Analysis

The Best Article on Money-Laundering You Will Ever Read

This article is republished with permission from the Bitmex Blog.

Arthur Hayes is co-founder of Bitmex, the largest bitcoin futures exchange on the planet (based in Hong Kong).Mr. Hayes and his research team put out some of the best articles on cryptocurrency that you can read anywhere.
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Money Launderers Use Property, not Bitcoin

By Arthur Hayes

For some, crypto-coins have a bad reputation: “it facilitates money laundering” is a common belief.

Enlightened Hodlers retort that Bitcoin is a terrible way to launder money: it has a public ledger and relative illiquidity vs. the USD.

While USD is the preferred method of account, which USD assets do money launderers favour?

Pro-Tip: It ain’t Bitcoin.

In these modern times, washing $1 million of crisp cocaine-tainted Benjamins is no easy feat.

If you walk up to a teller and attempt to deposit into a bank, they most likely will turn you away or call the police. You could call Saul in New York’s diamond district and attempt to wash it through precious stones; but, fencing those diamonds at close to par will prove difficult.

Governments always want more money parked in their jurisdictions.

However, sometimes they have to play the coy mistress and profess their desire to stop terrorist financing (except for the Saudis).

Below I will show that the property market is the preferred washing machine for the world’s unclean cash.

I will take a look at the real estate purchase and holding disclosures in Hong Kong, where China launders its money, and the United States where the world launders its money.

I will look at both through the lens of the Common Reporting Standard (CRS). We will step into the shoes of our average USD millionaire Zhou from China. How would he clean his cash, and keep the eye Xi from knowing where his loot is?

Chinese people are under no illusion about the rapacious nature of their government.

While many have benefited handsomely over the past 30 years, one wrong political misstep could send them back to the countryside penniless.

The complete lack of freedom means that Beijing, if it wants to, can completely bankrupt you on a whim with no due process.

America, the home of the free, decided that it needed to know where all the financial assets of its tax donkeys globally reside.

They required any financial institution to report on the assets of any American. China and many other countries also thought this was a great idea. Hence, the Common Reporting Standard was born. The CRS allows member countries to share financial data between themselves.

Under the CRS, China can call up Hong Kong and request information on any Chinese national.

There were two very interesting developments in the history of the CRS:
  1. America failed to ratify the CRS. Which means, for example, that America is not obliged to share financial data on Chinese people with assets in America with China. Things that make you go ‘Hmmmm…’ for $200, Alex – America wants all countries to follow FACTA and inform on Americans, but it won’t return the favour. I wonder where all those assets held by non-Americans will end up?
  2. Hong Kong exempted property from the assets deemed reportable.

As this SCMP article notes, Chinese people rushed to convert bank deposits into property. Property is one of the best generators of economic activity.

Many jobs are created on the back of a property boom. From a policy perspective, anything a government can do to encourage an increase in the property stock will make it look like it knows how to run a successful economy.

That’s the date the country falls in line with the Common Reporting Standards, or CRS – a Foreign Account Tax Compliance Act (FATCA)-type regime developed in response to a G20 request, aimed at combating cross-border tax evasion and protecting the integrity of the international tax system. The Chinese government pledged to join in with CRS in 2014.

Details on financial assets held by foreign individuals within mainland China will also start being collected.

The agreement means information will be exchanged with tax authorities in 100 countries and regions from next year, including Hong Kong.

The city has been considered a tax haven for many mainland investors, as there is no capital gains tax levied here. But now they are being forced to convert those financial investments into property, prior to the July deadline to avoid declaring any financial assets held abroad, to the Chinese authorities.

When it comes to the US, the National Association of Realtors is hell-bent on property purchases being exempt from KYC / AML regulations. FinCEN recognised that property became a blatant cash washing machine in certain hot markets, and imposed some disclosure requirements in August 2017.

Set to expire on February 23, 2017, FinCEN discovered that a significant portion of the reported covered transactions in the latest GTOs were linked to possible criminal activity by the individuals revealed to be the beneficial owners of the shell company purchasers.

As a result, FinCEN is extending the current GTOs for an additional 180 days, until August 22, 2017, and may consider permanent data collection requirements later this year for more cities.

The GTOs require certain title companies to identify natural persons with a 25 percent or greater ownership interest in a legal entity purchasing residential real property without a bank loan or similar external financing in the following geographic areas meeting specific transaction thresholds:

$500k and above – Bexar County, Texas

$1m and above – Miami-Dade, Broward, and Palm Beach Counties, Florida

$1.5m and above – New York City Boroughs of Brooklyn, Queens, Bronx, and Staten Island

$2m and above – San Diego, Los Angeles, San Francisco, San Mateo, and Santa Clara Counties, California

$3m and above – New York City Borough of Manhattan

This is a step in the right direction to fight those evil money launders at the very high end of the market, but for your average Zhou with a few million big ones to stash, it is still business as usual.

America remains the favoured place to stash cash away from Beijing’s prying eyes, or, indeed, those of any other government bent on stemming capital flight.

As long as someone stays below those investment limits, he or she can expect to have little difficulty obtaining a clean bank account and making a property purchase with cash.

Let’s Try With Bitcoin
It is clearly easy to wash and hide a few million USD in the liquid property markets of Hong Kong and America. What about using the favourite monetary boogeyman, Bitcoin?
Assume you want to move $1 million in cash into Bitcoin.
There are two options: either you can open an account on an exchange, or trade over-the-counter (OTC) with a dealer.
Any exchange that can handle this sort of volume has a serious banking relationship. Their bank will require extensive KYC / AML checks on all accounts. If the purpose is to hide the flow of funds, this is suboptimal.
Presented with a subpoena, the exchange will be obligated to present the customer details.
If you can’t use an exchange, perhaps an OTC dealer would trade with you. Unfortunately the large dealers also must follow KYC / AML regulations.
They again have banking relationships to maintain.
The major liquidity sources are exchanges and compliant OTC dealers. There are dealers who will onboard a client without KYC checks; however, their spread vs. the market will be extremely aggressive. A 20%+ vig to clean your money, assuming they can handle your size, is to be expected.

Washing money through the crypto capital markets is very difficult if you are unwilling to provide KYC information.

Property is much easier, and vested interests from the government to the real estate brokers want you involved. They will do all they can to alleviate KYC / AML reporting requirements.

Satoshi ain’t the biggest illegal finance enabler: no, it’s Uncle Sam.

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