19 July 1997
The term "Cyberpayments" is just one of many used to describe systems which facilitate the transfer of financial value (i.e. digital currency, e-money). In fact, these developments may alter the means by which all types of financial transactions are conducted and financial payments systems are operated. This new technology will change many of the fundamental principles associated with a "cash" oriented society. Such transactions may occur via the Internet or through the use of "smart cards" which unlike debit or credit cards, actually contain a microchip, which stores value on the card. Some Cyberpayments systems use both.
The common element is that these systems are designed to provide the transacting parties with immediate, convenient, secure and potentially anonymous means by which to transfer financial value. When fully implemented, this technology will impact users world wide and provide readily apparent benefits to legitimate commerce, however, may also have the potential to facilitate the international movement of illicit funds.
The speed which makes the systems efficient and the anonymity which makes them secure are positive characteristics from the public's perspective as well as law enforcement's in protecting the systems from being compromised. However, these same characteristics make these systems equally attractive to those who seek to use it for illicit purposes and increased anonymity while providing security, may actually impede law enforcement from obtaining necessary information to detect illegal activity.
The Secretary of the Treasury, Robert Rubin, has designated Eugene Ludwig, the Comptroller of the Currency to coordinate Treasury's efforts. The Financial Crimes Enforcement Network (FinCEN) has been designated as the coordinator for the Treasury law enforcement bureaus which include the US Customs Service, The Bureau of Alcohol Tobacco and Firearms, The US Secret Service, and the Internal Revenue Service's Criminal Investigations Division.
For the past 18 months, FinCEN has undertaken a series of steps to increase its understanding of these new technologies. In its Network role and coordinator capacity, FinCEN in partnership with the Cyberpayments industry, is attempting to identify opportunities for, and the vulnerabilities of these systems to money laundering as well as other types of financial crime. Our intent is to ensure that to the greatest extent possible, financial crime may be prevented and that adequate means for law enforcement to detect criminal activity is retained.
The concerns of the Treasury law enforcement bureaus are similar but not identical. While not exhaustive, the primary concerns appear to be the impact of Cyberpayments on the effectiveness of current regulatory/policy initiatives against financial crime and the impact on traditional investigative techniques and analysis. There are also various international jurisdictional issues to be considered.
The Effectiveness of Current Regulatory/Policy Initiatives Against Financial Crime
Historically, law enforcement and regulatory officials have relied upon the intermediation of banks and other types of financial institutions to provide "chokepoints" through which funds must generally pass. In fact, the Bank Secrecy Act, administered by FinCEN, is designed specifically to require financial institutions to file reports and keep certain records to ensure that such a paper trail exists.
In an open environment like the Internet or "peer to peer" transactions, exchanges of financial value may occur without the participation of a financial intermediary like a bank, and thus, the existing chokepoint is eliminated. Therefore, as more is known about the operations of these systems, the government must identify what regulatory measures, if any, should be considered.
The Impact on Traditional Investigative Techniques and Analysis
With the advent of home banking and Cyberpayments, there are fewer and fewer face to face transactions. How financial institutions will effectively "know their customers" and what the impact on traditional surveillance and financial document analysis will be in a potentially anonymous, paperless payment system is of particular concern.
International Jurisdictional Issues
Another challenge facing law enforcement is that because most Cyberpayment systems are being designed to operate internationally and in multiple currencies, it will be more difficult to determine the applicability of jurisdictional authority.
The apparent and immediate erosion of international financial borders resulting from Cyberpayment transactions mandates enhanced cooperation and efforts among international entities to ensure that there are consistent policies and standards. It will not deter financial crime if one country has extensive laws and regulations and another has none. The illicit money will merely move to the weakest link.
FinCEN is participating in Treasury's E-Money Council which was formed at the directions of Treasury Secretary Rubin, to assess the impact of Cyberpayments on Treasury's areas of regulatory and law enforcement responsibilities in a coordinated and systematic manner. FinCEN is assisting the E-Money Council plan a September conference in Washington DC which will address these issues.
In September 1995, FinCEN hosted a Cyberpayments Colloquium at the New York University School of Law. Financial services providers, regulatory, policy, and law enforcement officials, software developers, academics, and consumer representatives were brought together to discuss current and anticipated Cyberpayment systems and explore industry and government issues.
FinCEN has raised the issue of Cyberpayments at international forums such as the Financial Action Task Force (FATF). FATF is one of the key organizations that addresses the global problem of money laundering. It is dedicated to promoting the development of effective anti-money laundering controls and enhanced cooperation in counter-money laundering efforts among its membership and around the world.
Developing a taxonomy that will provide an initial picture of what the payment industry will look like in the 21st century
FinCEN will attempt to identify which traditional and non-traditional entities will be providing financial services and what new technologies will be utilized in the delivery of these services.
Ascertaining how this new technology impacts law enforcement
FinCEN, using information gleaned from its analysis of the various Cyberpayment systems and scheduled simulation exercises, will attempt to coordinate the identification of the vulnerabilities inherent in the emerging systems. We need to determine how the criminals may exploit the technology in order to support law enforcement's efforts to prevent them from doing so.
Continued Partnership with Industry
FinCEN continues to reach out to the private sector in an effort to bring law enforcement, regulatory agencies and the private sector together to develop effective measures to prevent and detect financial crime. In addition to holding private/public sector forums such as the Cyberpayments Colloquium and participating in industry conferences, FinCEN has created a subgroup of its Bank Secrecy Act Advisory Group (BSAAG) to study privacy issues and the government's obligation to protect against criminal activity.
The evolution of Cyberpayments systems has not been a straight line progression from one financial transaction system to another. It has been the multi-lateral development of hybrid systems. Essentially, the first electronic based transaction systems were credit cards and Automatic Teller Machine (ATM) cards containing a magnetic stripe that allowed the user to gain access to a line of credit or bank account. At the same time, there was development of magnetic stripe cards that could store value. The addition of microchip technology to cards increased the storage, security and applicability of the cards. The stored value card (Smart Card) is both an access device and a self contained store of value. Internet-based payment systems use the Internet's telecommunications capability to facilitate financial transactions with other users. However, the personal computer which serves as the user's interface with the internet payment system can also store value and is therefore, both an access device and self contained store of value.
Updated February 3, 1997