Why Money Launderers Love $100 Bills

21:17And then you could collect that same money in Bruges or in London and the other side of the Alps and the other end of Europe. Essentially, as soon as you could get there, the money was available for you to pick up. And, you know, how did they move the money? They obviously weren't moving bullion from Italy to Belgium or Italy to the UK for the same reason that ordinary people would want to do that. It wasn't safe. So they were just moving trade, silk going north or spices, wool coming south. And then we're just hiding the movement of cash in the paperwork. And, you know, in the years after World War II, some academics found what they were called their secret books in the state archive in Florence.

21:51And you could see how they were doing this. Essentially, they were providing banking services to politicians, to leading cardinals, other people in the church, in exactly the same way that banks might provide secret services now to politicians or any powerful people. And we're just hiding the transactions in the huge amount of paperwork generated by their trading activity. And this is basically now what the Chinese money laundering networks do. And you can tell that they're important. This is one of these weird things in money laundering studies, which is a very niche area, which is mainly just consists of me and about three other guys.

22:22But the money laundering studies, it is infested with acronyms. AML, anti-money laundering, CFT, counterfinance of terrorism. But if it's a really important one, it's a four letter acronym, not a three letter one. So the fact that Chinese money laundering networks are CMLNs, it's a four letter acronym. You know that that's a big deal.

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24:13Put ChatGPT to work on your most ambitious ideas and projects. Get started at ChatGPT.com by selecting Work Mode, available on Plus and Pro plans. You already know how AI is changing how everyday work gets done. How much ground you can cover and how fast a team can scale. To stay ahead, you need the tools that give you a competitive advantage, built for this new era. Welcome to Agentic Revenue. Adio is the CRM for this world. It meets you where you work, compounds every customer signal into context, then acts on it across your pipeline to let you move at unmatched speed and scale. With agents and automations for every job in revenue, Adio orchestrates your work around the clock.

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25:27There does seem to be something very traditionalist about, I guess, trade-based money laundering. But on a related note, can you talk to us about the carousel fraud that was taking place going in and out of the UK? And then when the rules were finally changed, I think it just shifted over to Europe, which kind of gets at the point that it seems very hard to fix what is like a jurisdictional arbitrage issue unless you have some sort of harmonization across different countries. Yeah, the carousel fraud is one of these absolutely fascinating crimes, which it's so complicated and so extraordinary that you think that if the criminals have designed it, if instead that they decided to set themselves to solving climate change or anything, then that problem would be solved.

26:12The kind of elaborate nature of the transactions they were doing, it grows out of of flaw in the way that the value added tax is designed in the European Union. Back then the UK was in the European Union. And essentially, the way it works is that if you're moving money, goods within a country, you charge value added tax. But if you move it between countries, you don't. So that difference had to be that way, because otherwise you would end up with the UK tax authority having to trust the French tax authority. And that's obviously never going to happen. So you had to have that zero rated transaction across borders, which just meant that you could cycle things in and out of one country in another country and essentially claim VAT that you'd never actually paid.

26:51And it went round and round and round. And that's why it's called carousel fraud. It went round like a merry-go-round. And it became, it started off as just as very simple transactions. And then as the tax authorities picked up on that, they became more and more complicated with different chains of shell companies going in all directions and incredibly complicated. But yeah, like you say, what's really interesting about it is the UK actually got very good at tackling this. And I actually use it in the book as an example of how how to fight financial crime. It was a really fully multi-agency approach, like not just leaving it to the banks like we do with money laundering, but really fighting it with everything that the state had and actually got very good at tackling this.

27:24But it just crossed into the rest of Europe where now it's a 50 billion euro a year problem, carousel fraud. And it's so elaborate and so well-developed that you're talking about something that spreads from Lithuania down to Portugal,

27:37Tracy Alloway:from Greece to Sweden. Can you explain the mechanics? I get that it's elaborate. But for the listeners, like, what is the mechanism? This may be stretching the tolerance even of the odd lots to really explain. But so it's called, so carousel fraud or missing trader into community fraud, MTIC, which is a four letter acronym. So you can tell it's a big deal. But basically what you have is if you import a product, let's say from Ireland, if you're in the UK, and then you don't pay VAT on that trade because you've imported it. Right. So no tax is paid. You then sell it to another shell company, which is controlled by you, but it looks like a different company in the UK.

