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Once hailed as unhackable, blockchains are now getting hacked.

Mark Ellis

More and more security holes are appearing in cryptocurrency and smart contract platforms, and some are fundamental to the way they were built.

Mike Orcutt, MS Tech February 19, 2019

Early last month, the security team at Coinbase noticed something strange going on in Ethereum Classic, one of the cryptocurrencies people can buy and sell using Coinbase’s popular exchange platform. Its blockchain, the history of all its transactions, was under attack.

A hacker had somehow gained control of more than half of the network’s computing power and was using it to rewrite the transaction history. That made it possible to spend the same cryptocurrency more than once—known as “double spends.” The attacker was spotted pulling this off to the tune of $1.1 million. Coinbase claims that no currency was actually stolen from any of its accounts. But a second popular exchange,, has admitted it wasn’t so lucky, losing around $200,000 to the attacker (who, strangely, returned half of it days later).

Just a year ago, this nightmare scenario was mostly theoretical. But the so-called 51% attack against Ethereum Classic was just the latest in a series of recent attacks on blockchains that have heightened the stakes for the nascent industry.

In total, hackers have stolen nearly $2 billion worth of cryptocurrency since the beginning of 2017, mostly from exchanges, and that’s just what has been revealed publicly. These are not just opportunistic lone attackers, either. Sophisticated cybercrime organizations are now doing it too: analytics firm Chainalysis recently said that just two groups, both of which are apparently still active, may have stolen a combined $1 billion from exchanges.

We shouldn’t be surprised. Blockchains are particularly attractive to thieves because fraudulent transactions can’t be reversed as they often can be in the traditional financial system. Besides that, we’ve long known that just as blockchains have unique security features, they have unique vulnerabilities. Marketing slogans and headlines that called the technology “unhackable” were dead wrong.

That’s been understood, at least in theory, since Bitcoin emerged a decade ago. But in the past year, amidst a Cambrian explosion of new cryptocurrency projects, we’ve started to see what this means in practice—and what these inherent weaknesses could mean for the future of blockchains and digital assets.

How do you hack a blockchain?

Before we go any further, let’s get a few terms straight.

blockchain is a cryptographic database maintained by a network of computers, each of which stores a copy of the most up-to-date version. A blockchain protocol is a set of rules that dictate how the computers in the network, called nodes, should verify new transactions and add them to the database. In general, more than half the nodes have to agree that a transaction is valid for it to be verified. The protocol employs cryptography, game theory, and economics to create incentives for the nodes to work toward securing the network instead of attacking it for personal gain. If set up correctly, this system can make it extremely difficult and expensive to add false transactions but relatively easy to verify valid ones.

That’s what’s made the technology so appealing to many industries, beginning with finance. Soon-to-launch services from big-name institutions like Fidelity Investments and Intercontinental Exchange, the owner of the New York Stock Exchange, will start to enmesh blockchains in the existing financial system. Even central banks are now looking into using them for new digital forms of national currency.

But the more complex a blockchain system is, the more ways there are to make mistakes while setting it up. Earlier this month, the company in charge of Zcash—a cryptocurrency that uses extremely complicated math to let users transact in private—revealed that it had secretly fixed a “subtle cryptographic flaw” accidentally baked into the protocol. An attacker could have exploited it to make unlimited counterfeit Zcash. Fortunately, no one seems to have actually done that.

The protocol isn’t the only thing that has to be secure. To trade cryptocurrency on your own, or run a node, you have to run a software client, which can also contain vulnerabilities. In September, developers of Bitcoin’s main client, called Bitcoin Core, had to scramble to fix a bug (also in secret) that could have let attackers mint more bitcoins than the system is supposed to allow.

Still, most of the recent headline-grabbing hacks weren’t attacks on the blockchains themselves, but on exchanges, the websites where people can buy, trade, and hold cryptocurrencies. And many of those heists could be blamed on poor basic security practices. That changed in January with the 51% attack against Ethereum Classic.

