As Ecuador rolls out a cellphone-based digital currency in the coming months, a potential boon for 40 percent of the population without bank accounts, questions remain as to whether it has enough protections to prevent criminals using it to launder money.
Touted as an electronic form of the dollar, the Central Bank of Ecuador (BCE) created the Electronic Money System, a centralized virtual currency intended to widen access to financial services -- around 40 percent of economically active Ecuadorans don’t have bank accounts. To get the digital cash, users have to go to a transaction station, show ID, and physically trade in their US dollars, which can then be sent via mobile phone to other people and businesses.
Since signup began in December, the BCE has registered over 11,000 accounts, which are limited to Ecuadoran citizens and tied to their national ID numbers. Although adoption remains low (they want 500,000 users by the end of 2015), new services are coming online, and by mid-2015 the Central Bank says users will be able to pay utility bills, taxes, and credit card bills from their mobile phones.
Early worries the system could be used to launder money prompted the government to announce transactions would be limited to $2000 per month and $300 per day for individual users (companies would have higher limits), according to El Comercio. “We have a whole department that will be dedicated to monitoring [unusual transactions]. It will be very easy to track electronic money in this system,” said Faustio Valencia, who oversees the program for the Central Bank, in October.
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In a conversation with InSight Crime, former Deputy Finance Minister Luis Mejia Montesdeoca expressed a more cautious view. Even though Ecuador has made efforts to comply with international anti-money laundering standards, according to Mejia, “it is too early to tell if [the electronic money system] will have a positive effect in the fight against money laundering. We cannot know.”
Many citizens remain skeptical of the project, although far more are unaware of it, the Guardian reported. Misinformation about the system abounds, like speculation Ecuador is trying to supplant the US dollar as its national currency, which analysts say is a possibility but the government vehemently denies (pdf).
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Whether or not the system will be used for criminal activity remains to be seen, but it certainly may avoid pitfalls seen in other digital currency schemes, like the virtual SUCRE or Bitcoin. Money launderers have used the SUCRE (the Spanish acronym for Unified System for Regional Compensation), a digital currency created by countries in the Bolivarian Alliance for the Americas (ALBA) to ease trade. And Bitcoin, a decentralized internet currency in which participants use cryptography to create new coins and verify transactions, has seen rampant and highly publicized illegal use.
According to a report by the Financial Action Task Force (pdf), virtual currencies are vulnerable to money laundering because they allow users to make transactions anonymously. Other weaknesses include a lack of clarity regarding anti-money laundering compliance and no central oversight, the report noted.
But centralization is no clear path to success when it comes to avoiding illegal transactions. Only the central banks of ALBA nations can use the SUCRE, not individuals. Still, five percent of SUCRE transactions were deemed suspicious in 2013.
When an importer in Venezuela wants to buy a product using bolivars from an exporter in Ecuador, Venezuela’s central bank converts the domestic currency into sucres and sends them Ecuador’s central bank, where the exporter is paid in US dollars. Financial statements from the BCE (pdf) show Ecuador received $431 million in sucres in 2014, the vast majority from Venezuela.
The trouble arises when sham companies use a money-laundering tactic called trade misinvoicing. According to the Wall Street Journal, one company in Ecuador exported calcium carbonate for $1000 a kilogram, notable due to the fact calcium carbonate only costs 17 cents a kilogram. The company can then claim the extra $999.83 as legitimate income.
While Ecuador’s new system has no clear ban on international transactions, the fact that users have to be citizens, and sending and receiving money requires Ecuadoran cell service, effectively eliminates the possibility of international illegal digital cash flows.
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Bitcoin, which is often compared to Ecuador’s electronic money system, is widely used to buy drugs from online internet marketplaces. Silk Road, the first and biggest such marketplace, was taken down in 2013 and the FBI seized a bitcoin haul to the tune of $33.6 million. The currency has also come under fire for money laundering concerns -- in April 2014 one Bitcoin entrepreneur was convicted for facilitating $1 million in illegal payments.
In its informational material, the BCE has tried to distance its e-cash from crypto currencies like Bitcoin and emphasizes the electronic money system is not anonymous. And unlike Bitcoin, which can be untraceable if used properly, Ecuador will be able to track every transaction made in the system, which has also led to privacy concerns. One expert told the Guardian the system “has the potential to be a surveillance programme.”
Money laundering in Ecuador is a serious problem given its dollarized economy. Large amounts of physical cash leave the country illegally, and according to a Global Financial Integrity report, Ecuador registered $1.9 billion in illicit financial outflows in 2012. The Economist Intelligence Unit showed Venezuelan groups create fake companies in Ecuador, declare non-existent exports, and then bring US dollars into the dollar starved Venezuelan market -- where they are worth far more on the black market.
The electronic money system can’t resolve these problems -- it is not a tool to prevent other forms of money laundering -- but its design may reduce illegal use.