Ican’t​ remember the last time I used cash. My bank statements show that I haven’t made a withdrawal from a cashpoint in the last twelve months. That’s just as well, since it’s significantly more of an effort to get hold of cash than it used to be. Before the pandemic, there were seven cashpoints within a five-minute walk from my house. All of them have now gone: the four attached to banks disappeared when the branches closed, the two in supermarkets were removed, the random one outside a building that used to be a bank but is now a bar has also vanished. Nerds like to say that the plural of anecdote is not data, but in this case, it kind of is, since the general decline in the use of cash is a marked phenomenon across the developed world, and especially in the UK. According to UK Finance, the sector’s trade association, in 2009 cash was used in 58 per cent of all transactions. The figure today is 9 per cent.

Since fewer and fewer people are using banknotes, it follows logically that fewer banknotes are needed, and therefore that fewer banknotes are being printed and put into circulation. Right? Wrong. In the UK, there is £1300 cash in circulation for every single one of us, but the amount of cash we actually hold is one seventh of that figure. The value of banknotes in circulation has been rising sharply for decades, and not just in the UK. In 2005, the total value of all the dollar bills in circulation was $759 billion. By 2015, it was $1.38 trillion. Last year, it hit $2.395 trillion. As Kenneth Rogoff put it in The Curse of Cash (2016), the dumbfounding thing is that ‘no one quite knows where exactly most of it lives or what it is used for.’ According to Oliver Bullough, in his alarming and unsettling book Everybody Loves Our Dollars, in 2022 the average American held $418 in cash, but there was $7357 of cash in circulation for every American man, woman and child. That means that a typical household of four represents $27,756 of missing cash, 80 per cent of which is in the form of the highest denomination US banknote, the $100 bill. That is a hell of a lot of $100 notes unaccounted for, especially when you bear in mind how seldom most people use, or even see, a $100 bill. There are 1.552 trillion euros in circulation, half of it again in the highest denomination banknotes, €100, €200 and €500. (The €500 bill ceased printing in 2019, but is still legal tender. Its nickname gives a clue to its main use: it’s called the ‘bin Laden’.) In Switzerland, 90 per cent of the value of outstanding cash resides in ludicrously valuable CHF 1000 banknotes – a single note is worth £943, or $1285.

So where is all that cash, who’s using it, and for what? The answer proposed by Bullough is bizarre: nobody knows. ‘The number of banknotes is increasing, and the question of why the value of banknotes has increased so markedly remains unanswered.’ Central bankers don’t have much interest in the question. It is immensely valuable for any country to be able to produce currency that’s in worldwide demand: for the cost of printing a few bits of paper, a developed economy receives billions of dollars of value in pounds, dollars or euros. This is called seigniorage, and central bankers are as keen as anyone else on what is in effect free money. But the incuriosity they’ve developed around the question is remarkable. Especially when you home in on what all that cash is actually being used for. According to the Financial Action Task Force, which was set up in 1989 to fight financial crime at a global level, ‘it does not seem unreasonable to suggest that the total amount of cash physically transported for money laundering purposes globally is in the order of hundreds of billions of dollars.’ This seems to be the amazing answer to the question of the missing cash: it’s being used in criminal transactions.

This theme – something not fully understood is going on at a massive scale right under the noses of governments – is dominant in Everybody Loves Our Dollars and in How to Launder Money by George Cottrell and Lawrence Burke Files. Bullough is a star investigative journalist with a long track record in writing about illicit financial flows. Cottrell and Files are also expert witnesses, though they’re an unlikely pairing. Files is an American financial investigator and specialist in due diligence, a veteran in the field – his name comes up in Bullough’s book. Cottrell is a young British man, born in 1993, with an aromatic CV. He was brought up on the toff-infested Caribbean hellhole of Mustique, sent to and then expelled from boarding school in England, supposedly worked in banking for a while, became deputy treasurer of Nigel Farage’s Ukip in 2015, was arrested by IRS agents at Chicago O’Hare in 2016 and charged with 21 counts of money laundering, pleaded guilty to one of them, did eight months’ federal time, went to work for the Brexit Party and currently lives in Montenegro, though he’s still often seen with Farage. He owns a company called Geostrategy, whose website has the unimprovable tagline ‘Reputation is built brick by brick.’ How to Launder Money is no masterpiece, but it is full of good stories and juicy details, and together with the vastly superior Everybody Loves Our Dollars helps us, if not to understand what’s going on (nobody does, apart from the money launderers themselves), at least to begin to understand the known unknowns.