The 51% rule

Susceptibility to 51% attacks is inherent to most cryptocurrencies. That’s because most are based on blockchains that use proof of work as their protocol for verifying transactions. In this process, also known as mining, nodes spend vast amounts of computing power to prove themselves trustworthy enough to add information about new transactions to the database. A miner who somehow gains control of a majority of the network's mining power can defraud other users by sending them payments and then creating an alternative version of the blockchain in which the payments never happened. This new version is called a fork. The attacker, who controls most of the mining power, can make the fork the authoritative version of the chain and proceed to spend the same cryptocurrency again.

For popular blockchains, attempting this sort of heist is likely to be extremely expensive. According to the website, renting enough mining power to attack Bitcoin would currently cost more than $260,000 per hour. But it gets much cheaper quickly as you move down the list of the more than 1,500 cryptocurrencies out there. Slumping coin prices make it even less expensive, since they cause miners to turn off their machines, leaving networks with less protection.

Toward the middle of 2018, attackers began springing 51% attacks on a series of relatively small, lightly traded coins including Verge, Monacoin, and Bitcoin Gold, stealing an estimated $20 million in total. In the fall, hackers stole around $100,000 using a series of attacks on a currency called Vertcoin. The hit against Ethereum Classic, which netted more than $1 million, was the first against a top-20 currency.

David Vorick, cofounder of the blockchain-based file storage platform Sia, predicts that 51% attacks will continue to grow in frequency and severity, and that exchanges will take the brunt of the damage caused by double-spends. One thing driving this trend, he says, has been the rise of so-called hashrate marketplaces, which attackers can use to rent computing power for attacks. “Exchanges will ultimately need to be much more restrictive when selecting which cryptocurrencies to support,” Vorick wrote after the Ethereum Classic hack.

A whole new can of worms bugs

Aside from 51% attacks, there is whole new level of blockchain security weaknesses whose implications researchers are just beginning to explore: smart-contract bugs. Coincidentally, Ethereum Classic—specifically, the story behind its origin—is a good starting point for understanding them, too.

smart contract is a computer program that runs on a blockchain network. It can be used to automate the movement of cryptocurrency according to prescribed rules and conditions. This has many potential uses, such as facilitating real legal contracts or complicated financial transactions. Another use—the case of interest here—is to create a voting mechanism by which all the investors in a venture capital fund can collectively decide how to allocate the money.

Just such a fund, called the Decentralized Autonomous Organization (DAO), was set up in 2016 using the blockchain system called Ethereum. Shortly thereafter, an attacker stole more than $60 million worth of cryptocurrency by exploiting an unforeseen flaw in a smart contract that governed the DAO. In essence, the flaw allowed the hacker to keep requesting money from accounts without the system registering that the money had already been withdrawn.

As the hack illustrated, a bug in a live smart contract can create a unique sort of emergency. In traditional software, a bug can be fixed with a patch. In the blockchain world, it’s not so simple. Because transactions on a blockchain cannot be undone, deploying a smart contract is a bit like launching a rocket, says Petar Tsankov, a research scientist at ETH Zurich and cofounder of a smart-contract security startup called ChainSecurity. “The software cannot make a mistake.”

There are fixes, of a sort. Though they can’t be patched, some contracts can be “upgraded” by deploying additional smart contracts to interact with them. Developers can also build centralized kill switches into a network to stop all activity once a hack is detected. But for users whose money has already been stolen, it will be too late.

The only way to retrieve the money is, effectively, to rewrite history—to go back to the point on the blockchain before the attack happened, create a fork to a new blockchain, and have everyone on the network agree to use that one instead. That’s what Ethereum’s developers chose to do. Most, but not all, of the community switched to the new chain, which we now know as Ethereum. A smaller group of holdouts stuck with the original chain, which became Ethereum Classic.

Last month, Tsankov’s team at ChainSecurity saved Ethereum from a possible repeat of the DAO catastrophe. Just a day before a major planned software upgrade, the company told Ethereum’s lead developers that it would have the unintended consequence of leaving some contracts on the blockchain newly vulnerable to the same kind of bug that led to the DAO hack. The developers promptly postponed the upgrade and will give it another go later this month.

Nevertheless, hundreds of valuable Ethereum smart contracts were already vulnerable to this so-called reentrancy bug, according to Victor Fang, cofounder and CEO of blockchain security firm Tens of thousands of contracts may contain some other kind of vulnerability, according to research conducted last year. And the very nature of public blockchains means that if a smart-contract bug exists, hackers will find it, since the source code is often visible on the blockchain. “This is very different than traditional cybersecurity,” says Fang, who previously worked for the cybersecurity firm FireEye.

