textfiles-politics/politicalTextFiles/money_laundering_2.txt

From: Orlin Grabbe <kalliste@delphi.com>
Newsgroups: alt.2600
Subject: money laundering & digital cash
Date: Fri, 12 May 95 00:21:58 -0500
Message-ID: <Ro98LwW.kalliste@delphi.com>

[This is part II of The End of Ordinary
Money.  Part I was previously posted on
the Internet, and will appear around  
June 1 in the July issue of Liberty, 
Box 1181, Port Townsend, WA 98368.]

******************************************
* Copyright 1995 J. Orlin Grabbe, 1280   *
* Terminal Way #3, Reno, NV 89502.  All  *
* rights reserved.  Internet address     *
* <kalliste@delphi.com>                  *
******************************************

THE END OF ORDINARY MONEY 

Part II:  Money Laundering, Electronic Cash, 
and Cryptological Anonymity

by  J. Orlin Grabbe

        It was bright lights and balmy action. Thomas 
Constantine, the head of the U.S. Drug Enforcement 
Administration (DEA), claimed we've entered a "new world 
order of law enforcement" [1]. He meant the cooperation of 
British,  Italian, and Spanish authorities in setting up a fake 
bank in Anguilla, in the Caribbean.  It was a sting to trap 
money launderers.  

        Like all pirate organizations, the group calculated 
success by the amount of booty seized.  And this cleverly 
code-named "Operation Dinero" added $52 million, nine 
tons of cocaine, and a number of paintings (including works 
by Reynolds, Reuben, and Picasso) to official coffers.  There 
were also 88 arrests.  In many ways it was a great scam in 
classic DEA style: government officials got to keep the 
goods, while taxpayers got to pay for the incarceration of up 
to 88 people.  
        
        The British Foreign Office--those wacky guys who, 
you will recall, conveniently released a barrage of 
information about Nazis in Argentina at the outbreak of the 
Falklands (Malvinas) war, and who also helped coordinate 
Operation Dinero--have since made a propaganda video 
about this official foray into fraudulent banking.  Among 
others it stars Tony Baldry,  junior minister.

        Be prepared for more of the same. The nine tons of 
coke should enable the British Foreign Office and the nosy 
DEA to burn the midnight oil for months to come, planning 
other booty-gathering raids and video thrillers.  After all, the 
FATF report of 1990  encouraged international banking 
stings like this one.  But it isn't just the pseudo-bankers you 
should worry about.  

The Banker as Snitch:  the Brave New World 
of Law Enforcement

        One of the precepts of the Church of the Subgenius 
is: *You will pay to know what you really think* [2].  But in 
the world of money-laundering, you will pay your thankless 
banker to turn you in to the government. In 1993 a Federal 
judge in Providence, Rhode Island, issued the longest 
sentence ever given for a non-violent legal offense:  he 
sentenced a man to 600 years in prison for money 
laundering.  The individual was fingered by his Rhode Island 
bankers, who then cooperated with federal agents in building 
a case against him, even while the same bankers received 
fees for banking services.   

        American Express was recently fined $7 million for 
failing to detect money laundering, and agreed to forfeit to 
the U.S. Justice Department another $7 million.  As part of 
the settlement, the bank will spend a further $3 million in 
employee education, teaching them recommended 
procedures for spying on customer transactions.   

        In a book about banker Edmond Safra [3], author 
Bryan Burrough notes: "To truly defeat money launderers, 
banks must know not only their own customers--by no 
means an easy task--but their customers' customers, and in 
many cases their customers' customers' customers." (p. x).  
And then, as part of an argument clearing Safra's Republic 
National Bank of money laundering charges, Burrough 
recounts how he visited the office of the Financial Crimes 
Enforcement Network (FinCEN) and talked with one of its 
top officials. The official said that, on the contrary, Republic 
had made "some solid suggestions about new ways the 
government could track dirty money" (p. xii).

        Most have still not gotten the message that their 
banker is a spy.  They are still stuck in yesterday's world, 
where legislation like the Right to Financial Privacy Act of 
1978 allowed banks, on the one hand, to monitor their own 
records and inform the government when there were 
suspicious transactions in an account. On the other hand, the 
bank was prohibited from identifying either the account 
number or the account's owner.  But the Privacy Act was 
effectively gutted by the Annunzio-Wylie Anti-Money 
Laundering Act of 1992, which gives protection from civil 
liability to any financial institution, director, officer or 
employee who makes a suspicious transaction report under 
any federal, state or local law.  The latter Act essentially 
implies banks can reveal to the government any information 
they want to about their customers, without fear of 
prosecution. [4]

Money Laundering--What Is It, Anyway?

        There's a specter haunting the international financial 
markets: the specter of crime by nomenclature, by 
theological semantics. To be sure, the faceless piece of 
transaction information that makes money "money"--a useful 
medium of exchange, whereby we exchange everything for 
it, and avoid the direct bartering of wheelbarrows for 
oranges--has been under attack before.  The 60s brought us 
"euro"-dollars, and the 70s "petro"-dollars. Now we have 
"narco"-dollars, "terror"-dollars, and (who knows?) maybe 
"kiddie-porn"-dollars. For some of the data bits stored in 
banks' computers comprise "clean" money and others "dirty" 
money, the latter legalistically smitten with original sin.

        As Yoga Berra might say, it's digital voodoo, all over 
again.

        Since the governmental powers that be can't do much 
about drug-dealing or terrorism--if only because they 
themselves are the chief drug dealers and the chief terrorists-
-they have transferred these and other (often alleged) sins to 
the money supply.  And since every dollar is a potential 
"narco" dollar or "terror" dollar, they must track each one as 
best they can [5].  The fact that monetary monitoring has 
done nothing to diminish either drug-dealing or terrorism is 
treated of no importance, because it's all part of a larger 
game.  All the players can easily see that this same financial 
tracking yields political side benefits in the form of social 
control and government revenue enhancement.

        Anyone who has studied the evolution of money-
laundering statutes in the U.S. and elsewhere will realize that 
the "crime" of money laundering boils down to a single, 
basic prohibited act:  *Doing something and not telling the 
government about it*.  But since the real Big-Brotherly 
motive is a Thing That Cannot Be Named, the laws are 
bogged down in prolix circumlocution, forming a hodge-
podge of lawyerly fingers inserted here and there into the 
financial channels of the monetary system.  

        U.S. legislation includes the Bank Secrecy Act of 
1970, the Comprehensive Crime Control Act of 1984, the 
Money Laundering Control Act of 1986, the Anti-Drug 
Abuse Act of 1988, the Annunzio-Wylie Anti-Money 
Laundering Act of 1992, and the Money Laundering 
Suppression Act of 1994. International efforts include the 
UN Convention Against Illicit Traffic in Narcotic Drugs and 
Psychotropic Substances of 1988; the Basle Committee on 
Banking Regulations and Supervisory Practices Statement of 
Principles of December 1988; the Financial Action Task 
Force (FATF) Report of April, 1990 (with its forty 
recommendations for action); the Council of Europe 
Convention on Laundering, Search, Seizure and Confiscation 
of Proceeds of Crime of September 8, 1990; the sixty-one 
recommendations of the Caribbean Drug Money Laundering 
Conference of June, 1990; the agreement on EC legislation 
by the European Community's Ministers for Economy and 
Finance of December 17, 1990; the Organization of 
American States Model Regulations on Crimes Related to 
Laundering of Property and Proceeds Related to Drug 
Trafficking of March 1992; and a tangled bouillabaisse of 
Mutual Legal Assistance Treaties (MLATs).

