 banks and no culture of banking. Around 90 percent of financial transactions run through the hawala system, experts estimate. Hawala dealers in Kandahar, the country’s second biggest city, and the opium-producing province of Helmand, are thought to handle $1 billion in drug money per year.

The Americans’ problems of throttling financing for the insurgents don’t end with a difficult-to-penetrate parallel money transfer system. “So far, not enough attention has been given to trade-based money laundering and to the misuse of the Afghan transit trade agreement,” according to Dennis Lormel, one of the speakers at the anti-money laundering meeting.

Lormel, who now runs a consultancy, DML Associates, was chief of the FBI’s Financial Crimes Program until he retired. In his view, the over- or under-invoicing of goods – trade fraud – yield millions of dollars that can filter back to the insurgents.

Success on the financial front, and for the ATFC, obviously depends on the political will of key players in the Afghan government, led by President Hamid Karzai. In November, he was declared the winner of disputed elections and promptly faced exhortations from U.S. President Barack Obama and Secretary of State Hillary Clinton to open a new chapter of good governance and fighting corruption.

Let’s see how Afghanistan will rank on Transparency International’s 2010 index.

For the growing number of Americans who see China heading for inevitable global dominance, nudging aside the United States, a brief walk down memory lane helps put long-term predictions into perspective.

Not so long ago, Japan was seen as the next (economic) number 1. American executives studied the 14 management principles of The Toyota Way, developed by the automobile manufacturer that grew into the world’s biggest car maker and is now recalling millions of defective vehicles.

Between the mid-1980s and early 1990s, books with titles such as Trading Places – How We Are Giving Our Future to Japan and How to Reclaim It (by Clyde Prestowitz) were required reading in Washington. Learned panelists expounded on the wondrous efficiency of “Japan Inc.”

A glut of “Amazing Japan” books, Chicago Tribune writer Ronald Yates noted in 1987, hammered home the same theme: Japanese technology is superior, Japanese management is better, Japanese products are unrivaled, Japanese people work harder, Japanese are smarter, Japan is No. 1.

Skip over the two decades of economic stagnation of Japan Inc. that soon followed the hype and fast forward to the present. The book which best reflects today’s American worries is entitled When China Rules the World: the End of the Western World and the Birth of the New Global Order, by British author Martin Jacques. His forecast is part of a growing library of essays, analyses and books on the 21st century belonging to China.

If history is any guide, there’s a better than even chance that the “goodbye America, hello China” school of thought will prove as embarrassingly wrong as the 1980s assessment of the relative strengths of Japan and the United States.

Long-term predictions tend to be more often wrong than right and the decline of the U.S. is a topic of seasonal regularity.

In February, a poll by the Washington Post and ABC, asked whether the 21st century would be more American or more Chinese. In terms of overall influence on world affairs, 43 percent opted for Chinese and 38 percent for American. In a Pew poll a few months earlier, 44 percent saw China as the world’s leading economic power and just 27 percent named the United States.

That was a remarkable reversal of opinion from early 2008, when 41 percent told Pew pollsters they thought the U.S. was the world’s top economic power and 30 percent named China. That shift probably says more about the sour mood of Americans very slowly emerging from a painful recession than about facts.
LONG WAY TO CATCH UP
China the world’s leading economic power? Its economy is less than a third of that of the U.S. Its GDP per head is one fourteenth of the U.S., roughly half that of Kazakhstan, according to the World Bank. About a quarter of the world’s economic output is produced by the United States, whose population is less than a fourth of China’s 1.3 billion.

So there’s a very long way to catch up for a country beset by a variety of Third World problems, from lack of paved roads in many rural areas to water pollution so severe that 700 million people have to drink contaminated water every day, according to the World Bank.

China enthusiasts made much of statistics early in the year that the country had overtaken Germany as the world’s largest exporter in 2009. Along with many of the figures cited to show China’s relentless long march to superpowerdom, it gives an incomplete picture.

A large proportion of those exports, three quarters by some accounts, are products assembled for international companies from imported components, not the fruit of brilliant Chinese innovation. Similar to the maquiladora assembly plants on the Mexican side of the U.S.-Mexico border, such factories provide jobs but don’t do much for the economic well-being of the average citizen.

And the fast economic growth of the past (eight percent plus, year after year) that has so impressed many American analysts is bound to run into a giant obstacle for which there is no solution in sight. Nicholas Eberstadt, a Harvard demographer, has long warned that China is facing a surge of citizens aged over 60 for which the Communist-run system is not prepared. By 2050, according to estimates by the Washington-based Center for Strategic and International Studies (CSIS), China will have more than 438 million people over 60 and 100 million over 80.

It is an unusual phenomenon, a country growing old before it grows rich, and it has consequences that go beyond retirement policy. China’s rapid ageing, a consequence of the government’s one-child policy, “threatens to impose a rising burden on the young, slow economic and living standard growth and become a socially destabilizing force,” said a CSIS report last year.

