Although electronic money has been around for decades, advancements in technology and new ways of processing payments are making it easier than ever to digitally store, send, and receive money. On the backend, however, e-money processing can be surprisingly complex, as transactions often pass through multiple entities to get from sender to receiver. It's this complexity that is making it easier than ever for cybercriminals to evade detection while processing payments for illicit activity.
In this two-part series, we look at the risk e-money poses for money laundering and other criminal activity, and we explore a case study of e-money used to facilitate human trafficking in the United States.
What is E-money?
E-money is a broad term that describes money that is digitally stored on a technical device or a banking system that is used to facilitate electronic transactions. This can include sending or receiving paychecks through direct deposit, moving money between accounts through electronic fund transfers, storing money in e-wallets, and spending money with credit and debit cards. What differentiates e-money from cryptocurrency is that e-money is backed by fiat currency (a country's legal tender) and may be exchanged for physical cash.
E-money in the European Union
A major cause of e-money's complexity stems from the way the European Union approaches regulation, but its effects are wide-reaching. Competition rules in the EU's 2009 E-Money Directive (EMD) have allowed a large number of entities called e-money institutions to spring up over the past several years. Because the EMD reduced the initial capital requirement for new e-money institutions to €350,000, the barrier to founding these companies is significantly lower. These entities have been authorized to issue e-money, but they are not licensed banks and may not perform banking functions such as lending. E-money institutions have the ability to operate e-wallets and to receive and send funds with fewer regulatory hurdles than banks.
How E-money is Abused
The ease of moving e-money is convenient for both legitimate and illegitimate purposes. Executives of major banks in Europe have lost their jobs following revelations of money laundering through e-money. Although authorities have talked about creating a centralized EU anti-money laundering task force, such an entity does not yet exist. And the complexity of the payments space means that money from Europe, the US, and virtually everywhere else is being moved around the world and funneled into all sorts of places, on behalf of all sorts of people - some of them cybercriminals. All of this movement, through all of these entities, makes e-money extremely difficult to track.
E-money's Increasing Complexity
E-money institutions can act as principal firms to agent firms. What this means is that an agent can use the license of the institution, essentially acting on the institution's behalf. While some e-money institutions are tied to only one or two agents, others have as many as 10 or more. Take, for example, a UK institution called CFS Zipp, which at the time of our review had 18 tied agents. When a transaction passes through one of these agents, it adds an extra layer between sender and receiver, which can make it more difficult for any one entity to know both who the payment is coming from and who it is going to. These agents are sometimes spread around the European Economic Area (EEA), which makes investigation and enforcement difficult for regulators and potential future task forces.
Impact on the United States
The US does not have such an open approach to e-money transactions. Stricter regulations in the US make it significantly more difficult to operate businesses similar to e-money institutions. However, these businesses still have real and widespread influence on criminal operations in the US and other parts of the world. Some US-facing websites are running credit cards through the payment infrastructure of EU e-money operators, and they are facilitating criminal activity occurring in the US.
In Part 2 of our series, we'll look at an illicit massage website that processes payment through the EU structure of e-money institutions, and how it is helping to facilitate human trafficking in the US. Learn more about how our investigative analyses can help you.