Buggy contracts, especially those holding thousands or millions of dollars, have attracted hackers just as advanced as the kind who attack banks or governments. In August, AnChain identified five Ethereum addresses behind an extremely sophisticated attack that exploited a contract flaw in a popular gambling game to steal $4 million.

Can the hackers be defeated? is one of several recent startups created to address the blockchain hacking threat. It uses artificial intelligence to monitor transactions and detect suspicious activity, and it can scan smart-contract code for known vulnerabilities.

Other companies, including Tsankov’s ChainSecurity, are developing auditing services based on an established computer science technique called formal verification. The goal is to prove mathematically that a contract’s code will actually do what its creators intended. These auditing tools, which have begun to emerge in the past year or so, have allowed smart-contract creators to eliminate many of the bugs that had been “low-hanging fruit,” says Tsankov. But the process can be expensive and time consuming.

It may also be possible to use additional smart contracts to set up blockchain-based “bug bounties.” These would encourage people to report flaws in return for a cryptocurrency reward, says Philip Daian, a researcher at Cornell University’s Initiative for Cryptocurrencies and Contracts.

But making sure code is clean will only go so far. A blockchain, after all, is a complex economic system that depends on the unpredictable behavior of humans, and people will always be angling for new ways to game it. Daian and his colleagues have shown how attackers have already figured out how to profit by gaming popular Ethereum smart contracts, for instance.

In short, while blockchain technology has been long touted for its security, under certain conditions it can  be quite vulnerable. Sometimes shoddy execution can be blamed, or unintentional software bugs. Other times it’s more of a gray area—the complicated result of interactions between the code, the economics of the blockchain, and human greed. That’s been known in theory since the technology’s beginning. Now that so many blockchains are out in the world, we are learning what it actually means—often the hard way.

The Future Is Here: The Potential of Blockchain Technology

Mark Ellis

By John Campbell, January 23, 2018

For all the investor hype around Bitcoin, which became an international sensation in the second half of 2017, the cryptocurrency still lacks the fundamental attributes of money and is behaving more like a speculative commodity. Ultimately, Bitcoin’s star could fade as rival cryptocurrencies overcome its inherent technical flaws and governments continue to crack-down on its use.

Blockchain technology, which is beginning to gain significant attention, possesses far more future potential than Bitcoin. There is just one snag, which has heretofore been largely ignored: energy use.

Bitcoin Basics

Created in 2009, Bitcoin is the first cryptocurrency released. For much of its existence, it was consigned to the periphery of finance, failing to generate much interest. However, in the latter half of 2017, Bitcoin mania descended upon investors who began piling into the cryptocurrency, with prices rising exponentially. To many, it was reminiscent of Dutch ‘tulip mania’ from the 1600s.

Bitcoin, unlike typical notes and coins, is not backed by a single central bank.

It was created by an unidentified developer who goes by the name of Satoshi Nakamoto; lending a certain mystique to the cryptocurrency.

Its developer purportedly developed Bitcoin as an alternative to national currencies because he was sceptical of the vast QE programmes national central banks undertook following the 2008 financial crisis.

Bitcoin is not alone as a cryptocurrency, although it garners most of the attention and has the largest market capitalisation. There are over 1,300 different types of cryptocurrencies and new ones spring up as creators try to overcome the technical challenges faced by rivals.


Bitcoin uses “blockchain technology.” This phrase has become synonymous with Bitcoin – in reality, most cryptocurrencies use blockchain technology. The blockchain, as it is commonly known, is a continuously updated, distributed digital ledger. It permanently records all transactions and, by design, it is practically unalterable.

Most importantly, it provides both parties with a transaction with the assurance provided by an unbiased third party, without the expense of intermediation. The word ‘block’ comes from the fact that transactions are bundled together to form a new ‘block’. Meanwhile, when it is created, it is combined like a ‘chain’ to all previous blocks.

The blockchain ledger replicates all historical transactions across millions of computers. This prevents a single user from tampering with history, as all records across the computers have to be in accordance with one another. Information can only be added to the blockchain, not altered. Furthermore, since transactions take place on the blockchain – which is public – a transaction of an item can be verified as unique. Finally, because the transaction does not require a third party (such as a bank) to adjudicate it, blockchain technology is decentralised.