        "Most economically motivated criminals always have 
wanted to appear legitimate," says attorney Kirk Munroe.  
"What is new is the criminalization of money laundering.  
The process itself now is a crime separate from the crime that 
produced the money" [6]. 

        Money laundering is said to be the "process by which 
one conceals the *existence*, illegal source, or illegal 
application of income, and then disguises that income to 
make it appear legitimate" (emphasis added) [7].  Notice the 
word "existence."  The sentence could be construed to mean 
that simply disguising the existence of income is money 
laundering.  But whatever money laundering is, in practice 
U.S. law purports to detect it through the mandatory 
reporting of cash transactions greater than or equal to a 
threshold amount of US$10,000.   For countries in Europe 
the figure ranges from ECU 7,200 to 16,000.  

        In the U.S., Section 5313 of the Banking Secrecy Act 
(BSA) requires a Currency Transaction Report (CTR) of 
cash deposits or transactions of $10,000 and above, which is 
IRS Form 4789, and a Currency Transaction Report by 
Casinos (CTRC), which is IRS Form 8362.  Section 5316 of 
BSA also requires a Currency or Monetary Instrument 
Report (CMIR) for transport of $10,000 or more of currency 
in or out of the U.S.  This is Customs Form 4790.  Section 
5314(a) of BSA requires reporting of foreign bank or 
financial accounts whose value exceeds $10,000 at any time 
during the preceding year.  This is called a Foreign Bank 
Account Report (FBAR) and is Treasury form TDR 90-22-1.  
Section 60501 of  the IRS Code requires the reporting of 
business transactions involving more than $10,000 cash.  
These are reported on IRS Form 8300.  

        Suppose you're an arms dealer in trouble and need a 
criminal lawyer.  You've violated those pesky ITAR 
restrictions because you carried a copy of PGP on your 
portable computer when you drove over to Matamoros from 
Brownsville for the day, and you forgot to fill out those 
customs forms, and that girl you met said she just *had* to 
set up a secure channel to her cousin who works in Washington, 
D.C., as an undocumented maid for a potential Cabinet 
nominee . . .  The lawyer charges a modest $200 an hour, so 
the first month you pay him $7,000 in cash.  The next month 
you pay him $4,000 in cash.  Under current U.S. law, the 
lawyer is required to report complete information about you, 
including the $11,000 total cash payment, on IRS Form 
8300, and ship it off to the IRS Computing Center in Detroit, 
Michigan, within fifteen days of receiving the second 
payment (which put the total above the reporting threshold).  
Never mind if either you or your lawyer thinks filing such a 
form violates attorney-client privilege, the Sixth Amendment 
right to counsel, or the Fifth Amendment right to be free 
from self-incrimination.  For if the report is not made, and 
the IRS finds out about it and penalizes and/or prosecutes 
your lawyer, the courts will most probably back up the IRS. 
[8]

        The scope and arrogance of the money-laundering 
statutes knows no bounds.  The Kerry Amendment to the 
Anti-Drug Abuse Act of 1988 demands that *foreign nations 
must also* require financial institutions to report deposits of 
US$10,000 or greater, and to make this information available 
to US law enforcement.  Otherwise the President is directed 
to impose sanctions against non-cooperative countries. [9]   

        Having extended the concept of evil to a vaguely 
defined practice called "money laundering," and having put 
in a detection system to help trace it, the laws have 
proceeded to make evasion of the monitoring system evil 
also.  This tertiary evil may be found in the practice of 
"smurfing" or "structuring," which is basically any method of 
spreading cash among accounts or across time to avoid the 
$10,000 reporting threshold.  Structuring is defined in a 1991 
amendment to the Bank Secrecy Act thusly:  "Structure 
(structuring). . . . a person structures a transaction if that 
person, acting alone, or in conjunction with, or on behalf of 
other persons, conducts or attempts to conduct one or more 
transactions in currency in any amount, at one or more 
financial institutions, on one or more days in any manner, for 
the purpose of evading the reporting requirements . . . 'In any 
manner' includes, but is not limited to, the breaking down of 
a single sum of currency exceeding $10,000 into smaller 
sums, including sums at or below $10,000, or the conduct of 
a transaction or series of transactions, including transactions 
at or below $10,000.  The transaction or transactions need 
not exceed the $10,000 reporting threshold at any single 
financial institution on any single day in order to constitute 
structuring within the meaning of this definition" [10].

        And what does the government do with the 
information it collects?  When your lawyer's Form 8300 
reaches the IRS Computing Center in Detroit, it will be 
entered into the Treasury Financial Data Base (TFDB).  
Similarly, if you cross a U.S. border with more than $10,000 
cash, you will fill out Customs Form 4790.  This form will 
be sent off to customs' San Diego Data Center, and it too will 
eventually show up in TFDB.  These and other forms will 
now be available on-line in the Treasury Enforcement 
Communications System (TECS II).  The TFDB data will 
also be processed through the FinCEN Artificial Intelligence 
(AI) System, which is trained to identify suspicious 
transaction patterns.  

        So when you deal in cash, expect to give a note to the 
government, a crumb to the friendly FinCEN AI.  But AI has 
a voracious appetite, so the reporting doesn't stop with cash. 
The heart of any modern monetary system is the  digital 
transfer of electronic money through the telecommunication 
links among bank computers.  Internationally, banks are 
connected by a computer messaging system operated by the 
Society for Worldwide Interbank Financial 
Telecommunication (SWIFT). Domestically, banks within a 
country use equivalents of the U.S. clearing systems operated 
by the Federal Reserve (Fedwire) and the Clearing House 
Interbank Payments System (CHIPS). A Federal Reserve 
Policy Statement of December 23, 1992 asks financial 
institutions to include (if possible) complete information on 
the sender and recipient of large payment orders sent through 
Fedwire, CHIPS and SWIFT.  "Historically, law enforcement 
efforts to curtail money laundering activities have focused on 
the identification and documentation of currency-based 
transactions; however, recent investigations have focused on 
the use of funds transfer systems," the statement notes.

        The focus on funds transfer brings in the resources of 
the U.S. National Security Agency (NSA). The NSA has 
been monitoring civilian communications ever since it 
installed IBM computers at Menwith Hill in the U.K. in the 
early 60s to keep track of international telex messages. NSA 
tentacles are now ensconced not only in transatlantic 
communications, but also in Pacific satellite transmissions, 
the regional Bell System offices, the SWIFT messaging 
system, the CHIPS clearing computers in Manhattan, and 
Fedwire.  In addition, a satellite surveillance system picks up 
high frequency transmissions of specially constructed 
computer chips which are activated by certain types of 
transactions-oriented financial software. U.S. agencies are 
not alone in financial monitoring. As a trivial additional 
example, the Council of Europe has recommended Interpol 
be given access to SWIFT to assist in money-laundering 
detection  [11].

PROMIS Land

        When they hear the term "money laundering," many 
automatically think of Miami, London, Hong Kong, or 
Panama City.  How about Arkansas?  According to what 
Money Laundering Bulletin calls The Greatest Story Never 
Told, an "archive of more than 2000 documents . . . allege 
that western Arkansas was a centre of international drug 
smuggling in the early 1980s--perhaps even the headquarters 
of the biggest drug trafficking operation of all time" [12]. 
Perhaps that is why it was in Arkansas that modifications 
were made to the stolen PROMIS software system to enable 
it to spy on banking transactions.  For where there are drugs, 
there must be money laundering, or so one can suppose.  
Curiously, however, some of the same set of characters were 
apparently involved on all sides: in drug running, money 
laundering, and also in the theft and modification of the 
PROMIS system.  (I will leave it to someone with more 
money, guns, and lawyers than I have to bring that part of the 
story to light, and will not pursue it further here.)