The first of these is how much money laundering takes place. Bullough quotes Jason Sharman, a professor at Cambridge, whose estimate is ‘squillions’. That is an accurate summary of the current state of knowledge. An informed guess, from Michel Camdessus, the longest-serving head of the International Monetary Fund, is that it is somewhere between 2 and 5 per cent of global GDP. The lower figure puts criminal activity at $2 trillion, or the same size as the Russian economy. The higher puts it at $5 trillion, or the same size as the German economy, the third largest in the world. (Cottrell and Files use the higher number.) If it were an industry, money laundering would be the third biggest business in the world, behind commercial property and ahead of pensions.

How did we end up knowing so little about something so big? The answer can be found in the history of the Financial Action Task Force, founded at the G7 summit in 1989. The FATF is the proverbial 800-pound gorilla of anti-money laundering – or AML – activities. You may think that’s already too many acronyms, but brace yourself, because the AML focus of the FATF has led to the regulatory measures KYC (know your customer), SAR (suspicious activity reports), CTR (currency transaction reports), PEP (politically exposed person) and many more. If this sounds bureaucratic and process-based to the point of tragicomedy, that’s because it is. The sheer extent of the legal apparatus, juxtaposed with the sheer extent of the world’s third biggest business, represents failure on a colossal scale. Rich countries, trying to cut down on illicit flows of finance, have focused their energies on the one thing they can see and control: transfers and transactions inside the official financial system. Bullough comes up with an excellent metaphor for this: the FATF is like a drunk looking for his lost keys under a streetlight, not because that’s where he lost them, but because it’s the only place where he can see.

The problem is that most money laundering doesn’t take place under the streetlight. It doesn’t take the form of visible transfers within the official system. A caveat about what we know: money laundering is a little like drug cheating in sport, where the current state of legal enforcement always lags behind the current state of malfeasance. We don’t know what successful money launderers are doing in the present moment. All we do know is what unsuccessful ones have been caught doing in the past. We are drunks looking for our keys in a big empty space with a single torch, and all we can find is evidence of the rare occasions when other people lost their keys.

Some examples are at the simple end, most of them involving what is called ‘placement’: taking illicit cash flows and depositing them in the financial system. The most obvious methods involve businesses that take cash: casinos, construction, nail salons, barbers (and in the UK minicabs, many of which were notoriously under the control of crime families until Uber killed that particular laundry). On Cottrell and Files’s estimation, ‘it typically takes three nail salons to launder the money from a brothel.’ At its most basic, placement involves taking cash payments over the counter, mixing them with illegal cash and depositing them in the bank. One famous example was ‘La Mina’ (‘the gold mine’), a network of gold and jewellery stores in the US which laundered money for the Mexican cartels at a rate of $2 million per day, for two years, giving a total of $1.2 billion. When it was exposed in 1989, an FBI agent said it was ‘the biggest laundering operation we’ve ever seen’.

But it can get more imaginative. You live in Puerto Rico, buy a lottery ticket and win. Good news – but it gets better! At this point a criminal offers to buy your lottery ticket from you, for more than it’s worth, in cash. You get a cash bonus in excess of your win, and the crook gets to launder the money by depositing the apparently legitimate winnings in his bank account. Or say you’re a Chinese maker of porcelain pots. A criminal approaches you and asks you to make a fake antique. He ships the piece to the UK and creates a false backstory for it, according to which it is owned by a private trust ‘to protect the privacy of the owner’ – of course, it’s really owned by him. The trust puts it up for auction, where he gets proxies to bid up the price before buying it himself, for a huge sum. He ‘repatriates’ the fake to China. The Chinese government is keen to bring home high-value art, and offers a tax break to people who do it, so our crook not only gets to launder money and move it abroad, he gets 12 per cent off his tax for doing so.* Why China? Because the government has stringent and energetically enforced controls against moving more than $50,000 out of the country. As a result, Chinese money laundering is such an extensive, ingenious and ever evolving industry that it has acronyms of its own: CUBS, or Chinese Underground Banking System, and IVTS, or Informal Value Transfer System. And why porcelain? Because, as Cottrell and Files explain, the age of ‘jade, paintings, books, metalwork etc … can be determined through non-destructive testing’.