Bitcoin transactions are ‘verified’ through a global computer network that performs the computational heavy lifting required to facilitate secure transactions. Verification takes place through the process of cryptography – mathematical code. Computers are required to provide a unique solution to a given challenge. This verification solves the double-spending problem. It prevents a user copying coins so as to appear to pay another user. Because this verification process is extremely energy-intensive, the bitcoin ‘miner,’ as they are known, who successfully solves the problem is rewarded with bitcoins for their efforts.

Moreover, computers are competing with one other to solve the challenge. There is an upper limit of 21 million bitcoins that can be mined, and to date, 16.75 million have been mined. Therefore, individuals who verify the transactions will no longer receive a reward as the upper supply limit is reached.

The expectation is that once the supply of bitcoins has been exhausted, transaction fees will be introduced in order to maintain an incentive for ‘miners’ to continue to verify transactions. One must remember that the process of verifying transactions is extremely energy intensive and ‘miners’ therefore require a reward for their efforts. However, the introduction of transaction fees is likely to discourage users, as the transaction costs fall on them. This provides an opportunity for rival coins with a superior technological concept that have virtually zero transaction costs.

The Problem of Power

The process of cryptography is extremely energy-intensive. Racks of powerful computer graphics cards are required to process advanced calculations to verify transactions. Some estimate the annual total power consumption from the ‘mining’ industry to be greater than that of Ireland. What is more, most of the Bitcoin activity takes place in China, which uses mostly coal-fired plants. In short, Bitcoin transactions are ‘killing the planet’.

So far, a crisis has been averted as ‘mining’ equipment has become vastly more efficient since 2009. But it is unlikely that such gains are repeatable indefinitely. There is also the question of what happens if cryptocurrencies eventually become widely adopted. While there is active research in the field, a breakthrough has yet to materialise. Energy consumption, therefore, remains a significant obstacle to worldwide adoption.

The Potential of Blockchain Technology

If Bitcoin, through the use of the blockchain, is designed to retire burdensome middlemen, what other bureaucratic authorities can blockchain technology help render irrelevant?

There is a lot of potential behind the use of smart contracts. Smart contracts are agreements that can be understood and executed using machines. This renders a third-party arbitrator irrelevant. Moreover, the smart contract can also perform due diligence duties. An example of a smart contract is a car lease programmed to prevent an individual from driving their car if they are seriously behind on their payments.

It is worth stressing that these concepts are in their infancy and are a topic of discussion rather than an inevitable outcome. In the case of the smart car contract, there is the issue of an individual, behind on their payments, being remotely blocked from driving their car in the case of an emergency. This would be unacceptable. Such inflexibility leaves complex problems that will require careful thought in order to have smart contracts that factor in the human quality of flexibility.

In a more positive example, blockchain technology could be used to create ‘coloured’ coins whereby certain properties are assigned to a currency. One such property would be the possibility to view previous transactions to see generally where the coin has been. This could be used to spot money from criminals or from sanctioned countries. Therefore, it would be possible for a user to block transactions from criminal individuals.

Finally, blockchain could prove to be a controversial technology, as all information is stored forever. This would appear to violate the right to be forgotten. In the end, a solution will need to be devised that affords sufficient privacy to users.


Blockchain technology could be another case where an adaptation of an original invention goes on to eclipse its original function. For example, the internet was born out of a US defence project (to provide resilient communications in the event of a cold war) that went on to revolutionise twenty-first-century business and communication.

Today, the internet’s spectacular rise leaves people wondering how they ever lived without it. Could blockchain technology go on to become another core utility, long after Bitcoin becomes obsolete? A lot still hinges on the ability to store and process vast quantities of data without expending unacceptable amounts of fossil fuel energy. At this stage, it is too soon to tell.

Bring On The Cashless Future

Mark Ellis



Cash had a pretty good run for 4,000 years or so. These days, though, notes and coins increasingly seem declasse: They're dirty and dangerousunwieldy and expensive, antiquated and so very analog.