28:19You charge VAT on that trade. So you add 20 % or whatever the percentage is of VAT on that trade. And then you export the good back to Ireland. Now, if the second company exports the good, because they've exported it, they can claim from the treasury, they can claim the 20 % back again. They can claim that 20 % because that's what they get because they've exported the good. So essentially you export it, but without ever having paid it in the first place, you're essentially claiming back VAT that you never paid. So it's called missing trader into community fraud because the trader that is supposed to pay the VAT to the treasury just vanishes.

28:52They go missing and they never pay it. So you are claiming back a tax that has never been paid, which has this amazing ability, unlike almost all other forms of organised crime that I know of. Essentially, there is no limit to the amount of money that a criminal gang can make out of this. So there is no reason for criminal gangs to compete. The more they collaborate with each other, the more elaborate the schemes can get and the more money they can claim. So you ended up with this, essentially, it seems to have grown to been discovered by accident by mobile phone vendors in the 1990s, who then realised that there was this unbelievable golden goose that they could just keep milking, if that's what you do with geese, keep egging for golden eggs consistently.

29:30And they kept going for absolutely ages. I mean, you know, some of the carousel fraudsters became on the British rich list of the richest people in the country because they made so much money out of it. But essentially that the flaw in it is at the fact that you can import something without paying VAT, and then you can claim the VAT back when you export it. And provided that there is an extra stage in that transaction, the missing trader, the person who is supposed to pay the VAT never pays it to the Treasury. The person who claims it back, claims it back. And therefore, you've essentially conjured up 20 % of the value of a shipment from thin air.

30:02And this is why it became so expensive to the Treasury. It is an incredibly elegant form of fraud. and talking to some of the insurance adjusters who were involved in trying to work out what on earth was going on. You know, they describe this with the sort of wonder that a physicist might talk about what's happening in CERN. Because I'm talking about only two shell companies, one selling it to another, then exports it. In reality, you're talking about thousands of shell companies moving goods backwards and forwards, up and down. And then when it all nets out, mysteriously 20 % of nothing has been created and the rest of us are on the hook for it.

30:35It is a gorgeous crime, if you like crime, but it was incredibly troubling and very, very expensive and really made some bad people very wealthy.

30:42Tracy Alloway:So obviously, we've touched on a number of different, I guess, vehicles for how money gets laundered. What is the official reason for why, given everything that we know, governments continue to produce lots of cash and particularly high denomination units of currency? Yeah, I am fascinated by this is called the paradox of banknotes, what you described at the beginning. It was first identified formally by Andrew Bailey, now the governor of the Bank of England, back then the chief cashier, so in charge of physical coins and notes back in 2009. And it is this very strange phenomenon whereby cash is an analog technology like videotapes or films and cameras that is being outcompeted by digital means of payment, really a very small proportion of transactions and now use cash.

31:33I think it's like something like 9 % now in the UK, maybe 13 % in the US. It's very few. So there is very little demand for cash from society. So you would expect, therefore, the supply of cash to be collapsing. And yet at the same time that the demand is very low, for some reason, supply is very, very high and getting higher all the time. Consistently, almost everywhere, the amount of cash in circulation is hitting record highs in the US. It's almost 2.5 trillion US dollars in circulation. I was hoping it would hit 2.5 trillion in time for the 250th anniversary, because it would have had a sort of nerdy appropriateness, but it didn't quite get there.