        The PROMIS software was created by the 
Washington, D.C.-based software company Inslaw for a 
single purpose:  to track people.  It was initially designed for 
the use of federal prosecutors.  Want to know who the judge 
was on a particular case?  Ask PROMIS.  Now want to know 
all the similar cases that same judge has heard?  Ask 
PROMIS again. How about all the accused money launderers 
a particular attorney has defended?  And so on. But after the 
Justice Department acquired the PROMIS software by 
"trickery, deceit, and fraud,"  and installed it in most of its 
regional offices,  the system was modified and sold to 
foreign intelligence organizations, then modified again and 
sold to banks.

        To see the relationship among these different uses, 
apparently diverse as they may appear, consider the 
following items of information about Joe Blowup who lives 
in Sacramento:

        Item 1:  Monday, June 3. 
        Master Charge record of 
        payment by Joe Blowup for 
        lunch at the Cliff House in San 
        Francisco.

        Item 2: Wednesday, June 5. 
        Motor vehicle records 
        show an automobile registered 
        to Joe Blowup is involved in a 
        minor accident in Barstow.

        Item 3:  Saturday, June 8. 
        Check for $3,000 made out 
        to Pierre "C-4" Plastique is 
        deposited in Pierre's account in 
        Glendale Federal Savings, and 
        clears against Joe Blowup's 
        First Interstate account in 
        Sacramento on Tuesday, June 11.  

Who might be interested in this computer-sorted 
chronology?  

        Firstly, anyone wanting to track Joe Blowup's 
movements.  He was in San Francisco on Monday and in 
Barstow on Wednesday. The sequence also generates 
obvious questions for further investigation. Did he meet 
Jacque in Barstow and give him the check there, or did he 
drive on to Los Angeles?  What is the check payment for?  
And who did Joe Blowup have lunch with in San Francisco?  
In order to generate relevant questions like these, federal 
agents, spies, and other detectives all want a copy of this neat 
software.

        Secondly, banks and other financial institutions.  
Notice that, in fact, most of the information is financial. 
That's because financial institutions keep carefully detailed 
transaction records, and over the years they've become 
increasingly sophisticated in doing so.  There is nothing 
nefarious in this per se. If I go to a bank to get a loan, the 
bank has a right to make an evaluation as to whether I will 
repay it.  They are principally concerned with 1) ability to 
pay, and 2) willingness to pay--and to make this evaluation, 
they rely on current and historical information.   In the 
example here, none of the items is of interest to banks,  
unless that accident in Barstow created a financial liability 
which would affect Joe Blowup's ability to repay other loans.  
But if the (modified) PROMIS software organizes banking 
transactions in a nice way,  then banks want a copy of it also.

        Thirdly, tax authorities. Do Joe Blowup's financial 
records indicate a pattern of rather more income than he has 
been reporting?  Or, in the case of doubt (and this is the fun 
part), is there a record of assets the IRS can seize in the 
meantime?  The IRS wants a copy of the software so they 
can better understand Joe Blowup's--and your--spending 
patterns, even though present IRS files already put private 
credit bureaus like TRW and Equifax to shame.
  
        In the decade of the 1980s, intelligence organizations 
around the world salivated over the ability of the PROMIS 
software to track terrorists, spies, political opponents, and 
attractive models. Aside from distribution to almost all the 
U.S. three-letter agencies, PROMIS was sold to intelligence 
organizations in Canada,  Israel,  Singapore,  Iraq,  Egypt, 
and Jordan among others. In addition, the DEA, through its 
proprietary company, Eurame Trading Company Ltd. in 
Nicosia, Cyprus, is said to have sold PROMIS  to drug 
warrior agencies in Cyprus,  Pakistan,  Syria,  Kuwait,  and  
Turkey.  PROMIS was also converted for use by the British 
Navy in connection with its nuclear submarine intelligence 
data base. [13]

        But there was more to these sales than the simple 
desire of the cronies of Ed Meese and Hillary Clinton to 
make a fast buck, important as the latter motive may be.  The 
sale was itself an intelligence operation.  As former Attorney 
General Elliot Richardson noted, "One important motive for 
the theft of Enhanced PROMIS may have been to use it as a 
means of penetrating the intelligence and law enforcement 
agencies of other governments.  The first step in this scheme 
was the sale to the foreign government of a computer into 
which had been inserted a microchip capable of transmitting 
to a U.S. surveillance system the electronic signals emitted 
by the computer when in use. Enhanced PROMIS has 
capabilities that make it ideally suited to tracking the 
activities of a spy network.  Several INSLAW informants 
formerly affiliated with United States and Israeli intelligence 
agencies claim that both the United States and Israel have 
relied on 'cutout' companies to provide ongoing support for 
the PROMIS software" [14].  Of course, what can be done 
with foreign intelligence computers can also be done with 
banking computers, and at least one of these "cutout 
companies" is a major provider of banking software. [15]

The Gathering Storm

        All of these efforts--the legal reporting mechanisms, 
the spying by bankers, and the supplementary activities of 
organizations like FinCEN, NSA and Interpol--fly in the face 
of a contrary technological and social development:  
*anonymous digital cash made possible by advances in 
cryptology*. 

        The principal opponents of any contemplated system 
of encrypted digital cash are the money-laundering laws and 
the Leviathan that feeds off them. The edicts against money-
laundering represent a broader attempt to make all financial 
transactions transparent, while the aim of anonymous digital 
cash is to keep financial activities private. People-monitoring 
systems such as those utilizing PROMIS track individuals by 
the electronic trails they leave throughout the financial 
system. But anonymous digital cash is specifically designed 
to make such tracks virtually invisible.  

        Money laundering, Barry A. K. Rider frankly offers 
as a definition, "amounts to a process which obscures the 
origin of money and its source" [16].  On that basis, the 
pursuit of anonymity in financial transactions *is* money 
laundering.

         At the beginning of the 90s, money laundering was 
an offense in only four states of the (then) twelve members 
of the European Union.  Now all twelve have a law making it 
a crime. In a scramble to justify continued large budgets, 
intelligence organizations have hopped on the anti-money-
laundering bandwagon.  The U.K. intelligence service MI5, 
in an attempt "to justify its existence after reviewing its 
future in the light of a probable reduction in counter-terrorist 
operations in Northern Ireland," has been "pressing for a 
change in the law which would see it involved in countering 
drug-trafficking, money laundering, computer hacking, 
nuclear proliferation and animal rights groups--a far cry, say 
police, from its original remit to 'protect national security' " 
[17].  Even accountants are getting in on the act.  The 
Institute of Chartered Accountants in Australia has issued "a 
set of guidelines on money laundering, including a 
recommendation that client confidentiality take second place 
to public interest if an accountant suspects laundering is 
occurring" [18].

        So the coming battle over financial footprints is 
inevitable, and perhaps inevitably bloody.  But in the end it 
is the money-laundering regulations that will have to go.  
Firstly, advances in the technology of anonymity are putting 
financial privacy within the reach of everyone.  Secondly, 
there is a growing awareness that the existing laundering 
statutes have little or no effect on terrorism or drug dealing, 
but instead are related to an upswing in government-
sponsored harassment of targeted political groups. 