Sensing this dissatisfaction, entrepreneurs have introduced hundreds of digital currencies in the past few years, of which bitcoin is only the most famous. Now governments want in: The People's Bank of China says it intends to issue a digital currency of its own. Central banks in Ecuador, the Philippines, the U.K. and Canada are mulling similar ideas. At least one company has sprung up to help them along.

Much depends on the details, of course. But this is a welcome trend. In theory, digital legal tender could combine the inventiveness of private virtual currencies with the stability of a government mint.

Most obviously, such a system would make moving money easier. Properly designed, a digital fiat currency could move seamlessly across otherwise incompatible payment networks, making transactions faster and cheaper. It would be of particular use to the poor, who could pay bills or accept payments online without need of a bank account, or make remittances without getting gouged.

For governments and their taxpayers, potential advantages abound. Issuing digital currency would be cheaper than printing bills and minting coins. It could improve statistical indicators, such as inflation and gross domestic product. Traceable transactions could help inhibit terrorist financing, money laundering, fraud, tax evasion and corruption.

The most far-reaching effect might be on monetary policy. For much of the past decade, central banks in the rich world have been hampered by what economists call the zero lower bound, or the inability to impose significantly negative interest rates. Persistent low demand and high unemployment may sometimes require interest rates to be pushed below zero -- but why keep money in a deposit whose value keeps shrinking when you can hold cash instead? With rates near zero, that conundrum has led policy makers to novel and unpredictable methods of stimulating the economy, such as large-scale bond-buying.

A digital legal tender could resolve this problem. Suppose the central bank charged the banks that deal with it a fee for accepting paper currency. In that way, it could set an exchange rate between electronic and paper money -- and by raising the fee, it would cause paper money to depreciate against the electronic standard. This would eliminate the incentive to hold cash rather than digital money, allowing the central bank to push the interest rate below zero and thereby boost consumption and investment. It would be a big step toward doing without cash altogether.

Digital legal tender isn't without risk. A policy that drives down the value of paper money would meet political resistance and -- to put it mildly -- would require some explaining. It could hold back private innovation in digital currencies. Security will be an abiding concern. Non-cash payments also tend to exacerbate the human propensity to overspend. And you don't have to be paranoid to worry about Big Brother tracking your financial life.

Governments must be alert to these problems -- because the key to getting people to adopt such a system is trust. A rule that a person's transaction history could be accessed only with a court order, for instance, might alleviate privacy concerns. Harmonizing international regulations could encourage companies to keep experimenting. And an effective campaign to explain the new tender would be indispensable.

If policy makers are wise and attend to all that, they just might convince the public of a surprising truth about cash: They're better off without it.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at

Never mind what you heard; millennials use cash

Mark Ellis

Dec. 9, 2016 | by atm Atom

You have probably seen headlines declaring something like, "Young Americans Hate Cash." However, the truth is quite the opposite.

Millennials use more cash than anyone else.

According to the Federal Reserve Bank of San Francisco's 2015 Diary of Consumer Payment Choice, released Nov. 3, Americans between the ages of 18 and 24 used cash in 38 percent of all payment transactions last year.

Many "death of cash" stories reference often-unscientific online surveys that rely on participants' preferences and memories.

By contrast, the Federal Reserve Bank collects data for the Diary of Consumer Payment Choice from a carefully selected, nationally representative sample of U.S. consumers who are instructed to record information for every payment transaction made over a three-day period.

In addition to its revelations about cash use by millennials, the Federal Reserve report shows that cash still outstrips every other payment method —  debit, credit, personal check or digital device — with a use rate of 32 percent by Americans as a whole.

Primary uses for cash in the report included person-to-person payments such as gifts and fund transfers, government transactions (75 percent) and nonprofit transactions (40 percent).

Additionally, cash was the primary method of payment in 39 percent of transactions involving food and personal care supplies, vehicle-related expenses, and entertainment and transportation.

The media have paid a great deal of attention to predictions about the end of cash and the promotion of credit, debit and digital transactions.

The further expansion into the payments market by players such as PayPal and mobile apps such as Venmo, along with the introduction of ApplePay, AndroidPay, Samsung Pay and a multitude of other digital wallet-style payment options could be part of what is feeding the tendency to dismiss cash as the relic of a bygone era.

But the fact remains that more than two-thirds (69 percent) of U.S. consumers still carry cash.