Chinese money laundering is involved in some extremely dark gambling-related activities, which Bullough describes. Money is moved abroad not in the form of cash but in the form of credit transactions through overseas casinos. ‘Handing over control of both debt and debt collection to organised criminals was hugely profitable for everyone,’ he writes. Some Chinese money laundering is less sinister, verging even on the comic. Example: Bicester Village. This extremely successful shopping venue is, according to Bullough, a prime route for Chinese criminals to launder cash. It works like this. A Chinese gang sends drugs to the UK. British drug dealers sell the drugs for cash. British drug dealers give the cash to Chinese students. Chinese students buy luxury goods from Bicester Village. Chinese students ship the goods back to China, where they’re sold and the money given to the drug dealers. Bullough estimates that the Bicester trade is worth £2 billion a year, just from tourists arriving by train. This kind of activity is an issue for the whole luxury market. Bullough asks a police contact about luxury watches, which are a notoriously effective way of moving monetary value. ‘I reckon the luxury watch trade is 80 per cent money laundering. Why wouldn’t it be? You can carry a huge, big bag of money and be very noticeable, or have the same value strapped to your wrist, and be completely anonymous.’ All this is invisible to the modern AML apparatus, which is focused on money that moves through the official financial system.

‘Trade-based money laundering’ follows a similar pattern. Bullough gives the example of a Mexican drug dealer who smuggles product across the border to the US. The drug in question would once have been marijuana, then cocaine, and is now likely to be fentanyl, which is cheap to manufacture and easy to conceal. The drugs are sold in the US for cash, which is used to buy, say, agricultural equipment. The machinery is shipped to Mexico, invisible as part of the $2.2 billion of physical goods that cross the border every day – that’s a total of $800 billion a year. Back home, it is sold by the drug dealer for pesos, which are now clean. The gangsters have exchanged drugs for clean peso bank deposits, without any record of the kinds of financial transaction that the AML/KYC/CTR/SAR apparatus is intended to detect.

It’s ingenious, and it’s also the origin story of modern banking, since it was bankers such as the Medici, originally cloth traders, who pioneered the practice of exchanging goods in one place for credits in another. That’s the reason so many banks have their origin in trading companies: Lloyds in iron, NatWest in cloth, Lehman Brothers in cotton and so on. The modern world economy offers a huge variety of techniques to conceal the movement of money in the flow of trade. Freeports and bonded warehouses, free-trade zones and forged bills of lading, under-invoicing and over-invoicing: all these things provide opportunities to camouflage the flow of illicit money in the mostly legal, overwhelmingly large flow of physical goods. Add the extensive repertoire of tricks used by launderers – shell companies in multiple jurisdictions; hidden ownership; paper trails that run out in long-defunct legal practices and accountancy firms – and it’s a miracle any of the illicit money is ever detected.

Some of the most sophisticated techniques for evading FATF controls are not attempts to hide from the legal frameworks set up by governments, but jujitsu-like tricks that use the authorities’ own systems. Here, as elsewhere, the only examples we have are when the crooks have been busted; we can be confident that there’s a lot more of this going on. The Russian Laundromat of the early 2010s used corrupt judges in Moldova to order the settling of debts for bankrupt companies. The companies were fictitious, and the payment of the ‘debts’ moved money to the supposed creditors’ banks in Latvia. A court-ordered settlement of legal debts? That, to any bank, looks like clean money. Nobody knows how much money the scheme laundered, but estimates range from $20 billion to $80 billion.

An even bigger scam that works through government systems is known as carousel fraud (naturally, it has an acronym too: MTIC, or Missing Trader Intra-Community fraud). This is a scheme which makes use of the fact that the EU does not charge VAT on trade that crosses a border. Bullough:

Imagine two companies which are secretly controlled by the same people. If company A imported some phones, then sold them to company B, it charged VAT on the deal. If company B then exported the phones, it reclaimed – from the government – the VAT it had paid to company A. The integrity of the VAT system depends on the two totals balancing out. The money that A pays in is equal to the money that B takes back. The scam lay in A disappearing and not handing over the money it owed, but B still claiming it. The hidden owners of the two firms therefore earned for themselves 17.5 per cent (the rate at which VAT was then charged) of the value of the shipment of the phones. The more phones you sold to yourself, the more money you made.