32:12But still, it's not far off in the Eurozone. It's something like 1.6 trillion euros. In the UK, it's about 100 billion pounds. So, you know, huge quantities of banknotes are being printed, and yet very few are being used. And there have been a number of proposals, suggested explanations for why this is happening. Andrew Bailey back in 2009 suggested it could be because of low inflation, that there was no real opportunity cost of holding bank notes, because why bother putting them in the bank when interest rates are so low? Another explanation was there were just lots of ATMs. So maybe the bank notes were just, as it were, piling up in the ATMs and that's where they were.

32:46Another explanation was trust in financial institutions was very low because it was immediately after the great financial crisis. Yeah, I think we can say certainly the number of ATMs is lower now than it was back then. And inflation has obviously gone up again. And you hope that the trust in financial institutions has at least partly returned in the last couple of decades. And yet the phenomenon has continued. In fact, it's accelerated, if anything, since then. The value of pounds in circulation, for example, has doubled since he made that speech. So, you know, there is clearly another reason for it.

33:15And central bankers tend to now just fall back on saying that it's a store of value, that there are two basic uses for money, really. It's either a medium of exchange or it's a store of value. Those are the two options. And since it's not being used as a medium of exchange, then they said, well, it's presumably being used as a store of value. And that's what they tend to come up with. And that's really frustrating, because you can see from the surveys that central banks do that it isn't being used as a store of value. The average American adult has, I think, something like$430 odd either on their person or at home at any one time.

33:49And yet there's more than$7 ,000 out there for every man, woman and child in the United States. It's an order of magnitude higher than the amount that's being used as a store of value. And yet there is no attempt really by central bankers to explain why that's happening. You know, what's going on? Where are all the banknotes? I mean, they do efforts to try and work out how many of them are outside the country. There's an economist at the Fed called Ruth Judson who's done some really interesting work on this, and then another colleague at the European Central Bank. And the European Central Bank reckons about half of Euro banknotes are outside the Eurozone.

34:23The Fed reckons sort of something like 65%, maybe, of dollar banknotes are outside the United States. But that's just a kind of a way of kicking the problem one step further. If it's a store of value outside the United States, it still must be being used for something. And yet, what is it? Well, essentially, we don't know. They never really, the Central Bank has certainly never really answer that question of where are all this astonishing quantity of banknotes that they're printing. And it is a really interesting puzzle. I mean, if you imagine that this was not banknotes that we're talking about, but was VHS cassettes, that Netflix has boomed, everyone's watching Disney Plus, and yet somehow VHS cassette production is hitting record highs year after year after year, I think we'd be really interested in where they were going.

35:07Who's watching all these things? And yet just because it's banknotes, everyone's like, oh, well, it's a store of value, forget about it. Can you talk to us about seniorage? So this is one of these concepts where like it comes up occasionally and I sort of nod my head and I go, yes, of course, central banks make money by distributing dollars. But I don't actually know how it works. Well, so seniorage is one of these really ancient, wonderful concepts that I mean, so you can tell it's old because we use an actually Norman French word for it. Seniorage means that which pertains to the senior or the Lord, which essentially is that making money, having a monopoly on the production of money is a very profitable thing to have, which is why almost as soon as any warlord kind of took over a patch of territory and declared himself to be king, one of the first things they did was have a monopoly on issuing money.

35:53And so there's quite a lot of warlords in Anglo-Saxon England that we only know the name of because we found a few coins with their names on. Essentially, in those days, it was that if you wanted to have your money coined, you had to bring it to the mint where the king would put his face on it and take a little bit for his trouble. That's the origin of the term seniorage. But in the modern sense, obviously, we don't use gold so much anymore. It's just paper. In the modern term, it's the profit that is made from issuing paper money. And there are two ways of looking at this. There's a sort of simple but wrong way and a right but complicated way.

