2008 State Department Report Targets Afghan Opium, Mobile Payments Issues

By Andrew Cochran

The 2008 edition of the International Narcotics Control Strategy Report was released by the U.S. State Department today. As in the 2007 edition, this year's report targets the explosive growth in opium production in Afghanistan and warns of the corrosive impact on counterterrorism operations there:

"Narcotics production in Afghanistan hit historic highs in 2007 for the second straight year. Afghanistan grew 93 percent of the world’s opium poppy, according to the United Nations Office on Drugs and Crime (UNODC). Opium poppy cultivation expanded from 165,000 ha in 2006 to 193,000 ha in 2007, an increase of 17 percent in land under cultivation... The export value of this year’s illicit opium harvest, $4 billion, made up more than a third of Afghanistan’s combined total Gross Domestic Product (GDP) of $11.5 billion. Afghanistan’s drug trade is undercutting efforts to establish a stable democracy with a licit economic free market in the country. The narcotics trade has strong links with the anti-government insurgency, most commonly associated with the Taliban. Narcotics traffickers provide revenue and arms to the Taliban, while the Taliban provides protection to growers and traffickers and keeps the government from interfering with their activities. During recent years, poppy production has soared in provinces where the Taliban is most active."

This year's edition includes a new section titled, "Mobile Payments--A Growing Threat":

"Unfortunately, while fighting the twin threats of money laundering and terrorist financing, we are also witnessing a plethora of new, high-tech value transfer systems that can be abused. Some of the most innovative are electronic payment products. FATF calls them “new payment methods” or NPMs. They are also sometimes called “e-money” or “digital cash.” Examples include Internet payment services, prepaid calling and credit cards, digital precious metals, electronic purses, and mobile payments or “m-payments.” Driven by a remarkable convergence of the financial and telecommunications sectors, the rapid global growth of m-payments demands particular attention. M-payments can take many forms but are commonly point of sale payments made through a mobile device such as a cellular phone, a smart phone, or a personal digital assistant (PDA)."

The section describes a typical method of moving money through m-payments:

Increasingly, in many areas, m-payments provide a new option to expatriates and “guest workers” that wish to send part of their wages home to support their families. M-payment transfers are replacing the use of traditional banks and money service businesses that historically have charged high fees for small transfers. M-payments also provide fast, safe, efficient value transfer service, which will encourage some users to bypass the use of underground remittance systems such as hawala.

The following is an example of how money can be moved via cell phones:

• The sender gives cash for transfer to a remittance center, plus a fee of approximately 3-5 percent (fees generally depend on the amount transferred, and there are generally limits on the amount that can be transferred at one time).

• The remittance center transfers the amount electronically through the phone company to the receiver’s cell phone account.

• The recipient receives a text message with notice of the transfer of credit to his or her “electronic wallet.”

• The recipient goes to a licensed outlet, retail store, or even a fast-food restaurant to pick up the cash or use the credit. For example, in a restaurant the patron connects to the cash register with his or her cell phone, enters a personal identification number (PIN), and authorizes payment. The entire transaction takes just a few seconds. The entity that provides the goods, services or disburses the cash may also charge a small fee.

The report then discusses the difficulties in following m-payment flows and gaps in policy development by regulators and law enforcement:

"Unfortunately, there is little financial intelligence on most forms of NPMs, including m-payments. Many law enforcement and intelligence agencies currently have little expertise in m-payment methodologies and technology. This gap in expertise is often coupled with a lack of codified authority to examine abuses in the communications systems. Moreover, most m-payment networks have security features that hinder law enforcement and intelligence services in their efforts to detect suspect transactions...

The NPM issue is briefly mentioned in the 2007 National Money Laundering Strategy:

“FinCEN, in coordination with the federal banking regulators and the industry, will issue guidance and develop regulatory definitions and requirements under the BSA for stored value products and payment systems.” Unfortunately, there has been little progress in formulating and disseminating guidance and our traditional money laundering countermeasures are not adequate to address the looming threat posed by abuse of m-payments to today’s e-banking and cashless system.

In the digital age, it is increasingly difficult to “follow the money.” The FATF and numerous organizations and governments worldwide recognize the use of NPMs, including m-payments, as a growing threat. Much work and creative thinking will be required to maintain the advantages NPMs, including m-payments offer, while at the same time preventing exploitation and misuse by money launderers and terrorist financiers and simultaneously protecting user privacy and the integrity of the global financial systems."

The issue is similar in nature and in the complications faced by regulators to those involved in the regulation of stored value cards, which I discussed in a post last October and in the first "U.S. Money Laundering Threat Assessment," released in January 2006 (see my post at that time).

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