The Fed report includes other interesting facts about cash, as well. For instance:

  • cash remains the preferred payment option for low-income Americans (those whose income is less than $25,000 annually);
  • cash is also the top payment instrument for Americans with annual household incomes of $50,000 or less;
  • cash is the second most used form of payment for households with an annual income between $50,000 and $100,000; and
  • cash maintains a solid rate of use (between 23 percent and 25 percent) in households with an annual income of more than $100,000.

The bottom line: Everyone uses cash.

Despite reports — whether from consumers or the media — cash is far from being a dead payment method. It continues to be a healthy part of a growing payments ecosystem and a standby for many when it comes to situations involving smaller payments, emergencies and disasters.

Too big to die?: Debating the future of cash

Mark Ellis

September 28 2016  Mike Lee, CEO ATM Industry Association

I've just returned from the Bank Customer Experience Summit in Chicago, where I was privileged to be on the winning team in this annual event's great debate on the question, "Is it time to kill cash?"

Despite the arrival of digital shopping and digital banking, which are to be warmly welcomed by all due to the new levels of convenience, customer experience and choice they offer consumers, especially on the mobile web, the facts demonstrate overwhelmingly that cash is both too big and too important to remove from society.

Cash is just too big to die because:

  • it is used for 83.7 percent of global retail transactions;
  • the world's 2 billion unbanked people — including 38 percent of adults and 28 percent of households in the United States — depend on cash to live;
  • the world's two largest countries, India and China, with a combined population of 2.6 billion people, are cash-loving, cash-intensive societies;
  • advanced and major economies like Germany, Japan and Italy are also cash-preferring and cash-intensive (79 percent of payments in Germany, for example, are made in cash, according to the Bundesbank);
  • the informal sector, which makes up 18.3 percent of the GDP in the European Union alone, is totally cash dependent; and
  • there are 360 billion banknotes in circulation, with 150 billion new ones printed each year, as well as $400,000 in cash pumped out of 3 million ATMs every second.

Cash is just too important to eliminate because:

  • cash is humanity's favorite and most trusted form of money;
  • cash is vital to the money supply of every nation, and is classified by governments as a safe asset, forming a critical part of monetary policy and stability;
  • cash, which always works and is the most ubiquitous form of money, is the number one back-up payment method when electronic systems go down or don't work;
  • use of cash is a proven method in households across the nations of learning how to budget and how to fight debt by staying within budget;
  • most merchants worldwide accept cash as the most common type of payment and cash drives sales for countless small businesses and entrepreneurs;
  • both baby boomers and millennials include cash as part of their weekly payments portfolio;
  • international aid agencies and donors are calling for an increase in the provision of cash, rather than physical aid, to victims of natural disasters and wars; their experience has shown that cash can help displaced people get back on their feet; and
  • the U.S. dollar is the world's reserve currency and it plays a very important role as a store of value and investment, and for backing up currencies hit by changing exchange rates.

In our closing statement in Chicago, the pro-cash team argued that there simply is no business case for restricting freedom of choice in payments for millions of consumers and merchants through the eradication of cash.

If you want to diminish human freedom — whether for citizens or businesses — you need a darn good reason. But we could find no commensurate rationale for taking away the option to use cash when the vast majority of cash transactions are perfectly legitimate and made in good faith.

Some argue that the justification for the abolition of cash is its use in criminal activity. But let's look at the figures.

Card fraud is increasing at a faster annual rate than card sales. A Nilson report showed that sales of cards grew 15 percent in 2015, compared with a 19 percent rise in card fraud for the same period.

Meanwhile, e-crime has become a huge business. Some estimates put the cost of cybercrime to the global economy at more than $445 billion. Compared with the scale of card data fraud and e-crime, crimes involving cash can be counted as peanuts. Cash, in fact, is a bulwark against e-crime and identity theft.

Not only is there an absence of a proper rationale for restricting freedom of choice to use cash, but also, a cashless state would almost certainly deepen already fragile social divisions between rich and poor, haves and have-nots; between the banked and unbanked, and along the digital divide.

The abolition of cash could seriously endanger social cohesion and set back any upward mobility between the informal sector and formal economy.