36:26So the simple but wrong way of looking at this is that it's very cheap to print money. It costs about nine cents to print a hundred dollar bill. You know, there's whatever, 20 billion US dollar bills out there somewhere. So, you know, if you think about that, each one costs nine cents to print. You can see that there's a 99.9%, 99.91 % margin on producing them. That's a very profitable thing. That's your seniorage right there. The fact that you're making$99, 91 cents every time you print a hundred dollar bill. So that's the simple but wrong way of looking at it. And central bankers will tell you this is wrong because actually a hundred dollar bill, if you take a$100 bill out of the bank, you're not actually buying that$100 bill because you can sell it back at any time for the same amount that you bought it for.

37:07So actually, it's an interest-free loan to the government is what it really is. And this is where we start getting towards very much the end of my maths. And I'm hoping that you guys will correct me at this point. So there's two and a half trillion US dollars out there somewhere. That's an interest-free loan to the US government, broadly understood, of two and a half trillion dollars. Now, I think the The US government debt, outstanding government debt, is something like 40, almost$40 trillion now. So$2.5 trillion on top of that is like an additional, what is that sort of 6 % or something of US government debt, which the US government isn't having to pay any interest on.

37:42That's quite a significant saving for the US government not to have to pay that money. I think that, as I remember rightly from the last thing I saw, I think that debt servicing now is something about 19 % of the federal budget. If you had to pay interest on that extra two and a half trillion, then that's probably another percentage point on top of that. So, you know, that's quite a decent amount of money which the US government saves, essentially by having a chunk of its debt in the form of bearer instruments that don't pay interest. So that's, as it were, the right but complicated way of looking at Sany Ridge.

38:16But either way that you look at it, Sany Ridge is a very profitable thing to have, which is why governments tend to like having a monopoly on the issuing of money. Because it's essentially either it's just straightforwardly profitable selling bits of paper or it's a very cheap way of raising a loan. Right. So just to repeat Joe's question, then politically, who is actually blocking getting rid of, for instance,$100 bills? Would it be central banks and the Treasury protecting seniorage, or is it simple inertia, or is it maybe tax-avoidant industries, the powerful nail salon and, I don't know, psychic reader in New York lobby or something like that?

38:59I think broadly speaking, this doesn't come up. The system, from the perspective of the European Central Bank or the Fed or the Bank of England or the Bank of Canada, the system is working fine. There's lots and lots of demand for their products. Why would you want to get rid of them? If you look at it more broadly and you work out that essentially the products are enabling crime on a geopolitical scale, then you would say, well, actually, the harm that's being caused far outweighs the profits that's coming from the seigneurage. We should do something about this. But, you know, essentially, these are different bits of government and they don't necessarily talk to each other.

39:31There have been occasions in the past when governments have got rid of big bills to try and reduce criminality or terrorism. After the attacks on Paris in 2016, the Europeans announced that they weren't going to produce, they used to have a 500 euro bill, which was referred to colloquially as the Bin Laden, because everyone had heard of it, but no one had seen it. And by the time one of your banknotes has been called the Bin Laden, you know that you're in a degree of trouble. That's not a good nickname to have. That's the first hint. Singapore used to have a big bill as well, I think a 10 ,000 euro bill, a$10 ,000 bill, which they got rid of.

40:02But broadly speaking, you've got a kind of collective action problem, which is that if the US stops producing its$100 bill, and I wish it would, I don't think that there is anyone really who would be inconvenienced by the lack of$100 bills except the bad guys. Music video producers. them. Well, your music video producers, I mean, I suppose what would hip hop artists wave around in their music videos, but leaving that aside, the Europeans would still be producing 100 euro and 200 euro banknotes. And then the Americans would then essentially lose out on the senior age to the Europeans, and the criminal economy would get no smaller because they would just switch to using euros instead, and vice versa.

40:42There are enough central banks producing big bills, whether that's a 50 pound note, or 1000 franc note, or 200 euros,$100 bill, that if one of them went out the game, it essentially wouldn't make that much difference to the criminals, but would make a substantial difference to their own income from this. So what you need is an international agreement that everyone could get together and say, we're not going to do this. And that's what has been eluding humanity. Well, in this, as in so many other ways, when it comes to trying to tackle financial crime, because if you are the person, jurisdiction that is enabling financial crime is actually quite profitable for you personally.

