Politically, who is actually blocking getting rid of, for instance, $100 bills? Would it be central banks and the Treasury protecting seigniorage, or is it simple inertia, or is it, I don't know, maybe tax-avoidant industries — the powerful nail salon and, I don't know, psychic readers in New York lobby or something like that?
I mean, I think broadly speaking, this doesn't come up. You know, the system from the perspective of the European Central Bank or the Fed or the Bank of England or the Bank of Canada — the system is working fine. There's lots and lots of demand for their products. Why would you want to get rid of them? You know, if you look at it more broadly and you work out that essentially the products are enabling crime on a geopolitical scale, then you would say, well, actually, the harm that's being caused far outweighs the profits that's coming from the securities. We should do something about this. But, you know, essentially these are different bits of government and they don't necessarily talk to each other. I mean, there have been occasions in the past when governments have got rid of big bills to try and reduce criminality or terrorism. After the attacks on Paris in 2016, the Europeans announced that they weren't going to produce. They used to have a €500 bill, which was referred to colloquially as the Bin Laden because everyone had heard of it, but no one had seen it. And by the time one of your banknotes has been called the Bin Laden, you know that you are in a degree of trouble. That's not a good nickname. So that's the first hint.
Hello, and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway and I'm Joe Weisenthal. Joe, everything I know about cash came from that tour we took of the Chicago Fed's cash facility with its president, Austan Goolsbee. That was really fun. I'm trying to think, what do you remember?
I remember just seeing lots and lots of cash. I remember appreciating the security, the smell of the cash. It has a very idiosyncratic smell. I remember the color of the cash, which you don't really notice — all the different shades of dollar bills — until you see them stacked up.
Right. We just think of them as green.
Yeah, it's like pink, but they're shades.
Yeah. So 50 shades of green. And then one thing that I remember is Austan actually telling us that 85% of the $2.4 trillion in circulation happens to be $100 bills. Do you remember that?
Yeah. And this is one of those sort of like facts about the world that people seem to know, but don't really think through to. It just sort of comes up every once in a while. This phenomenon that, you know, by and large, like two things I think people may know about the cash economy, which is by and large, people use less and less cash in their daily lives. That fact seems to have actually had no effect on the amount of cash in circulation, right? It keeps growing. And then quite a bit of that cash in circulation is in relatively high denomination bills that are even used less than, say, the five to the twenty.
Yeah, I don't know about you, but I do not walk around with a lot of hundred dollar bills in my pocket.
No. And on the rare occasions when I do go to a cash machine, I always choose 20 or even five.
Right? So the question is, what are people doing with all these hundred dollar bills? Right. And when we talked about it with Austan, he described it as a disconnect between the stats and the daily use of cash of most Americans. But I think there's kind of an obvious answer here. Right? What are people doing on their bills?
Yeah, I can tell you the last time I walked around with a significant stack of hundred dollar bills. Okay, I was playing in a poker game in New York City, and it was not a regulated poker game. And I didn't lose all my money that night. And so I walked home with a lot of hundred dollar bills.
So maybe that is a sort of some good humble bragging, Joe, about winning at poker.
I didn't win, I said I didn't lose all my money back, but maybe that's sort of a clue about the types of activities that might lend themselves to high denomination individual bills.
Yeah. So this episode is perhaps poker adjacent. We're going to be talking about money laundering, which we've never done — an episode specifically devoted to money laundering. And it is, in fact, like a huge business. It appears some of the numbers you read about them and they're like staggering. And I almost like don't believe some of the numbers. But when you figure out it's like, okay, drugs are probably a big deal, fraud is probably a big deal, crime is a big deal. People are trying to get their money out of countries that have very sort of rigid capital controls. China being an obvious example, you could see how it adds up.
Yeah, absolutely. And of course, money laundering is kind of the thing that makes a lot of crime possible, right? Like a lot of people wouldn't be in the crime business if they couldn't actually use the money they're generating from it. And money laundering is the way they're able to do that. So I think it's a worthy subject to dive into. I really want to learn more about how it all works.
All right, let's do it. We do, in fact, have the perfect guest. We're going to be speaking with Oliver Bullough. He is a journalist and author of Everybody Loves Our Dollars. So Oliver, thanks so much for coming on Odd Lots.
Thanks for having me on the show. I'm really pleased to be here.
Talk to us about the scale of money laundering, because you sometimes hear these statistics thrown out, like bigger than the entire GDP of Germany. Certainly bigger than a lot of big tech companies and things like that. How large are we talking about here?
Well, I mean, it's worth saying in advance that obviously no one really knows — the criminals are not filing accurate tax returns. You know, so there's a lot of supposition going on here. But the most widely used estimate is that we're talking about between 2 and 5% of global GDP. And since global GDP is approximately $100 trillion, that means, you know, between 2 and $5 trillion being laundered globally. And, you know, that's a pretty decent amount of money. You could build quite a lot of data centers with that. And that's growing all the time.
You know, I like how we measure everything in data centers now. How many data centers can you build?
Yeah, I mean, I don't know if the criminals are building a lot of data centers. I mean, they are choosing almost any avenue they can find to launder their money. So perhaps that's the new thing. But, you know, the old things are still very much current. I mean, we were talking about obviously cash money earlier, and although we like to focus on shiny things, crypto for laundering money, I mean, criminals are pretty traditional in the ways they move their cash. So we are often talking about literal banknotes.
Do you have a sense of how that 2 to 5% number is derived? Because yes, we've seen that steady, etc., but also, as you said, no one is filing these things in any sort of official manner because it's a lot of money. Do you have a sense of like how people — why people think it's in that ballpark?
