Baker Institute paper looks at electronic money trail
New report details ‘murky world’ of illicit financial transactions

BY FRANZ BROTZEN
Rice News staff

A dramatic growth in technologies, combined with older methods of money transfers, has helped create new opportunities for criminals to cover their financial tracks. A new report by the James A. Baker III Institute for Public Policy and the Brookings Institution Center for Technology Innovation details the latest trends in the illicit movement of money around the world and proposes several ways to curtail it.

	CHRISTOPHER BRONK

“The combination of the enormous growth in social networks, the complexity of peer-to-peer systems and software and the number of Internet and wirelessly connected devices is altering the landscape of financial transactions at a rate and to a degree that is unprecedented,” wrote Christopher Bronk, fellow in information technology policy at the Baker Institute and one of the report’s co-authors.

“Shadowy Figures: Tracking Illicit Financial Transactions in the Murky World of Digital Currencies, Peer-to-peer Networks and Mobile Device Payments” was also co-authored by John Villasenor, nonresident senior fellow at the Brookings Institution in governance studies and the Center for Technology Innovation, and Cody Monk, instructor/lecturer at the National Intelligence University and the Naval Postgraduate School.

“Almost no one would argue that governments do not have a right to track and trace digital financial transactions associated with activities such as terrorism and human trafficking,” the authors wrote. “It is less clear, however, how governments can surmount the formidable technical and organizational challenges associated with detecting and monitoring these transactions.”

They suggested that any solution “will require a combination of self-regulation, government-industry collaboration and change in both technology and culture within government agencies.”

While cybercriminals have taken advantage of new technologies, the authorities also have improved their capability to detect them. But the sheer amount of digital information can thwart the efforts of law enforcement and others trying to deter illegal financial transactions. “While every digital transaction may in theory be available to find, tracing a specific suspect transaction that is intentionally buried ‘in the noise’ can be like trying to find a pickpocket who just stole a wallet in a crowded market,” Bronk wrote. “The knowledge that the pickpocket is certainly among the hundreds of people within view is of little comfort if there is no practical ability to search every person in the market.”

The report suggests purely technological solutions will not be enough to overcome such obstacles. It calls for organizational changes that would include regulatory, intelligence and law enforcement agencies, as well as the private sector.

But rather than a top-down approach in which government imposes a series of regulations, the Baker Institute report urges “collaborative self-regulation with input from government.” Additionally, U.S. authorities could “establish an interagency government/industry working group or expand the charter of an existing group to focus specifically on emerging financial threats.” The report cites such examples as the FBI’s Business Alliance and Academic Alliance partnerships as well as an initiative announced in 2010 by the National Institute of Standards and Technology, the Science and Technology Directorate of the Department of Homeland Security and the Financial Services Sector Coordinating Council aimed at improving cybersecurity for financial services.

Bronk and his co-authors noted that “any discussion of acquiring and sharing information aimed at combating illicit financial activity conducted using new technologies will involve the issue of privacy rights.” They conceded there are no easy answers on balancing those rights with the government’s desire to gather and analyze personal data. “However,” they wrote, “those involved in developing solutions to the challenges posed by illicit financial transactions can assist the legislative process by explaining the types of information available under different monitoring models and the extent and manner to which that information could possibly be tied to specific transactions or individuals. While this will not eliminate the existence of highly divergent views on privacy, it will at least help ensure that decisions regarding what solutions to implement are made with an informed understanding of their privacy implications.”

Any effort to keep tabs on financial transactions will quickly become obsolete if it is not adaptable, the authors warned. A combination of technology, regulatory frameworks and collaboration between government and the private sector “that reflect today’s more fluid and diverse financial transaction environment, government and industry will be better positioned to address illicit transactions today and to adapt to address those of the future.”

The report was published by the Baker Institute and can be viewed in its entirety at http://bakerinstitute.org/publications.

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