from the St Louis Fed
— this post authored by Charles Kahn, Research Fellow
A new pact for combatting robocalls was announced this year involving attorneys general from all 50 states and large telecommunications companies, such as AT&T, Verizon, and T-Mobile.[ 1] It will probably work just about as well as the attempts to combat money laundering and for pretty much the same reasons.
How Cash and Internet Phone Calls Are Similar
Just like a dollar bill, a phone call is liquid. The dollar bill is designed to pass easily from one hand to the next, enabling multiple transactions with a minimum of fuss. The network of telecommunications via the internet is similarly designed for a call to pass easily from one service provider to another to get to its ultimate destination.
In each case, the lack of fuss equates to a lack of record-keeping by those doing the transmitting:
- Unlike an endorsed check in the old days, a dollar bill does not contain within itself the record of the history of transmission.
- Similarly, the packet of data containing the snippet of the call does not provide in its most basic form an accurate history of its travels.
In each case, these histories and data can be added, at the cost of speed and flexibility. But the ease of transmission also means that these histories can be spoofed.
Heading Off Money Laundering
The siren call of anti-money laundering regulation involves the idea of a chokepoint at the final step in the transmission of illegally gained funds. This is the point where the funds re-enter the well-regulated mainstream of the payments system – bank accounts in particular. The idea is that illegal profits can be trapped by inspecting each transmission in a regulated account to assure the provenance of the funds.
The problem is that not only does the immediate source need to be checked, but also the source of the source, and the source of that source and so forth. The cost of the inspection grows exponentially. The cost to the money launderers of adding an extra layer grows linearly.
Heading Off Robocalls
So with the anti-robocall initiative. Signing up the big telecom companies makes sense: Their customers are the victims. These companies have to make sure that the packets received for their customers are good.
But they receive packets from small telecom operators, and the source of profits from these operators are largely the transmission of robocall packets. Regulators can force these companies to do a better job of inspection. But that simply adds another layer to the process for the robocallers. The next-to-last round becomes marginally less dodgy, but the companies they receive from are not subject to the same standards, at least until the next iteration of tightening comes. Then, those monitored have to become monitors in turn. We’ve seen precisely this process in the anti-money laundering world.
What’s Next?
What is the end of the cycle? In payments services, a closed system is an impossible goal. Even if all the money stays in a bank and all the account holders are screened, there is no practical way of assuring that payment between two of them is not compensation for illegal activity. In that case, the ultimate difficulty comes from the joint desire of the two parties to the transaction to avoid detection.
In the case of a robocall, the situation is not quite as bad: The ultimate recipient is happy to complain about receiving the call. So if the system is closed, it can be self-disciplining at a cost of the loss of liquidity: It would be impossible to receive calls from anyone outside the system. (Not that the large telecom companies will mind the boost to their market power.)
Notes and References
1 Tracy, Ryan. “Large Telecoms, State Enforcers Make Pact to Combat Robocalls.” Wall Street Journal, Aug. 22, 2019.
Additional Resources
- Review: The Case for Central Bank Electronic Money and the Non-case for Central Bank Cryptocurrencies
- Review: Payment Systems and Privacy
Source
https://www.stlouisfed.org/on-the-economy/2020/january/robocalls-money-laundering-common
DisclaViews expressed are not necessarily those of the Federal Reserve Bank of St. Louis or of the Federal Reserve System.mer
