From the False Positive substack, July 29:
Chinese crime syndicates are operating underground banks to launder the proceeds of fentanyl sales. But their practices, and the risks they pose, are far from new.
One way of thinking about finance is to imagine it as an endless web of information assembly lines. Every transaction starts as a signal: some person wants to buy some thing. This is the raw material of demand. That material must, in turn, eventually make its way to whomever is in a position to supply. Sometimes this is easy. When you buy mangos at a farmers market, for example, you have direct communication with the supplier, handing over cash with one hand while receiving mangos with the other. But such direct interaction is rare. For most transactions, buyer demand must first travel along informational conveyor belts, where intermediaries shape, mold, and redirect that raw material before it reaches suppliers.
Take residential real estate. If a couple wants to purchase a beachfront bungalow in Santa Barbara, they probably aren’t going to just show up at the front door with a duffle-bag full of cash. That would be weird. Rather, they are much more likely to express their demand through a realtor. This information then makes its way down the assembly line, where it passes through a series of intermediaries: the seller’s realtor, title company, mortgage advisor, attorney, and, finally, the bank.
But buyers and sellers are not the only ones interested in this process. There is also the inquisitive eye of the state. Every stage of the information assembly line contains clues — about unpaid taxes, money laundering, terrorist financing, and all sorts of other shenanigans. The state would love to patrol every assembly line looking for these clues, like a mustached inspector peering over the shoulder of nervous factory workers.1 But this is expensive. And many of us would prefer that our information is assembled by intermediaries in private.
The state’s solution to this problem has been to outsource surveillance. It requires that certain intermediaries on the information assembly line look for signs of suspicion and report those suspicions to regulators. These are what is referred to as Anti-Money Laundering, or AML, obligations. At the risk of abusing the analogy, intermediaries with AML obligations are like factory produce inspectors. They spend all day staring at fruit as it travels across the conveyor belt, sorting out the rotten apples and tossing them into separate bins.
But what if, somewhere along the production line, the informational conveyor belt just…disappears? The Financial Times has reported that Chinese crime syndicates are capable of performing such sorcery.2 These syndicates, the FT writes, are using a “new” network to launder the proceeds of fentanyl sales, one that “…minimizes the movement of funds across borders.” The money simply disappears in one place and reappears in another, as if governed by quantum physics. But this is not magic. Nor is it new. It is instead an alternative conveyor belt of information, one that has operated outside the confines of the state for over a thousand years. And it goes by a simple yet ominous name: underground banking.
Six Feet Under
Imagine, for a moment, that you are a textile merchant somewhere along the 6,000 kilometer stretch of the ancient Silk Road. Every business has risks. But your risks are a bit more extreme. Large stretches of your trade routes are located in harsh desert climates where water is sparse. Nor is there any guarantee of security. Nomadic raiders could strike your caravans at any moment. And, even if you survive the trip, you could arrive to your destination only to find that it has been sacked by Attila the Hun (or, later, the roaming armies of Genghis Khan).3
The last thing you want to do, in such a dangerous environment, is carry cash on you. Credit cards would be a great alternative. “No!” you might explain to Chase customer service after having your card stolen by Hun raiders, “I definitely did not order horse archers.”....
....MUCH MORE