41:18The City of London has been doing quite well out of this for decades. And most of the harm is then spread elsewhere in the world. So you get the profit and other people get the harm. And the fact that the$100 bills are the favoured tool of the cartels in Colombia and Mexico is very bad for Colombia and Mexico, but it's also quite profitable for the United States. So that's the essential challenge is trying to persuade people that they all need to act together. And that's something that, well, Well, no one's really tried it, but even the vague suggestions. Some economists have talked about this in the past.

41:48Kenneth Rogoff has talked about this at length and tried to get interest for this idea. He's really come up against the challenge of trying to get everyone in a room together to agree to do it.

42:13Some people treat ChatGPT like some kind of smart search engine, and some use it to get work done. ChatGPT Work is a new way of working in ChatGPT that can take action across your apps and files, stay with a project for hours if needed, and turn a goal into finished work. It's designed to help you move from a chaotic starting point to a reviewable first version. So all the source materials, briefs, and scattered information that you have to grind through to turn into something useful can just become something useful. Put ChatGPT to work on your most ambitious ideas and projects. Get started at ChatGPT.com by selecting Work Mode, available on Plus and Pro plans.

42:56You already know how AI is changing how everyday work gets done, how much ground you can cover, and how fast a team can scale. To stay ahead, you need the tools that give you a competitive advantage, built for this new era. Welcome to Agentic Revenue. Adio is the CRM for this world. It meets you where you work, compounds every customer signal into context, then acts on it across your pipeline to let you move in on match speed and scale. With agents and automations for every job in revenue, Adio orchestrates your work around the clock. Built to handle the scale of your workloads, extensible with API and MCP, and with the infrastructure to keep up with your most ambitious agents.

43:32Loved by high-growth startups like Granola, Modal, and Etched, Adio runs the work behind every win. That's Adio, the agentic CRM, the intelligent system that never sleeps. Picks up leads at 2 a.m., catches renewals before they slip, hands you the answer before you ask. Try Adio free at adio.com slash iHeart. That's adio.com slash iHeart.

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44:26Tracy Alloway:It's not clean unless it's OxyClean. You know, something I realized, the Chinese currency, the highest denomination note there is 100 RMB, so only about$15. Also, every one of their bills is the exact same design, basically. It's the Mao photo, which I think is kind of interesting. You look around, it seems like they usually switch it up, et cetera. One thing I'm curious about, was crypto ever an important part of this story? I remember back then people were like, oh, it's going to be used for money laundering and stuff. And I thought that the crypto people made a good point. It's like, look at the banks and the cash you're producing.

44:59Tracy Alloway:That's where most of the action is happening. Obviously, crypto isn't really like what it was, at least on a few years ago, etc. But during that period, did it ever really move the dial as a vehicle? I mean, crypto is huge for money laundering. Specifically, there are many cryptos. It's not just one thing. Specifically, we're really talking about stable coins when we talk about crypto being big in money laundering. I was talking earlier about trade-based money laundering and how essentially you can move value via moving stuff, whether that's Caterpillar, Earth moving equipment or handbags or drugs or whatever around the world.

45:35And you move value in that shape like the Medici's used to. Crypto allows you to do that instantaneously. So the really entrepreneurial money laundering gangs now tend to miss the Russians, the Chinese, the Iranians do this too. They combine cash and crypto. So cash works at a street level and then you collect the cash and you exchange it for crypto. And then the crypto is useful for moving your wealth around the world, for buying product from Colombia or elsewhere. So the two are not exclusive. In fact, they supercharge each other. Criminals have always liked to stack different techniques on top of each other.

46:11And so, yeah, cash remains the most useful criminal tool at a street level. But it's bulky, it's not secure, it's kind of annoying and smelly, it's annoying to count and so on. So if you can get away from using that as quickly as possible in order to move it around the world, that's where crypto comes in and is super useful. The Russians have created their own cryptocurrency, A7, A5, although it's in a little bit of trouble at the moment, essentially as a way of allowing themselves to do this outside of the Western controlled stablecoins. But there are other Western-controlled stablecoins that are available, which I'm sure you have spoken about on the podcast.