The truck full of phones would then simply turn round and repeat the trip. It’s complicated, but ‘all you need to remember is that by importing phones to the UK, flipping them between two shell companies, and exporting them again, criminals earned free money. And they could do it again and again and again.’ Hence the nickname ‘carousel’.

Simple examples were easy to spot, once the authorities knew what they were looking for, so criminal techniques grew in sophistication, with chains of companies used to sell the goods onwards. These ‘buffer companies’ were in many instances legit businesses that had no idea they were participating in a huge fraud. Other schemes moved goods backwards and forwards simultaneously, mixing legitimate transactions with fraudulent ones, and adding missing traders in other countries to make the paper trail even harder to follow. The scam began in the Asian community in Stoke-on-Trent and spread, first in the UK, then throughout the EU. One of the fraudsters, Nasser Ahmed from Bristol, made the Sunday Times Rich List in 2006, with £151 million. He fled court minutes before a guilty verdict in 2005; nobody knows where he is now.

Carousel fraud is a good news, bad news story. The good news is that the UK devoted significant resources and considerable ingenuity to tackling the problem, which is now much smaller than it used to be – in the UK. The bad news is that carousel fraud simply relocated to the EU. The flaw in the design of VAT remains, and the EU has been complacent about addressing it. ‘Europol estimates MTIC to be costing EU member states €50 billion a year, and thus to be the most profitable crime in the EU, far beyond the powers of national authorities to control.’

Far beyond the powers of national authorities to control. That is a truly astonishing state of affairs. The fact is that a great deal is being done to combat it. It’s just that none of it works. The system focuses on the apparatus of AML regulations, which look at financial transactions within the system. That’s flaw number one. Flaw number two is that the apparatus has created the wrong incentives. Banks have a responsibility to report any transactions they think are suspicious and are fined and sometimes prosecuted if they mistakenly let a fraudulent transaction through. For them, there is no upside to the work of checking, just downside risk, so, inevitably, they flag every transaction which could conceivably be seen as suspicious.

This links to the phenomenon of debanking, in which people with any connection not just to crime, but to political activity of any kind, are prevented from having a bank account. Lots of decent people smiled quietly at the news in 2023 that Nigel Farage had been debanked by Coutts. They shouldn’t have: debanking affects just as many people on the left and in the centre as on the right. Ask any Muslim charity; ask any charity trying to help Ukraine. ‘Between 2016 and 2022, the number of accounts being closed annually in the UK rose from 45,091 to 343,350.’ Banks don’t have to give any reason or explanation, and there is no process for challenging a debanking. A piece of news that got much less attention than it should have was the report in the summer of 2023 that Jeremy Hunt, who by that time was chancellor of the Exchequer, had the year before been blocked from opening an account with the UK-based online bank Monzo. This was, he claimed, because he was a PEP – a ‘politically exposed person’. It is very obviously dysfunctional to have rules so hair-trigger sensitive that the chancellor can’t open a bank account.

The rules are extensive, complicated and very expensive to transgress. The result is that in the US alone, banks file ten thousand SARs every single day. That’s 3.8 million reports a year. It is impossible for the authorities to act on every one of those. The outcome is a system that flags so much activity it functionally resembles one that doesn’t flag any activity at all. The scale of the system is flaw number three: all of this is extraordinarily expensive. Compliance – the process of following the rules – costs $206 billion a year globally, according to the research company LexisNexis. That’s a lot of money for a system that looks in the wrong place, doesn’t work even when it’s looking in the right place, and causes enormous amounts of friction to the law-abiding, who are the ones who ultimately bear the cost. Its processes are hugely intrusive (Bullough rightly wonders at how little fuss there is over the privacy implications of SARs), create bureaucratic obstacles to ordinary citizens and businesses, and don’t do what they are supposed to do: prevent money laundering.