Electronic Finance 101

        Many of the basic features of electronic cash--
variously referred to as "ecash", "digital cash", "digital 
money", and so on--may sound novel to those unfamiliar 
with the financial markets.  But much of the financial system 
is already on an electronic basis, and has been so for years.  

        To see why, consider the foreign exchange market 
[19]. This is a largely interbank market for trading the 
currency of one country for the currency of another:  dollars 
for pounds, dollars for yen, and so on.  But if I, as an 
interbank trader, sell U.S. dollars for British pounds, what 
are the actual logistics of the transfer? Consider the problems 
that would be imposed by a cash-based market.  The standard 
transaction size in the foreign exchange market is an amount 
of currency equivalent to US $1 million.  A US $20 bill 
weighs about 1 gram.  So, if transacted in cash, the 
$1,000,000 (50,000 bills) would weight approximately 50 
kilograms or 110 pounds.  Imagine the cost involved in such 
a transaction if in order to sell dollars for pounds I had to fill 
up a suitcase with $20 bills, lug the 110-pound suitcase to a  
Manhattan taxi, take a long ride to Kennedy Airport, fill out 
a CMIR form and check my baggage, arrive at Heathrow 
seven hours later, retrieve my baggage, go through customs, 
and catch a cab  to the appropriate British bank in central 
London.  Once there I would pick up the equivalent in 
pounds sterling and reverse the whole process. 

        There's a problem with this scenario: *transactions 
costs*.  Anyone trying to change dollars into pounds will go 
to some other bank where he doesn't have to pay for my 
plane tickets and cab fares, not to mention my courier salary 
and that lunch I had at the Savoy before I headed back to 
New York.  

        (In the present markets for cocaine and heroin it is 
hard to reduce transactions costs, because the weight of the 
drugs is less than the weight of the cash proceeds. In the 
early 80s,  cash bills were actually loaded into suitcases and 
moved around.  To save time and money, however, the cash 
wasn't counted. After a spot check of bills for denomination 
and authenticity, the suitcases were simply *weighed* to 
determined the total value.  This measurement was accurate 
to within a few dollars--close enough.  But foreign exchange 
trading isn't illegal and doesn't, and can't, happen this way.)

        To see how international money transfers really 
work, consider the case of a Greek immigrant, who has 
opened a restaurant in Boston, has made a little money, and 
wants to send some cash to the folks back home.  In earlier 
days he probably would have gone down to the Western 
Union office and handed the attendant cash to "wire" to his 
mother in Athens.  The Western Union office in Boston 
would put the cash in its safe,  or perhaps deposit it in a 
Boston bank, and would meanwhile send a message to the 
Athens office:  "Give so-and-so X dollars" (or, more likely, 
"Y drachmas").  That is, the cash received was not the same 
as the cash sent.  All that was sent was a message.  But no 
one cared, because cash itself is *fungible*: the dollar that 
is taken out is interchangeable with, but not the same as, the 
dollar that was put in.  The bills are also not *registered*: 
no particular name is associated with any particular serial 
number. 

        In this example, bills were put into the safe at one end 
of the transaction, and different bills were taken out at the 
other.  Consider now a slight modification to this scenario:  
Eurobond trading.  Eurobonds are generally placed in the 
depository systems operated by Euroclear in Brussels or 
Cedel in Luxembourg.  Once bonds are in the vault, they 
generally stay there, because of transactions costs.  If a trader 
in Frankfurt sells a GM eurobond with a coupon of 7 1/8 
percent and maturing in 2012 to a trader in London, they 
both send messages to Euroclear.  Euroclear compares the 
two set of instructions, checks the cash balance of the 
London trader, then switches the computer label of 
ownership of the bond to the London trader, and the 
ownership of the requisite cash to the Frankfurt trader.  
Again, however, the bonds are not registered, and are 
fungible within the parameters of a particular issue.  There 
may be several thousand GM eurobonds with a coupon of 7 
1/8 percent and maturing in 2012, and the London trader 
owns one of them, but his ownership is not attached to a 
particular bond serial number. [20] 

        This is pretty much the way the foreign exchange 
market works.  If a New York bank deals dollars for 
deutschemarks with a London bank, they send each other 
confirmations through SWIFT.  Then the New York bank 
will turn over a dollar deposit in New York to the London 
bank, while the London bank will turn over a deutschemark 
deposit in Frankfurt to the New York bank.  The Frankfurt 
bank simply switches the name of the owner of the 
deutschemarks from the London bank to the New York bank.  
The New York bank now owns X-number of fungible, 
unregistered (but completely traceable) deutschemarks at the 
Frankfurt bank. 

        "I remember my shock when I learned that the fastest 
way for two banks in Hong Kong to settle a dollar 
transaction was to wire the money from Hong Kong to New 
York and back again,"  said Manhattan assistant district 
attorney John Moscow [21].  He was shocked because he 
didn't understand how the process works.  The "wired" 
dollars were sitting in New York all along as numbers in a 
bank computer, originally labeled as owned by the first Hong 
Kong bank.  After the transaction is completed, they are still 
in the same place, but labeled as owned by the second Hong 
Kong bank.  There is nothing mysterious about this at all.

        Now let's modify the basic scenario again:  Yankee 
bond trading.  Yankee bonds are dollar-denominated bonds 
issued by non-U.S. citizens in the U.S. bond market.  Yankee 
bonds are registered.  If you buy a bond, your name is 
attached to a particular bond with a particular serial number.  
If someone steals the bond, he will not be able to receive 
interest or principal, because his name is not attached to the 
bond serial number.  So when Yankee bonds are traded, the 
seller's name is removed from the serial number of the bond 
being sold, and the buyer's name is attached.

        To this point we have talked about things that 
potentially exist in physical form.  I can take a bond out of 
the vault, or I can cash in my electronic deutschemarks for 
printed bills. The final modification to these various 
scenarios is to get rid of the physical paper entirely.  Such 
purely electronic creatures already exist: U.S. Treasury bills-
-short-term debt instruments issued by the U.S. government.  
You buy, for example, a $10,000 T-bill at a discount, and it 
pays $10,000 at maturity. But you don't see printed T-bill 
certificates, because there aren't any.  T-bills are electronic 
entries in the books of the Federal Reserve System.  You can 
trade your T-bill to someone else by having the Fed change 
the name of the owner, but you can't stuff one in your pocket.  
You can "wire" your T-bill from one bank to another, 
because the "wire" is just a message that tells the Federal 
Reserve bank to switch the name of the owner from one 
commercial bank to another.

Smart and Not-So-Smart Cards

        In the previous section we saw that most of the 
financial system is already on an electronic basis.  And we 
understand that "wiring" money doesn't at all correspond to 
the mental image of stuffing bills down an electrical wire or 
phone line.  To bring this story closer to home, let's consider 
how most of us use a computer and a modem on a daily basis 
to make financial transactions.  Even if we don't own a 
computer.  Or a modem.  Let's talk about smart and dumb 
cards--ATM cards, credit cards, phone cards, and much 
more.

        Some "smart cards" have microprocessors and are 
actually smart (and relatively expensive). They are really 
computers, but missing a keyboard, video screen, and power 
supply. Others, such as *laser optical* cards and *magnetic 
stripe* cards, are chipless and  only semi-smart.  