46:47In fact, I know you have. You know, you mentioned earlier this idea that if the U.S. got rid of$100 bills, then maybe everyone would just start using 200 euro bills or something like that. I'm curious, in your discussions, you must have had some, with money launderers or people who investigate money laundering. Do you hear a lot about, I'm trying to think what to say, fraudsters thinking about the actual value of the currency or making currency heading decisions? So like, I don't want dollars because I think the dollar is going to go down. I'm going to move into euros instead. Or is it just purely about the use case and some broader utilitarian diversification kind of thing?

47:29I would love that if there was. I mean, I used to live in Russia and it's how I got into writing about financial crime, was living in Russia. I mean, the good thing about working in Russia as a journalist is you don't really need to look out financial crime. It tends to come and find you. And it was that there was a really deep awareness of the relative strengths of the euro and the dollar. And this was a time when the euro was looking very strong. And so there was a movement towards euros by ordinary Russians. But you can't get away from the fact that the dollar is just much more liquid a market.

48:03It's much more widely accepted. And it was interesting. It actually used to get different exchange rates for different kinds of dollars. When I first lived in Russia, I was paid in cash dollars. And I would always try and be paid in$100 bills because I knew I could get more rubles for$100 bill than I could for a 20 because there's that demand for hundreds. So no, I mean, dollars were that the utility of dollars was more about the universal application of them. the fact they're accepted everywhere. And because, as you say, there is a 200 euro banknote, you can move twice the value in the same space with euros as you can with dollars.

48:37But because the dollar has got this kind of first mover advantage, and it's globally accepted, the dollar remains the lingua franca of global criminality, the$100 bill, just because it is a much deeper, more liquid market, which has an interesting, obviously an interesting parallel to the role of the dollar as a global currency in the licit economy, which is that it has all of the instruments built up around it. Everyone trusts it. Everyone knows it. And it is very difficult to dislodge that once it's been established.

49:05Tracy Alloway:Yeah. Just a last question for me. You mentioned the rise of some of these acts in the 70s and 80s to clamp down on money laundering, et cetera. Has the political climate changed? What was the political climate then such that there was an inspiration to really try to move on this. And would you just say we're in an environment today where there is just, it's just not most people, most countries don't care very much and they have other things to worry about. And there isn't really the appetite to do another push, even if the reporting says there's quite a bit of it out there. I'm really glad you asked that because it gives me the opportunity to bring up my personal anti-money laundering hero, who's a guy called Wright Patman, who was a congressman from Northeastern Texas, who represented Texarkana in the area around there.

49:55From the 1928 up to 1974, he was one of those imperfect but amazing Southern Democrats. He was, by Southern Democrat standards, a really good guy, but not necessarily a really good guy by everyone's standards today. But he did have a very healthy distrust of monopoly power, financial institutions, which grew out of this sort of what was called the populist movement in Texas and the South and the Midwest in the late 19th century. And he really, as chair of the House Banking Committee in the 1960s, he pushed through some really interesting committee hearings and innovations. And so the anti-money laundering legislation, which is called the Bank Secrecy Act, even though that's not its proper name, grew out of his personal kind of obsession with the wrongdoing of the financial institutions.

50:39And because of the kind of way that Congress was very hierarchical back then, what the Banking Committee did, then Congress tended to go along with. He had a huge amount of personal power and prestige that allowed him to do that. And I'm not sure that that would be replicatable today. The role that he played, though, I think in a way is sort of, in some ways, you could see similarities with, say, the role that Elizabeth Warren played with consumer finance after the great financial crisis. He managed to push through some changes and spearhead that. So there was an opportunity back then with the growth of offshore finance in the 1960s.

