🟪 How little money laundering is too little?

"The right amount of money laundering is not zero"

Author

Byron Gilliam
October 01, 2024

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“Say you come across a suitcase with five million bucks in it. What would you buy? A yacht? A mansion? A sports car? Sorry. The IRS won't let you buy anything of value with it. So you better get that money into the banking system.”

—  Marty Byrde, Ozark

How little money laundering is too little?

The business of obscuring the origin of ill-gotten gains has come a long way lately.

No longer is money laundering a family affair of buying rundown strip clubs in the Missouri Ozarks and running new $100 bills through a washing machine to make them look like they’ve “been around the block,” as Marty Byrde explains it.  

Instead, it happens in Telegram chat groups, often open to public viewing, where legally incorporated companies broker illegal transactions between global cyber-scammers and the Asia-based money laundering operations that specialize in evading US banks’ KYC and AML checks at industrial scale. 

It’s all become so normalized that these brokers even make extra revenue by selling advertisements in the Telegram groups they host, as I learned in this excellent expose of the new-look money laundering industry.

My primary takeaway from Yanyu Chen’s detailed reporting is that, like lawn mowing, podcasting and college sports, money laundering has become ever more professionalized. 

As amazing as Chen’s story is, this development was both predictable and unavoidable — because the global banking system is designed to tolerate fraud. 

“The right amount of financial fraud is not zero,” as the financial blogger Patrick McKenzie puts it. “The right amount of money laundering is not zero.”

That’s because a financial system designed to be unusable by criminals would be effectively unusable by non-criminals, too. 

This is why the Cambodian money launderers profiled in Chen’s article can still open bank accounts in the US.  

Having done some KYC checks in a previous life (and having watched a lot of Ozark), I was surprised and a little dismayed to read that the US banking system is so porous — but McKenzie would not be.

McKenzie, more attuned to the cost of keeping legitimate users out of US banks, is less concerned with the cost of letting illegitimate users in. 

The question he says we should be asking ourselves is, “Are we facilitating enough criminal activity?”

Practically everyone would say, yes, we are facilitating more than enough criminal activity, thank you.

Except, perhaps, crypto people. 

Last week, a US judge denied Roman Storm’s motion to dismiss charges of money laundering that the Department of Justice had brought against the founders of the crypto mixer Tornado Cash.

The crypto industry has sprung to Storm’s defense, framing the case against him as an attack on both the freedom of speech and financial privacy.

They might be right — if code is speech and financial privacy is a human right, then the societal benefits of crypto may well outweigh the disbenefits of crypto money laundering. 

But, man, that is a tough argument to win. 

So much so that the traditional finance world does not bother trying — banks just say they are doing their best to eliminate all money laundering, even though both they and their regulators know that’s impossible (and not even desirable). 

When it’s discovered that a bank has let some dirty money through the system, for example, the regulator doesn’t look at it and say, “Yeah, that’s about the right amount of money laundering to allow. Well done.”

Instead, they act shocked — shocked! — that the proceeds of crime have been processed by a US bank, and impose giant fines as punishment. 

In truth, though, they agree with McKenzie that the amount of money laundering facilitated by US banks should not be zero.

Turning the fraud dial toward zero (as Matt Levine describes it) makes it harder and harder for well-meaning people and legitimate businesses to access financial services. 

Stringent KYC/AML rules already make it painfully difficult for new businesses (lacking documentary evidence of their legitimacy) to open bank accounts. 

KYC/AML rules could always be more stringent, of course — and the fact they’re not is an admission that there is some correct amount of money laundering to allow. 

In crypto, this implicit admission becomes explicit.

No one denies, for example, that Tornado Cash is used by money launderers, so its many defenders are left to argue that the good outweighs the bad.

At least, that’s what I think they’re arguing.

Storm’s defense is framed in terms of First Amendment rights, what the definition of a “money transmitter” is, and what, exactly, constitutes money laundering. 

These arguments can get a little technical: Can the writer of immutable smart contracts be held responsible for how people use them? Can you launder money that you never take possession of?

But Storm’s defenders presumably wouldn’t be arguing these technicalities if they didn’t believe that the benefits of free speech and financial privacy didn’t outweigh the disbenefits of money laundering.

The prosecution’s case, by contrast, is far easier to understand and pretty hard to argue with: Money laundering is bad. 

The defense will of course say that is oversimplified, but one thing the two sides agree on is that the outcome of the Tornado Cash case is very important. 

Speaking for the defense, Jake Chervinsky says the case against Roman Strom is “an assault on the freedom of software developers everywhere.”

Speaking for the prosecution, JP Koning says that a not-guilty verdict would mean “that money laundering effectively ceases to exist as a crime.”

Weirdly, both lines of thought seem equally convincing to me —- which might be why no one in traditional finance wants to have this particular debate.

But if the argument is decided by a jury of 12 normal people, as the Tornado Cash case seems likely to be, I imagine Koning’s argumentation will prove more persuasive, mostly because “money laundering is bad” is simply easier to understand than “code is speech.”

And even if the crypto perspective does win Roman Storm’s legal battle, I’m not sure that will win them the war — the law would probably just be changed to close what I think most normal people will view as a crypto-enabled loophole in KYC/AML regulations.

If so, to durably win the war over financial privacy, the defenders of Tornado Cash will have to prove that the right amount of crypto laundering is something above zero.

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