        Laser optical cards are popular in Japan, and can hold 
up to 4 megabytes of data--enough for your tax and medical 
files and extensive genealogical information besides.  The 
cards are a sandwich, usually a highly reflective layer on top 
of a nonreflective layer.  A laser beam is used to punch holes 
through the reflective layer, exposing the nonreflective layer 
underneath.  The presence or absence of holes represents bits 
of information.  A much weaker laser beam is then used to 
read the card data. You can later mark a file of information 
as deleted, or turn it into gibberish, but you can't reuse the 
area on the card.  

        Magnetic stripe cards, popular everywhere, doesn't 
hold much information.  An ATM card is one example. Data 
is recorded on the magnetic stripe on the back of the card 
similar to the way an audio tape is recorded.  There are three 
tracks--the first of which is reserved for airline ticketing [22]. 
This track holds up to 79 alphanumeric characters including 
your name and personal account number (PAN). The ATM 
doesn't actually use the first track for transactions, but it may 
read off your name, as when it says, "Thank you, Joe 
Blowup, for allowing me to serve you."  The second track 
contains up to 40 numerical digits, of which the first 19 are 
reserved for your PAN, which is followed by the expiration 
date. The third track will hold 107 numerical digits, starting 
again with your PAN, and perhaps information related to 
your PIN (personal identification number, or "secret 
password"), along with other information, all of which 
potentially gets rewritten every time the track is used.

        The ATM machine into which you insert your card is 
itself a computer.  The ATM typically has both hard and 
floppy drives, a PC mother-board which contains the 
microprocessor, and a power supply--as well as drawers for 
deposits, cash, and swallowed cards.  If the ATM is "on-line" 
(i.e. one that is connected to a distant central bank computer, 
which makes all the real decisions), then it also has a modem 
to communicate over phone lines with the central computer. 
When you make a request for cash, the ATM machine 
compares your password to the one you entered.  If they are 
the same,  it then takes your request and your PAN, encrypts 
(hopefully) the information, and sends it on to the central 
computer.  The central computer decrypts the message, looks 
at your account information, and sends an encrypted message 
back to the ATM, telling it to dispense money,  refuse the 
transaction, or eat your card.

        In between the ATM and the authorizing bank is 
usually a controller, which services several ATMs.  The 
controller monitors the transaction, and routes the message  
to  the  correct authorization processor (bank computer). 
Some transactions, for example, will involve banks in 
different ATM networks, and the transaction will have to be 
transferred to a different network for approval.  The  
controller  would  also generally monitor the status of the 
different physical devices in the ATM--to see that they are 
operating properly and that the ATM is not being 
burglarized.

        Consider some of the security problems in this 
framework.  The first duty of the local ATM is to verify 
you've entered the correct PIN. A typical way of doing this is 
to recreate your PIN from your card information and then to 
compare it to the one you entered. 

        Here is a general example of how PINs are created 
(there are many variations). The bank first chooses a secret 
16-digit "PIN key" (PKEY).  This key will be stored in the 
ATM's hardware.  The PKEY is then used as a DES-
encryption key to encrypt 16-digits of  your account number, 
which the ATM reads off your card.  The result of the 
encryption is a 16-digit hexadecimal (base 16) number.  
Hexadecimal numbers uses the digits 0 to 9 and also the 
letters A to F (the latter standing for the decimal numbers 10 
to 15).  Next a table is used to turn the 16-digit hexadecimal 
number back into a 16-digit decimal number [23].  The first 
four numbers of the resulting 16-digit number are the 
"natural PIN".  (If you are allowed to choose your own PIN, 
a four digit "offset" number is created, and stored on the 
third track of your ATM card.  This offset will be added to 
the natural PIN before it is compared to the one you entered 
at the ATM keyboard.)  

        Since this comparison between the natural and 
entered PIN is done locally in the ATM hardware, the 
customer's PIN is not transmitted over phone lines.  This 
makes the process  relatively more secure, assuming no one 
knows the PKEY.   But if an evil programmer knows the 
PKEY, he can create a valid PIN from any customer's 
account number.  (Customer account numbers can be found 
by the hundreds on discarded transaction slips in the trash 
bin.)  He can easily and quickly loot the ATM of its cash 
contents.

        The security problems worsen when the ATM gets a 
"foreign" card.  A foreign card is essentially any card from 
any bank other than the one that runs the ATM. The local 
ATM does not know the PKEYs of these other banks, so the 
PIN which is entered at the ATM must be passed on to a 
bank that can authorize the transaction. In this process, the 
account number and PIN will be encrypted with a 
communication key (COMKEY), and then passed from the 
ATM to the ATM controller. Next the account number and 
PIN will be decrypted at the controller, and then re-encrypted 
with a network key (NETKEY) and sent on to the proper 
bank. 

        Foreign PINs give the evil programmer three 
additional possibilities for defeating security.  The first way 
is to get hold of the COMKEY. He then taps  the  line  
between  the  ATM  and  the  controller, and siphons off 
account number/PIN pairs.  A second possibility is to get 
access to the controller, because the account number/PIN 
pairs may be temporarily in the clear between encryptions.  
The third possibility is to obtain the NETKEY, and tap the 
line between the controller and the foreign network. [24]  

        The COMKEY and NETKEY are generally 
transmitted over phone lines, so the chances of acquiring 
them are pretty good.  These two encryption keys are 
themselves usually transmitted in an encrypted form, *but the 
keys used to encrypt them are sometimes sent in the clear*.  
Thus while banks are generally somewhat careful with their 
own customers, they are often quite helpful in giving rip-off 
artists access to the customers of other banks.  The evil 
programmer simply reads off the encryption keys, uses them 
to decrypt the COMKEY and NETKEY, which are in turn 
used to decrypt account numbers and PINs.

        The way to solve these security problems is to use 
smart cards and public key cryptography. Banks can transmit 
their public keys in the open without worrying about evil 
wire-tapping programmers. Customer messages encrypted 
with a bank's public key can only be decrypted with the 
bank's private (secret) key.  Digital cash issued by the bank 
can be signed with the bank's private key, and anyone will be 
able to check that the cash is authentic by using the bank's 
public key.  In addition, the bank will not be able to 
repudiate cash signed in this way, because only the bank had 
access to its own secret key. Communications between ATM 
machines and bank computers can also take place with 
randomly-generated encryption keys that can be determined 
by each of the two parties, but which cannot be discovered 
by someone who listens in on both sides of the traffic. [25]

Are Smart Cards the Mark of the Beast?

        Besides optical and magnetic stripe cards, there are 
two types of "chip" cards.  Chip cards are basically any cards 
with electronic circuits embedded in the plastic. One type of 
chip card, called a memory (or "wired logic") card, doesn't 
have a microprocessor and isn't any smarter than the cards 
we discussed previously.  Prepaid phone cards are of this 
type.  They may have about 1K of memory, and can execute 
a set of instructions, but can't be reprogrammed.

        Then there are the truly smart cards that have a 
microprocessor and several kilobytes of rewritable memory.  
Smart cards allow for greatly increased security, since access 
to their data is controlled by the internal microprocessor.  
And there can be built-in encryption algorithms.  This 
versatility has made smart cards controversial.

        The negative reputation arises from certain cases 
where smart cards were imposed by force, as well as from 
smart-card storage of biometric data.  The use of smart cards 
became a prerequisite for Marines to receive paychecks at 
Parris Island, S.C.  Finger-print based smart-card ID systems 
were implemented by the Los Angeles Department of Public 
Social Services and the U.S. Immigration and Naturalization 
Service. The "Childhood Immunization" bill, introduced by 
Sen. Ted Kennedy (D-MA), would have tracked vaccination 
of all children under six years of age, together with at least 
one parent, across geographical areas through smart cards  
Access control at the U.S. Department of Energy Hanford 
Site requires smart card badges which store the cardholder's 
hand geometry.  Security access through retinal scan patterns 
stored in smart card memory have been tested at the Sandia 
National Laboratory.