Without a solution to that problem, “it is difficult to envision a prosperous, long-term future for China.”

So, here’s a word of advice for Americans fretting about their country’s standing in relation to China: Relax!

-Bernd Debusmann is a Reuters columnist. The opinions expressed are his own-

The project involved more than 2,500 scientists. It cost $ 10.5 billion between 1983 and 2009 and it included one of the most bizarre scientific tasks of all time: evaluate whether nuclear waste stored deep inside a Nevada desert mountain would be safe a million years into the future.

That was the safety standard set in September, 2008, by the Environmental Protection Agency (EPA) as a condition for allowing nuclear waste to be stored deep in the belly of the Yucca Mountain, 95 miles (155 km) from Las Vegas, long the subject of political debate and a fine example of nimbyism (not in my backyard).

The vastly complex computer models and simulations experts launched to figure out whether Yucca Mountain would be a safe environment in the year 1,000,000 and beyond ended before there was a scientific conclusion.

President Barack Obama has pulled the plug on the entire Yucca Mountain enterprise, million-year safety study and all, by writing it out of his financial year 2011 budget, which begins in October.

Yucca Mountain’s death by budgetary axe defies logic. It coincides with Obama’s stated support for expanding nuclear power. More reactors mean more waste, now piling up above-ground at sites scattered around the country.

In February, Obama announced $8.3 billion in government loan guarantees for two nuclear reactors in Georgia. They would be the first new plants since the 1979 nuclear meltdown at Three Mile Island in Pennsylvania, an accident that caused no casualties but became a rallying symbol for the anti-nuclear movement.

Citizens Against Government Waste, a Washington watchdog group, described abandoning Yucca Mountain without figuring out what to do, long-term, with the toxic nuclear waste produced by new (and existing) reactors as “patently illogical,” a “politicized and short-sighted decision.”

The group is right.

This is a matter of politics trumping science and it involves a president who pledged, in his inaugural address, to “restore science to its rightful place” from where, in the eyes of many Obama partisans, it had been dislodged by the administration of George W. Bush, routinely accused (and often with good reason) of “politicizing science.”

Yucca Mountain, which rises 4,950 feet (1,510 metres) from the Mojave desert, on the edge of a nuclear test site, was meant to be the central burying ground for radioactive waste now stored at 121 sites in 39 states, some 150 million pounds (68 million kg) of toxic stuff and more piling up. The material is initially submerged in pools of water and then sealed in steel and concrete casks.

The idea of shipping them all to a remote site in the desert has had wide appeal – except for most people in Nevada, where Senator Harry Reid, now the leader of the Democratic majority in the Senate, has been waging a relentless campaign against using Yucca.

“I am proud that after two decades of fighting the proposed Yucca Mountain nuclear waste dump, the project is finally being terminated,” Reid writes on his website. “(It) is simply not a safe or secure site to store nuclear waste.”

That’s his opinion. There’s no shortage of scientists who disagree.

AN INSULT TO INTELLIGENCE?

During Nevada stops in his campaign for the presidency, Obama came out strongly against Yucca Mountain, a position that helped him beat his Republican rival John McCain and win the hotly-contested state’s five electoral votes.

McCain has called closing the mountain while encouraging new plants “an insult to intelligence.”

Reid is running for re-election in November and he will no doubt hold up the decision on Yucca Mountain as a triumph of his persistence. His poll numbers have not been good recently and it remains to be seen whether Yucca will lift them. Some Republicans are convinced that Obama’s nuclear waste decision was taken purely for the benefit of Reid.

In an op-ed in the Washington Times late in February, Mark Sanford, the Republican governor of South Carolina, home to a nuclear complex holding 36 million gallons of liquid radioactive waste, said that the Obama administration was “walking away from a $10 billion investment and starting all over because of one man’s race for office in Nevada.”
Starting all over?

That process is meant to be initiated by a 15-member Blue Ribbon Commission, a device not infrequently used in Washington to give the appearance of action while actually delaying it. As Citizens Against Government Waste put it: “The administration is kicking the nuclear can down the road, into the next administration and onto the shoulders of future taxpayers.”

The commission, heavy on Washington insiders and relatively light on scientists, has two years “to provide recommendations for developing a safe, long-term solution to managing the nation’s used nuclear fuel and nuclear waste.” Looking for an alternative site to Yucca Mountain, another deep-underground storage facility, apparently is not part of the commission’s brief.

So then what? Start from scratch? Perhaps a return to the dawn of the nuclear age? The options under discussion then included burying radioactive material in the ocean floor, placing it in polar ice sheets — and even blasting it into space.

Reuters file photo shows the remote Nevada site of Yucca Mountain in 2002. REUTERS/STR New

(You can contact the author at Debusmann@Reuters)