Let’s​ agree that the status quo isn’t working. What to do? Bullough has three recommendations. One of these, a change in the legal attitude to drugs, is a large issue and to my mind a separate one, with the significant weakness that it is very unlikely to happen in a reasonable time frame. Putting that to one side, of his two other recommendations, the first is both simple and radical: it is that governments get rid of high-denomination banknotes. ‘What non-criminals would honestly be inconvenienced if the largest US banknote was a $20 bill?’ he asks. ‘Would fascism really return to Germany if the €200, €100 and €50 banknotes were retired?’ Bear in mind that 80 per cent of the value of US currency is in $100 bills, and 70 per cent of those are held overseas. In the words of an assistant commissioner of the Met, ‘untraceable, untaxable income in the hands of criminals is the new lingua franca of organised crime. The link between Medellín and Moscow is the $100 bill.’

There are precedents for governments taking decisive action in this area. The biggest recent experiment in demonetising banknotes came very abruptly in India on 8 November 2016, when the Modi government, without trailing or discussing or signalling the policy in any way, demonetised 500 and 1000 rupee notes overnight (at the time, they were worth roughly £6/$7.50 and £12/$15). These were vastly the most commonly used Indian banknotes, amounting to 15.44 trillion rupees in value. At that point, 99 per cent of Indians paid no income tax. The idea was to force as much as possible of that huge untaxed economy into the daylight. Anyone holding these notes had to take them to the bank, where newly denominated notes would be issued in their stead. If they had lots of cash, they would have to give an explanation. The policy didn’t work, for reasons that are still being debated, the main one apparently being that people with ill-gotten cash found people to act as their proxies and repeatedly deposit small amounts of cash. This is the same tactic used by money launderers: ‘smurfing’ is the term for using accomplices to make lots of small cash deposits below official reporting thresholds. But what would happen if a government targeted large denomination notes, the kind preferred by professional criminals? Hint to the US Treasury and the European Central Bank: there’s only one way to find out.

Bullough’s other big policy recommendation is to switch some of the hundreds of billions of dollars spent on compliance to research. The illicit flows of money, ‘between 2 and 5 per cent of everything’, are such an important phenomenon in the contemporary global order that our current state of ignorance is indefensible. I haven’t even mentioned gold, which is used all the time in criminal transactions, let alone cryptocurrency, the single biggest recent innovation in money laundering.

This isn’t just a problem for far-off countries of which we know little, like the EU and the US and China. Here in the UK we are at the epicentre of certain sorts of financial crime, laundering money both at high levels through the City and at low levels on our high streets. On 30 April, the Chartered Trading Standards Institute published a head-melting report in which it said that 97 per cent of its officers were aware of suspected organised crime activities operating through local retail premises; that 99 per cent of officers had seen an increase in cash-intensive businesses on their local high streets; that there are areas of the country where ‘as many as half of mini-marts, convenience stores and vape shops, up to a third of American candy stores and one in four fast-food takeaways are estimated to have links with organised crime.’ The recent proliferation of cash-only barbers in high streets seems a fairly clear example of this kind of money laundering. Late last year, Operation Machinize, which focused on these activities, resulted in 2700 premises being raided and 924 arrests. Money laundering is happening all across the UK economy, at scale, right here and right now. It is shameful that we do so little about it, and know so little about it. Last word to Bullough:

In the months before the Labour Party won Britain’s 2024 general election to become the government, I went out for a coffee with a senior adviser looking for ideas to incorporate into the party’s financial crime plan. I said it needed to hire more police officers and give them the time and space to arrest criminals.

‘Well, that’s not going to gain us any headlines, is it?’ the adviser replied.

And that’s where we are. Money laundering is the thing that makes almost all crime possible, especially the crimes that states claim to be most concerned about: drugs and terrorism. The apparatus set up to combat it doesn’t work. It’s also hugely expensive, and it creates a maddening proliferation of obstacles and inefficiencies to ordinary people and legitimate businesses. Governments don’t do anything about the status quo, for a number of reasons: it inconveniences them to look too deeply into the darker corners of their own financial systems, and they make money from printing their own currencies and don’t much care how that cash is used. But most of all, they don’t do anything about it because they haven’t got a clue.