51:11And he took that opportunity to bring the Bank Secrecy Act onto the books. So it is difficult to see who would fill the position that he filled now. I mean, that kind of politician isn't really present, but who knows, things move fast. And I personally would like to see politicians engaging with the minutiae of money laundering in the same way that he did and trying not to just, as it were, punt responsibility onto the banks and say that they just need to produce another 100 ,000 suspicious transaction reports and instead say, well, actually, what does money laundering really look like? How do we tackle money laundering using crypto?

51:44How do we tackle money laundering using handbags or earth moving equipment? What is actually going on? What's really driving this? Because we have a status quo that is incredibly expensive, very intrusive. We haven't talked about debanking, but that is a serious issue, both in politics, but I think more broadly, globally, that affects hundreds of thousands of people, mostly Muslims, but others too. There's a really grotesque side effect of anti-money laundering and anti-terrorist financing restrictions. It's very expensive and it really doesn't work. So we're putting a lot of expense on financial institutions, and therefore on ourselves, and not really inconveniencing criminals to any meaningful extent.

52:24And one of the reasons why we're not inconveniencing them is because while governments are putting these very expensive regulations onto financial institutions, they are simultaneously printing essentially limitless quantities of banknotes that are allowing criminals to evade those same restrictions by just using cash. So it is an incredibly frustrating situation to look at. And to be honest, it just makes me furious most of the time. How would you actually change the incentive structure for banks? I'm thinking of like some poor compliance officer sitting in a basement somewhere and he's filing thousands of suspicious activity reports, knowing that they're probably going to go into like some black hole that no one is ever going to read.

53:05And at the same time, it's not like the bank is getting rewarded for filing all of those. It's all downside, right? It's if you miss something and you get caught, then you're in trouble. So it feels like something could be improved on that side of things. The original idea with suspicious activity reports, which grew out of the creation of the Financial Action Task Force at the Paris G7 in 1989, the original idea would they would be a source of real-time intelligence for law enforcement agencies, that they would receive these reports that would allow them to essentially see money laundering as it was happening.

53:39And for that to work, you need to have enough people to read the reports. You need to have essentially effective software systems that can take in the reports and kind of triage them to the places where they need to go. And that's what we don't have, that there has been this demand on financial institutions to hire tens of thousands of compliance officers who sit there bashing out reports for false negatives endlessly or false positives. And it's just incredibly laborious, bureaucratic and tiresome work. But at the same time, most countries don't actually, no countries really resource their law enforcement agencies sufficiently to actually read the reports that are being produced.

54:17So you have, like you say, huge number of reports that are just going into essentially a black hole where they sit there and maybe they'll be looked at in the future, and maybe they won't. And the downside of getting it wrong for a financial institution is a billion dollar, billion dollar plus fine. And the plus side of getting it right is kind of non-existent. So in terms of changing the incentives, it would be far better to have fewer suspicious activity reports that were actually being read. And then you could have a system where financial criminals were actually being prosecuted, and you would get a sort of a kind of feedback loop that that would then restrict the ability of their financial criminals to move their money.

54:57Because the whole idea of an anti-money laundering system is to try and take the profit out of financial crime or any acquisitive crime. That's what they're trying to do, is to make it expensive to launder money. That's what we're failing to do at the moment. So anything that can take away criminals' money and essentially take away their ability to move it so easily around the world, that would essentially be the purpose. And that is supposedly the purpose of the system that we have. Instead, we have a system that piles a huge amount of paperwork on financial institutions and a huge amount of expense and occasionally fines them for their trouble, but doesn't really do anything to stop financial crime.

55:33And that's kind of, as we say in Britain, arse backwards. All right. I think that's a good place to end it. Oliver Bullough, thank you so much for coming on All Thoughts. Thanks for having me on the show. Thank you, Oliver.

55:46Tracy Alloway:That was great.

55:59So, Joe, that was a fun conversation.

