There is an upside to the use of these systems when they are detected by law enforcement, says Carol Van Cleef, partner at Patton Boggs LLP, who is counsel to E-Gold, which has not been in operation for about three years. “With these closed online payment systems, law enforcement can glean much more significant information out of them than what they can get out of the banking system, which often cannot follow the flow of value beyond the first transaction and serves as a point of entry for cash, which by its nature is anonymous,” she explains. “For example, if you have E-Gold, and you wanted to give me some E-Gold, it happens within that E-Gold system, and E-Gold will see both sides of the transaction and even where the E-Gold goes after I get it.”
Third-party processors. Third-party payment processors are nonbanks that provide payment processing services to small businesses and merchants. The payments include credit, debit, and wire transactions, among others. While the processors themselves aren’t banks, they tend to use banks to process the payments, according to the Federal Financial Institutions Examination Council (FFIEC).
Because these businesses are not banks, they are not subject to the same money-laundering regulations as banks. Therefore, they offer money launderers a way to cloak themselves from the banks.
The third-party processor may or may not know that it is dealing with a money launderer. If a payment processor does not verify merchant identities, the fraud risks and money-laundering risks increase. The banks can end up on the hook.
In 2010, for example, Wachovia Bank (now a division of Wells Fargo) agreed to pay more than $160 million to settle a case that alleged it had laundered Mexican drug money. Wachovia admitted failure to detect suspicious activity in third-party payment-processor accounts.