Yeah, I mean, that's a really good question, actually. It derives from an estimate given by Michel Camdessus, who was the head of the International Monetary Fund back in the late 90s, a French central banker. And he came up with this idea in the late 90s that it was between 2 and 5% of global GDP, which was based on a couple of economists' work at the time trying to work out the size of the global economy. And it was very much a guesstimate at the time. Yeah. And it's been attacked from lots of different directions, you know, trying to work it out in a sort of macro way, looking at it in a micro way, trying to work at various guesses. And people do keep coming back to this kind of a range. You know, so the estimate that tends to be given is, yeah, 2 to 5%. It's the same estimate that was given in the late 90s, which is — it's a kind of uncomfortable truth hidden in that estimate, which is that if the scale or the share of the global economy that is criminal is the same now as it was in the 1990s, it means that everything we've done to try and tackle money laundering, which has been an awful lot since the late 90s, has essentially failed to do anything except perhaps prevent the criminal economy from getting bigger. You know, criminals have been able to outmaneuver regulators and law enforcement agencies and governments' attempts to limit them, you know, by sort of ceaseless entrepreneurial nature. You know, ever since there have been attempts to stop them from laundering money. And, you know, the fact that their share of the global economy just grows alongside the global economy is proof of that.
The fact that it's growing in tandem with like broader economic growth.
So, okay, what's going on with our efforts to actually tackle money laundering? Because I used to cover the banking industry. And one thing you would hear from banks all the time is how onerous, you know, KYC regulation — no, your customer regulation — was, how terrible it was that they had to file thousands and thousands of like suspicious activity reports, lots and lots of complaints about everything they're doing to stamp out suspicious or illegal activity. But at the same time, per your commentary, it doesn't seem like it's actually been effective.
Yeah. I mean, you know, it's obviously easy to dismiss what banks say as special pleading, but actually they do have a point. We have an incredibly intrusive and onerous system put in place to try and stop money laundering and terrorist financing, which was — I mean, it was created — the first AML legislation, this sort of rather weirdly named Bank Secrecy Act, was passed back in 1970 in the US. And then it spread globally when, you know, it became clear that one country couldn't fight money laundering on its own because it was pretty easy to just fly your banknotes to the Bahamas, Cayman Islands or Panama. And then so it's pretty important to have that cooperation. And then everyone had to cooperate. So we ended up from the late 80s, thanks to an institution called the Financial Action Task Force, with a kind of global approach to tackling money laundering, which has become, yeah, incredibly intrusive, incredibly expensive. I mean, the estimates from LexisNexis is that global compliance with AML legislation costs something like $200 billion a year, which is a lot of money. I mean, if you look at what you could do with that money, if you weren't using it for this, that would be enough to solve world hunger and to provide clean water and sanitation to everyone on Earth, with about 50 billion left over. So it's a huge amount of money which is being spent on this issue, and a lot of that money is being spent by banks who are expected to, you know, to check transactions, to do — I mean, to use ever more elaborate AI-powered compliance software, which they are, you know, doing — they are attempting to do the job being asked of them. They face very large fines if they don't do that job. So it's fairly easy to see why they're doing it, but it's not working. The system that we have is incredibly laborious, very bureaucratic. It generates, as you say, you know, millions upon millions of suspicious activity reports every year, but it is signally failing to stop the money launderers who are always at least one step ahead.
So obviously, we really want to get into the details of the creative ways that criminals and so forth move money across borders. But just to sort of set the scene a little bit. We started this conversation by talking about how much cash there is in circulation and the prevalence of high denomination bills. We're also talking about all the suspicious sort of incident reports that banks file. Big picture, I sort of have two questions. One is what is the general sense of the distribution? How much is this happening via cash and the bearer instruments that are hard to track, and how much — you know, we see the headline from time to time, a bank will get into really big trouble. HSBC got into trouble years ago. How much do we think is happening sort of inside regulated financial institutions? They didn't identify the illegal movement of money.
Yeah. I mean, obviously it is happening via regulated financial institutions. We know this because occasionally they get caught. Yeah. Whether that's Danske Bank or Deutsche Bank, HSBC, whoever. But if you look at the scale of global cash smuggling and you compare that to the amounts that, even in these gigantic money laundering scams, which are, you know, accused of going through regulated financial institutions, it's just an absolutely different league. I mean, what Danske Bank was accused of moving — rightly — about $130 billion over several years for suspicious Russian clients. You know, global cash smuggling is certainly in the hundreds of billions annually. You know, cash is a hugely significant tool for moving illicit wealth around the world. And even that is dwarfed by what we refer to as trade-based money laundering. I mean, it is essentially a way of moving value around the world, not in the form of money at all, but in the form of stuff. If you are moving value out of China, it's far easier to do it in the form of, you know, it's actually misinvoicing a shipment of manufactured goods or knockoff designer clothes or whatever than it is to move it in the form of money at all. So, you know, there is a focus on the regulated sector, banks in particular, when we talk about money laundering, for obvious reasons, because, you know, that it's sort of easy to look in a spreadsheet and see value moving around, but actually it's a far bigger deal. If you look at how money is moved in the form of cash and how money is moved in the form of stuff, and you know, that form of money laundering, trade-based money laundering, is almost impossible to estimate. So, I mean, there is an institution in Washington, Global Financial Integrity, that estimates that about $1 trillion a year is moved via trade-based money laundering. You know, we're talking about amounts of money being laundered outside the financial system that completely dwarfs what's happening within the financial system.
