Virtual currencies and an increase in electronic banking are making it harder for governments to trace illicit financial transactions, warns a paper published Aug. 29 by the Brookings Institute.

The paper, authored by John Villasenor and Christopher Bronk, both of Brookings, and Cody Monk, of the National intelligence University and Naval Postgraduate School, surveys recent Internet- and mobile technology-led changes in the financial world. It is far from clear "how governments can surmount the formidable technical and organizational challenges associated with detecting and monitoring these transactions," the paper says.

Among the developments the paper cites is Bitcoin, a fully virtual currency "backed only by the confidence of the people who use it for transactions." One Bitcoin, as of late July, was worth $13; its users are kept hidden behind public-private key encryption pairs. Bitcoin is supported by a peer-to-peer network that keeps a record of every transaction in every connected server, a vulnerability that almost certainly will disappear in the future in favor of a system that distributes transaction information so that no single server or small collection of servers have a complete transaction record, the paper says.

It's also possible that a replacement system might not only distribute transaction records, but store them temporarily, "so that even the collective information stored on all the servers in the system at any given time would not enable a complete reconstruction of transaction history."

The rise of mobile money transfers on mobile devices--a phenomenon of particular note in the developing world--also poses a challenge, the report says. A service in Kenya allows users to convert money into an "e-float" loaded onto mobile devices that can be used to transfer money.

"With the spread of [mobile money transfers], the network of devices available for possible use in illicit financial transactions includes not only every Internet-connected laptop computer, but almost every mobile telephone as well," it says.

The sheer volume of electronic financial transactions can also lead to financial opacity. A transfer of $900,000 in 100 transactions of $9,000 might be easy to spot, the paper says, but a transfer of the same amount using 100,000 transactions in randomized amounts "generally in the $6 to $15 range," would be much harder to spot.  

The federal government, the paper says, should investigate information processing methods that can appropriately detect and trace illicit transactions, such as a way to anonymize customer data to allow for analysis.

For more:
- download the paper, "Shadowy Figures: Tracking Illicit Financial Transactions" (.pdf)

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