I’ve been writing about the global financial system for thirty years, but reading this revelatory book by Oliver Bullough, I now realise I barely knew the half of it. My focus has always been on the regulated financial system, where legitimate businesses raise money from banks and markets, and ordinary folk go to get their mortgages. But Bullough, an investigative journalist, has spent much of his career focusing on the unregulated side: the murky world of illicit finance, where oligarchs and drug dealers go to launder their loot. In this meticulously researched book, he traces the growth of this parallel system into a vast, sophisticated global market, detailing the largely futile efforts to contain it.

It’s an extraordinary story that takes Bullough from Bicester Village, where Chinese students clean out the discount branded-goods outlet stores, to the Marshall Islands, Miami, Fort Worth, Vancouver, Riga and the Mariana Islands, a tiny US territory in the Pacific. At its core, it is about an industry that has grown up to solve a particular problem: how to turn the vast amounts of cash generated by the drugs trade into ‘clean’ money in the legitimate financial system so that it can be used to buy all the houses and fancy cars that a crime lord might require. 

In the early days, gangsters only needed to take their cash by the trolley load to their nearest bank, where they could deposit it, no questions asked. But in 1970 life became more complicated thanks to the efforts of a dogged US congressman, Wright Patman, whose campaign resulted in the passage of the Bank Secrecy Act. This obliged US banks to report deposits above $10,000. Cartels had to employ teams of ‘smurfs’ to go from bank to bank making deposits of less than $10,000, or to smuggle the cash out of the country and deposit it in an offshore account in a more secretive jurisdiction, from where it could be sent back onshore.

In the late 1980s, G7 governments took steps to try to shut this down too – not, as it happens, in response to concerns about the drug trade or lost tax revenues, but because of a French political scandal that threatened to embarrass President François Mitterrand. Their solution was to establish the Financial Action Task Force (FATF), which set out forty recommendations, underpinned by the threat of blacklisting from the global financial system for jurisdictions that failed to comply. This came into force just as the world of illicit finance was becoming truly global, following the collapse of the Iron Curtain. 

Yet as Bullough explains, this tick-box approach to tackling money laundering has done little to curb financial crime, and has even had some unintended consequences. The countries that tended to get blacklisted were tiny jurisdictions like the Marshall Islands, while British, French and Dutch overseas territories linked to far more money laundering largely escaped censure because the FATF’s powerful members protected each other. Another problem was that the new rules put the onus on banks to report suspicious activity, which soon led to risk-averse compliance departments overwhelming regulators with far more reports than they could process. 

Worse, once terrorist financing was added to the list of financial crimes for which banks were to be held liable in the wake of the 9/11 attacks, banks found it easier simply to deny accounts to entire swathes of the population with the most tenuous links to proscribed groups. Bullough writes movingly about the immense difficulties faced by the Somali community in Britain in opening a bank account, as well as Muslim charities and Russian dissidents. When Nigel Farage was ‘debanked’ by Coutts, he was able to use his public profile to fight back. But those who lack his powerful connections find themselves shut out of the financial system.

Besides, the illicit financial system is every bit as innovative as the regular one. When Latvia’s banking system was effectively shut down by US authorities after it was found to be laundering vast amounts of Russian illicit finance via anonymous accounts, the business swiftly moved to Lithuania, Cyprus and Dubai, often with many of the same bankers overseeing it. 

Today, much of the world’s money laundering doesn’t require cash to cross borders. Sometimes the money is used to buy goods that can be sent abroad as legitimate trade. That is what one police officer interviewed by Bullough says many of those Chinese students in Bicester Village are doing. Other times, the cash can be used to provide loans to those who can’t get access to money overseas, including sanctioned Russian oligarchs and Chinese high-rollers constrained by capital controls, which are then repaid via domestic transfers. The result is a vast global illicit money-go-round. 

No one knows how big this system is. But one indicator is the stock of banknotes, which continues to soar even as cash use for everyday transactions collapses. Indeed, Bullough reckons that the single most effective thing governments could do to combat illicit finance is to get rid of high-denomination notes, since this would increase the bulk of notes that money launderers would need to handle. The problem is that governments have little incentive to do this. After all, selling pieces of paper that cost cents to produce for €500 is highly profitable. 

In any case, cash itself may soon become obsolete. The crime world is rapidly moving to cryptocurrencies such as Tether, an El Salvador-based stablecoin whose value is tied to the dollar. These enable money to be transferred anywhere in the world instantly, out of sight of regulators, and are enthusiastically supported by the Trump administration – and indeed by the Trump family, who have made billions out of cryptocurrencies since the president’s inauguration. The rise of digital money may hasten the day when our two parallel financial systems merge.