        Visa recently announced plans for creating an 
"electronic purse." The purse would be a reloadable spending 
card.  You would charge the card up at an ATM machine, 
where it would suck some cash value out of your account, 
and store it in memory.  You would then use the card instead 
of cash to make small purchases.  Visa is attracted by the 
estimate that consumer cash transactions in the U.S. are 
about five times the size of bank-assisted transactions (those 
that use checks, credit cards, and debit cards).  Visa has been 
joined in this endeavor by a consortium that includes 
VeriFone, the leading supplier of point-of-sale transaction 
systems, and Gemplus, the leading manufacturer of smart 
cards.  

        There may be increased security in the use of an 
electronic purse, but it is not clear how  replenishing one's 
card balance at an ATM is any more convenient for the user 
than getting cash at an ATM.  Since Visa is not advertising 
the privacy aspects of electronic purse payments, one must 
assume this feature was omitted in the planning. Hence a 
cynic could conclude that the "electronic purse" is little more 
than a Rube Goldberg device which, by substituting for cash, 
will create a better set of PROMIS-type transaction records.

          These and other examples suggest possible uses of 
smart cards for more general surveillance and social control. 
The truly paranoid envision the use of a single smart card for 
every financial transaction, medical visit, and telephone call. 
This information would be sent directly to a common 
PROMIS-like data base, which would constitute a record of 
all your activities. In addition, "your card could be 
programmed to transmit its identification code whenever you 
use it.  So you (or your card, anyway) could be instantly 
located anywhere on earth via the satellite-based Global 
Positioning System" [26]. 

        But smart cards don't have to be used this way.  
Recall that mainframe computers once appeared destined to 
turn the average citizen into Organization Man, a creature to 
be folded, spindled and mutilated in lieu of IBM's punched 
cards.  The advent of the personal computer, however, 
showed the same technology could be a tool of individual 
freedom and creativity.  

        There is nothing intrinsically evil in storing a great 
deal of information about ourselves, our finances, and our 
current and future plans.  That is, after all, exactly why some 
of us carry around portable computers.  But in this case the 
use of the computer is voluntary, and we ourselves control 
both access to, and the content of, the information.  The same 
principle applies to smart cards.  It is smart cards more than 
any other aspect of banking technology, I believe, that will 
allow for financial privacy through cryptology, for 
anonymous and secure digital cash transactions.  It's simply a 
matter of taking control of the technology and using it to 
enhance personal freedom.


Electronic Cash the Way It Ought To Be

        Suppose we had it our way.  Suppose we sat down to 
create digital cash that had all the right properties. What 
would these be?  Think of the attractive properties of 
currency--physical cash. [27]

        1) Physical cash is a portable medium of exchange. 
You carry it in your pocket to give to people when you make 
purchases. The digital equivalent of this process could be 
provided by smart cards, which would have the mobility of 
physical cash and even improve on it.  The weight of 
$1,000,000 in digital money is the same as the weight of $1. 
        
        2) You would want the ability to make digital cash 
payments off-line, just like you can with physical cash.  A 
communication link between every store you shop at and 
your bank's authorization computer shouldn't be required. 
Moreover, if digital cash is to have all the desirable qualities 
of physical cash, you should be able to transfer digital cash 
directly to another smart-card-carrying individual. Smart 
cards that could connect directly to other smart cards would 
be ideal in this respect, and would represent an improvement 
over physical cash.  Even if everyone observed two smart 
cards communicating, they would have no way of knowing 
whether the transaction involved $5 or $50,000.  There 
would be no need to slide money under the table.

        3) Digital cash should be independent of physical 
location--available everywhere and capable of being 
transferred through computer and other telecommunication 
channels.  So we want a smart card that can jack into the 
communication nodes of the global information network. 
One should be able to pop into a phone booth to make or 
receive payments.

        4) Got change for a dollar for the quarter slots in the 
pool table? Just as we "make change" or divide physical 
currency into subunits, so should electronic cash be divisible.  
Is this a problem?  Hmm.  Electronic calculators can perform 
an operation know as division, and so can third-graders.  So 
smart cards ought to be able to handle this also, even if it 
presents a few difficulties for theoretical cryptology.

        5) To be secure against crooks and rip-off artists, 
digital cash should be designed in such a way that it can't be 
forged or reused.  We wouldn't want people spending the 
same money twice, or acting as their own mini-Federal 
Reserve Systems and creating money from nothing. This 
cryptological problem is different between on-line and off-
line cash systems. In on-line systems the bank simply checks 
whether a piece of cash has been spent before.
        
        Proposed off-line systems rely on a framework 
developed by David Chaum. Chaum has been the preeminent 
cryptological researcher in the field of digital cash [28]. In 
his framework for off-line systems, one can double-spend the 
same piece of digital cash only by losing one's anonymity. 
This has considerable value, because the bank or the person 
defrauded, knowing the identity of the devious double-
spender, can send out a collection agent.  

        But I consider this way of enforcing the "no double-
spending" rule a serious flaw in Chaum's framework. 
Catching thieves and rip-off artists is not the comparative 
advantage of either banks or the average citizen.  (Banks are 
usually only good at providing transactions services, and 
charging interest and fees.) Would you really want to see, 
say, The First Subterranean Bank of Anonymous Digital 
Cash merge with the Wackenhut Corporation?      Luckily, 
however, there are alternative approaches that will prevent 
double-spending from ever taking place [29].

        6) The most important requirement for individual 
freedom and privacy is that digital cash transactions should 
be untraceable, yet at the same time enable you to prove 
unequivocally whether you made a particular payment.  
Untraceable transactions would make impossible a PROMIS-
type data sorting of all your financial activities. In Joe 
Blowup's financial chronology, discussed previously, you 
wouldn't be able to connect Joe Blowup's name to any of his 
purchases. Similarly, no one would know about the money 
you wired to Lichtenstein, your purchase of Scientology e-
meters and the banned works of Maimonides, or your 
frequent visits to the Mustang Ranch.  Privacy-protected off-
line cash systems can be made nearly as efficient as similar 
systems that don't offer privacy. 

Parallel Money Systems

        To set up a digital cash service meeting these 
requirements, you would need to buy the rights to use patents 
held by David Chaum and RSA, or equivalent rights, and 
then set up a bank to issue accounts and smart cards in a 
legal jurisdiction where the service won't run foul of the local 
banking and money-laundering laws. Of course, in many 
other countries the money-laundering statutes will be quickly 
amended in an attempt to apply the same reporting 
requirements to anonymous digital cash transactions as 
currently apply to currency transactions. Such laws will 
probably generate little compliance. [30] Since the 
transactions in question are unconditionally untraceable, 
there won't be any evidence of wrong-doing.  

        The system of anonymous digital cash will arise as a 
parallel system to the existing one of ordinary money. 
Therefore there will be a record of the initial entry into the 
anonymous system.  For example, you might write a $10,000 
check drawn on Citibank to The First Subterranean Bank of 
Anonymous Digital Cash.  This check will be recorded, but 
no subsequent transactions will be traceable, unless you 
make transfers back out into the ordinary banking world. 
Over time, as more people begin to use the anonymous cash 
system, some wages will be paid in anonymous digital cash.  
This will enable all income transactions, as well as 
expenditures, to take place entirely outside the ordinary 
monetary system. 