56:01Tracy Alloway:Yeah, I love reading about the intricacies of all these details and the complexity and how far. It's a lot of creativity in crime. Extraordinary amount of creativity. And it's like, OK, you come up with one idea where you can sort of it's like they found a free money glitch in the tax system where you import something, have one transaction, then claim the refund, etc. And then it's like finding these ways to do it across thousands and thousands of companies or fake companies, whatever it is. It's always very impressive to me. With carousel fraud, though, I keep thinking like, OK, sure, it makes you rich, right?

56:36Yeah. But your job is basically filing a bunch of paperwork and incorporating a bunch of shell companies, which sounds really, really boring.

56:43Tracy Alloway:The problem is like it makes you rich, but it provides you no meaning in life. Yeah. I mean, I think like why not just start a business, right? Do something interesting. Don't just make money by like creating shell companies. I don't know. I think people can find ways to enjoy themselves with just lots and lots of free money. You know, it's interesting. I've thought about this before when he was talking about the way criminals, as he called it, stack cash and crypto. And something I've thought about, and I think there's a lot, there's actually sort of like common, even when he described a sort of like classically Medici style banking system or whatever how many transactions that we think of as like being somewhat bilateral are actually like very multi-step so let's say you wanted to sell me a painting and i was like oh i'll pay it for you in bitcoin or like i don't really see that happening but it's like i want to i would have to like that would be three transactions because there would be i would be purchasing bitcoin from some entity yeah the bit one bitcoin exchange would then like move it to your wallet and then presumably you don't want to hold a lot of bitcoin you so then you sell the bitcoin for cash.

57:47Tracy Alloway:So what looks like, oh, I'm going to pay you in Bitcoin is like really three distinct movements. And I think that a lot of these things that he describes, how can you deposit money in Rome and then withdraw it as soon as you get there in London, is this nature of the fact that a lot of times what looks like a transaction is really like this big multi-leg transaction that can sort of be decomposed and rearranged like Lego blocks in multiple ways. Yeah, which means there are all Those little like vulnerabilities and steps that you can end up exploiting. Well, also on the crypto thing, it was interesting to hear that money laundering is predominantly about stable coins.

58:24Yeah, I was surprised. And that kind of gets back to the seniorage point, which is if you think of stable coins as something that nowadays finances U.S. government debt because a lot of the money goes into U.S. treasuries, then you're back to this idea that, well, maybe people aren't particularly incentivized to crack down on what's essentially an interest free. Well, not in the case of Treasury, but a loan to the U.S. government.

58:46Tracy Alloway:It's also interesting just generally that like whenever you're talking about money laundering or crime, you use a metric that is very rarely ever discussed in economics, which is dollar value per unit of spatial volume. Right. Because that is a rare metric. But that's what we're talking about. Like if it's like, why is a Rolex a useful vehicle? It's because a high dollar value at a small spatial volume. And so what does the$200 bill or$100 bill on a Rolex and other things have in common? The opposite would be like, I don't know, a giant couch or something like that. It's probably a pretty inefficient way to do it.

59:26There's a business opportunity for someone to create lots of tiny, tiny, really valuable things, which I think gets us back to the beginning of money itself.

59:34Tracy Alloway:It gets us back to the very beginning, jewels and all that stuff. Yeah, exactly. Shall we leave it there? Let's leave it there. This has been another episode of the Odd Lots podcast. I'm Tracy Allaway. You can follow me at Tracy Allaway. And I'm Jill Weisenthal. You can follow me at The Stalwart. Follow our producers, Carmen Rodriguez at Carmen Armand, Dash O 'Bennett at Dashbot, Kale Brooks at Kale Brooks, and Kevin Lozano at Kevin Lloyd Lozano. And for more Odd Lots content, go to Bloomberg.com slash Odd Lots or the Digley newsletter in all of our episodes. And you can chat about all these topics 24-7 in our Discord, discord.gg slash Odd Lots.

1:00:08And if you enjoy Odd Thoughts, if you like it when we talk about financial crime, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

1:00:38Thank you.

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