        Since the anonymous cash system will exist parallel 
to the existing system, a floating exchange rate will be 
created by market transactions between ordinary money and 
anonymous money.  Think, by analogy, of a currency board.  
Such a board issues domestic currency through the purchase 
of foreign "hard" currencies. In the same way, anonymous 
digital cash will be issued through the purchase of ordinary 
cash or bank deposits.  That is, when you make a deposit at 
The First Subterranean Bank of Anonymous Digital Cash, 
First Subterranean will issue you an anonymous digital cash 
account, and will in turn acquire ownership of the ordinary 
money.  The exchange ratio will not necessarily be one-for-
one. Anonymous digital cash that does not meet some of the 
ease-of-use requirements listed previously may exchange for 
less than 1 ordinary dollar. On the other hand, digital cash 
that meets all those requirements will trade at a premium, 
because anonymous digital cash has enhanced privacy 
aspects. Money launderers, for example, currently get about 
20 percent of the value of money that is made anonymous.  
That represents an exchange rate of 1.25 "dirty" dollars for 
one "clean" dollar. The market will similarly determine the 
exchange ratio between ordinary and anonymous digital 
money.

        In the 1960s various tax and regulatory burdens, and 
political risk considerations, gave rise to a new international 
money market, the eurodollar market, which was created 
specifically to get around these regulatory and political road-
blocks [31]. When a junior staff member of the Council of 
Economic Advisors named Hendrik Houthakker discovered 
the  eurodollar market's existence, he thought it was an 
important development, and recommended that some 
discussion of it be included in the annual Economic Report of 
the President.  "No, we don't want to draw attention to it," he 
was told.  When Houthakker himself later became a member 
of the Council under Nixon, he made sure the Report 
included a discussion of the euromarkets.  But it was only 
much later, in the mid-70s, that the Report said, in a burst of 
honesty: "The emergence and growth of the Eurodollar 
market may be viewed as a classic example of free market 
forces at work, overcoming obstacles created by regulations, 
and responding to market incentives to accommodate various 
needs" [32]. 

        In a similar way it will be said in some future Report, 
that "the emergence and growth of anonymous digital cash 
may be viewed as a classic example of free market forces at 
work, overcoming obstacles created by surveillance 
technologies and money-laundering regulations, and 
responding to market incentives to accommodate the public's 
need for financial privacy."  


[Part III:  The Technology of Anonymous Digital Cash]

[Don't inquire about this article for a few months.  If you 
don't want to see any mathematics, don't inquire at all.]

Footnotes

[1] Quoted in Money Laundering Bulletin, January 1995, p. 
3. 

[2] Some may view this as a trade secret of the Church of the 
Subgenius, so let me cite two sources of publicly available 
information. Firstly, I heard it in a sermon by David Meyer, 
Pope of All New York, at the Kennel Club in Philadelphia in 
the fall of 1985. Secondly, it is similarly proclaimed in 
Subgenius Recruitment Tape #16, which may be rented from 
Kim's Video in the East Village of Manhattan.

[3] Bryan Burrough, Vendetta:  American Express and the 
Smearing of Edmond Safra, HarperCollins, New York, 1992.

[4] Sec. 1517 (c) states:  "Any financial institution that 
makes a disclosure of any possible violation of law or 
regulation or a disclosure pursuant to this subsection or any 
other authority, and any director, officer, employee, or agent 
of such institution, shall not be liable to any person under 
any law or regulation of the United States or any 
constitution, law, or regulation of any State or political 
subdivision thereof, for such disclosure or for any failure to 
notify the person involved in the transaction or any other 
person of such disclosure."  

[5] "A completely cashless economy *where all transactions 
were registered* would create enormous problems for the 
money launderers" (emphasis added), Report of the 
Financial Action Task Force on Money Laundering, Paris, 
February 7, 1990.  

[6] Kirk W. Munroe, "Money Laundering:  the Latest 
Darling of the Prosecutor's Nursery,"  law firm of Richey, 
Munroe & Rodriguez,  P.A.,  Miami, FL, 1994.    

[7] President's Commission on Organized Crime, The Cash 
Connection:  Organized Crime, Financial Institutions, and 
Money Laundering, U.S. Government Printing Office, 
October 1984.  This definition is certainly more coherent 
than Michael Sindona's circular statement that "laundering 
money is to switch the black money or dirty money . . . to 
clean money."  

The U.S. definition of money laundering is found in 18 
U.S.C. 1956, which was enacted in 1986, and strengthened 
in 1988, 1990, and 1992.  It sets out three categories of 
offenses:  transaction offenses, transportation offenses, and 
"sting" offenses.

Transaction Offenses:  It is a money laundering transaction 
crime for any person to conduct, or to attempt to conduct, a 
financial transaction which, in fact, involves the proceeds of 
specified unlawful activity, knowing that the property 
involved in the transaction represents the proceeds of some 
crime, and, while engaging in the transaction, with either a) 
the intent to promote the carrying on of the specified 
unlawful activity, or b) the intent to commit certain tax 
crimes, or with the knowledge that the transaction is 
designed at least in part a) to conceal or disguise the nature, 
location, source, ownership, or control of the proceeds, or b) 
to avoid a cash reporting requirement.

Transportation Offenses:  It is a money laundering 
transportation crime for any person to transport, transmit or 
transfer, or to attempt to transport, transmit or transfer, a 
monetary instrument or funds into or out of the U.S., and, 
while engaging in the act, with either a) the intent to promote 
the carrying on of specified unlawful activity, or b) the 
knowledge the monetary instrument or funds represent the 
proceeds of some crime, and the knowledge that the 
transportation, etc., is designed, at least in part, (i) to conceal 
or disguise the nature, location, source, ownership, or control 
of the proceeds, or (ii) to avoid a cash reporting requirement.

"Sting" Offenses:  It is a money laundering crime for any 
person to conduct, or to attempt to conduct, a financial 
transaction which involves property represented to be the 
proceeds of specified unlawful activity, or property used to 
conduct or to facilitate specified unlawful activity, said 
representation being made by a law enforcement officer or 
by another person at the direction of, or with the approval of, 
a federal officer authorized to investigate or to prosecute 
'1956 crimes, and, while engaging in the transaction, with 
the intent to a) promote the carrying on of specified unlawful 
activity, or b) conceal or disguise the nature, location, source, 
ownership, or control of the property believed to be the 
proceeds of specified unlawful activity, or c) avoid a cash 
reporting requirement.

[8] See Samuel J. Rabin, Jr., "A Survey of the Statute and 
Case Law Pertaining to 26 U.S.C.  60501 (Forms 8300)," in 
Money Laundering, Asset Forfeiture and International 
Financial Crimes, by Fletcher N. Baldwin, Jr., and Robert J. 
Munro, 3 vols., Oceana Publications, New York, 1994.

[9] Section 4702 of P.L. 100-690.

[10] 31 C.F.R. 103.11(p) (1991).

[11] "The means should, in fact, include access by Interpol 
to the telecommunications system SWIFT . . .," Draft 
Explanatory Report on the Convention on Laundering, 
Search, Seizure and Confiscation of the Proceeds from 
Crime," September 8, 1990.

[12] Money Laundering Bulletin, March 1995,  p. 3.

[13] U.S. Congress, Committee on the Judiciary, The Inslaw 
Affair, House Report 102-857, September 10, 1992.

[14] Memorandum to Judge Nicholas Bua from Elliot 
Richardson, p. 34.  The NSA, naturally, is not 
acknowledging the existence of such a chip, much less 
providing technical information. But in order to avoid 
detection of the chip's transmission signal by the 
organization being spied upon, the chip would be designed 
so its broadcast would be masked by the general--or some 
characteristic--electronic noise of the computer. This could 
imply a low-probability-of-interception digital spread 
spectrum (SS) communication system with a broad 
bandwidth, perhaps in the range of 1 to 10 gigahertz.  As a 
related example of this technique, a "low level wideband SS 
signal, can easily be hidden within the same spectrum as a 
high power television signal where each signal appears to be 
noise to the other" ("Spread Spectrum Techniques," in Geoff 
Lewis, Newnes Communications Technology Handbook, 
Oxford, 1994). The broadcast power requirements of such a 
chip would not be large, but rather similar to a walkie-
talkie's. The information broadcast by the chip could then 
either be monitored locally and re-transmitted to satellite, or 
transmitted directly to a geosynchronous signals-collection 
satellite such as Magnum. The Magnum and other U.S. spy 
satellites are operated by the Air Force on behalf of the 
National Reconnaissance Office, while NSA does the signal 
processing.  (I am grateful to John Pike, Director of Space 
Policy & CyberStrategy Projects, Federation of American 
Scientists, for advice on the information in this footnote.  He 
is not responsible for any errors or the specific content of any 
statement.)   
 
[15]  I have in mind an NSA operation.  But after Part I of 
The End of Ordinary Money was circulated, the CIA 
approached my own former company (which sells banking 
software) and proposed that it provide cover for their agents 
to enter foreign banks.  The CIA also separately offered to 
pay $100,000 for the customer list of a particular bank 
among the Swiss big four.

[16] Barry A. K. Rider, "Fei Ch'ien Laundries--the Pursuit of 
Flying Money," in Money Laundering, Asset Forfeiture and 
International Financial Crimes. 

[17] Money Laundering Bulletin, April 1995, p. 2.

[18] Ibid, p. 4.

[19]  Details of the foreign exchange, eurocurrency, and 
eurobond markets are covered at length in J. Orlin Grabbe, 
International Financial Markets, 3rd edition, Simon & 
Schuster, New York, 1995.

[20] Eurobonds are bearer bonds.  So if you have the bond in 
your pocket, you own it, in the same way you own the dollar 
in your pocket.  The same goes for interest coupons--they are 
to be paid to bearer.  Most eurobond-issuing companies pay 
interest to Euroclear, which distributes the payments to the 
owners of the bonds stored in its depository vaults.  But the 
companies are afraid that if the bonds are stolen, they will 
have to pay the same coupons again.  Hence they insist 
coupons be clipped and destroyed as they are paid.  When I 
visited Morgan Guaranty (which operates Euroclear) in 
Brussels in 1982, there were 20 employees whose full-time 
job was clipping coupons.

[21] John W. Moscow, "The Collapse of BCCI," in Money 
Laundering, Asset Forfeiture and International Financial 
Crimes. 

[22] Details of the card size, layout, coding, and recording 
are laid out in ISO standards 7810 to 7813.  The first track is 
sometimes called the International Air Transport Association 
(IATA) track, the second the American Bankers Association 
(ABA) track, and the third the Mutual Institutions National 
Transfer System (MINTS) track.

[23]  This may be as simple as assigning the numbers 0 to 5 
to the letters A to F.  If this assignment is made, the 
probability is three-fourths that a digit in the resulting 
decimal number is one of  0 to 5, while there is only one-
fourth probability that a digit is 6 to 9.

[24]  Computer logs are often kept for each part of a 
transaction.  So the evil programmer doesn't have to tap lines 
if he can get hold of the logs instead.

[25] Public key encryption is implemented in the Datakey 
smart card of the National Institute of Standards and 
Technology.  This card uses the Hitachi H8/310 processor. 
Atmel and Phillips chips also include public-key encryption 
hardware, and allow algorithms to be implemented by the 
card's application designer.  Smart and other chip card 
standards are laid out in ISO 7816.  (More on smart cards can 
be found in Jose Luis Zoreda and Jose Manuel Oton, Smart 
Cards, Artech House, Boston, 1994.) The recent ANSI X9F 
standards include those for using public key systems to 
secure financial transactions. The communication link would 
involve two-way authentication using Diffie-Hellman key 
exchange.  

[26] Clark Matthews, "Tomorrow's 'Smart Cards': Technical 
Marvels That Give Government Fearful Power,"  reprinted 
from The Spotlight,  undated.

[27] Some of the following points were broached in a 
different way by T. Okamoto and K. Ohta, "Universal 
Electronic Cash," Advances in Cryptology--Crypto 91, 
Springer-Verlag, Berlin, 1992.

[28] See David Chaum, "Achieving Electronic Privacy," 
Scientific American, August 1992, pp. 96-101; "Blind 
Signatures for Untraceable Payments," Advances in 
Cryptology--  Crypto 82, D. Chaum, R.L. Rivest, & A.T. 
Sherman (Eds.), Plenum, pp. 199-203; "Online Cash 
Checks," Advances in Cryptology--Eurocrypt 89, J.J. 
Quisquater & J. Vandewalle (Eds.), Springer-Verlag, pp. 
288-293;  "Efficient Offline Electronic Checks," with B. den 
Boer, E. van Heyst, S. Mjxlsnes, & A. Steenbeek, Advances 
in Cryptology--Eurocrypt 89, J.-J. Quisquater & J. 
Vandewalle (Eds.), Springer-Verlag, pp. 294-301; 
"Cryptographically Strong Undeniable Signatures, 
Unconditionally Secure for the Signer" with E. van Heijst & 
B. Pfitzmann, Advances in Cryptology--Crypto 91, J. 
Feigenbaum (Ed.), Springer-Verlag, pp. 470-484; "Numbers 
Can Be a Better Form of Cash than Paper," Smart Card 
2000, D. Chaum (Ed.), North Holland, 1991, pp. 151-156; 
"Privacy Protected Payments: Unconditional Payer and/or 
Payee Untraceability," Smart Card 2000, D. Chaum & I. 
Schaumuller-Bichl (Eds.), North Holland, 1989, pp. 69-93; 
"Security Without Identification: Transaction Systems to 
Make Big Brother Obsolete," Communications of the ACM, 
vol. 28 no. 10, October 1985, pp. 1030-1044; "Smart Cash: 
A Practical Electronic Payment System," J. Bos & D. 
Chaum, CWI-Report CS-R9035, August 1990; "Untraceable 
Electronic Cash," with A. Fiat, & M. Naor, Advances in 
Cryptology--Crypto '88, S. Goldwasser (Ed.), Springer-
Verlag, pp.  319-327.

[29] "[P]rior restraint of double-spending can be achieved by 
using a tamper-resistant computing device that is capable of 
merely performing a signature scheme of the Fiat-Shamir 
type (of one's own choice), such as the Schnorr signature 
scheme" (Stefan Brands, "Highly Efficient Electronic Cash 
Systems,"  March 17, 1994.) 

[30]  I highly recommend Henry David Thoreau's essay Civil 
Disobedience.
..
[31] These included the interest ceilings set by the Federal 
Reserve's Regulation Q, Kennedy's Interest Equalization 
Tax, and the Foreign Credit Restraint Program.  See 
International Financial Markets, Chapter 1.

[32]  Economic Report of the President, 1975.

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