Both sides of the great Chicago debate ended up agreeing on this point: Cash is not broken. So the idea of the cashless society becomes a solution desperaely seeking a problem.

And, oh, yes, besides all this, cash doesn't have batteries that can explode or run down; it requires no power at all to work. And yet a cash payment is a super-fast transaction with immediate settlement.

Cash is so liquid and so easy. It also enables an anonymous transaction, which provides a welcome slice of privacy for individuals in today's high-surveillance societies. On top of all this, cash is absolutely fee-free for citizens to use.

These are some of the main reasons why any freedom-loving human being would cherish the choice of using cash — along with all the innovative digital and plastic forms of money we can use to buy what we need to live our lives well.

Losing Sparta: The Bitter Truth Behind the Gospel of Productivity

Mark Ellis

When Lisa Norris was a kid in Cookeville, Tennessee, her father worked at Acme Boots, and that plant and her childhood were intertwined. One of her earliest memories is of wandering around the factory among bins of leather, breathing in the smell of the well-iled wood floors. Then the boot plant went to Mexico and her dad landed at Wrangler, which makes jeans, and then Red Kap, which makes workwear, and rarely ever again did he stay at a job for more than eighteen months. Each time, the plant would downsize or shutter, the jobs would cross the border, and he’d have to start all over again.

Norris spent her teenage years doing 4- and helping out at her grandfather’s hardware store. She also went to five different high schools as her father chased work. This experience is why, in her early thirties, after several years doing human resources in the auto and defense industries, she started her own consulting firm dedicated to helping plants implement lean manufacturing principles and union avoidance, in an effort to save jobs in central Tennessee. “In all of my eleven years I never had a plant that left the area that I was involved with,” she told me proudly. “I was able to say nothing’s ever left. Nothing’s left the building.”

In late 2008, she got a call from Dave Uhrik, a veteran operations manager she deeply admired, who broke the news that he’d been hired on to manage a plant near Sparta, just down the road from where Norris grew up. The large factory produced commercial lighting fixtures and had recently been acquired by Philips, the $39 billion Dutch multinational best known for its vast array of consumer products, from light bulbs to electric toothbrushes to television sets. It took Norris “exactly twenty-even minutes” to decide that she was going to sell her business and join what Uhrik pitched as “the dream team.” It was barely half the pay, but it was a chance to put all of her ideas into practice, to be part of “the best of the best,” a model for what was possible in American manufacturing. “It was like, Oh, my goodness, we could do great things!”

The humming Sparta plant had it all. For one thing, the town is within a day’s haul of most US markets—rom New York and Chicago to Atlanta, St. Louis, and Dallas. Tennessee has decent, well-aintained highways. The plant was union— new experience for Norris—ut this IBEW local was steely-yed about keeping and creating jobs; it had, for example, accepted a two-ier pay scale and surrendered contract protections in order to attract a highly automated production line from New Jersey. The press for that new line, known as a Bliss, was nearly three stories high (so big it had to be anchored twenty feet underground) and could stamp out eight or ten massive commercial fluorescent fixtures every minute. It attracted lucrative contracts from hospitals, prisons, grocery-tore chains, and Walmart supeenters. Norris called it “a monument.” Brent Hall, the union rep, described it as a beating heart. “Every time that press rolled over,” he said, “the whole building would shake.”

Other production lines at the plant could push out smaller, custom products tailored to the needs of a specific buyer. A whole swath of the maintenance crew had been sent, on the plant’s dime, to get certified as industrial electricians and welders and millwrights so that they could retool machines on the fly, switching production from one job to the next in a matter of minutes. “Anything they wanted, we’d build it for them,” Scott Vincent, one veteran electrician told me. With Uhrik and Norris at the helm, the plant started buying steel and other inventory on consignment, and trimmed turnaround times to the point that its invoices would be getting paid before the bills on raw materials were even due. Tasked with cutting costs by $4 million, the management team tapped employees to identify inefficiencies in the assembly process, worked with suppliers to reduce components costs, and drastically reduced the number of products with defects. The plant boosted productivity by 7 percent and kept labor costs low, at around 4 percent. Still, thanks to the union, most workers were earning $13 to $15 an hour—“real decent money around here,” as one maintenance worker told me, especially for a workforce where many had never graduated high school—ith two to three weeks of vacation and a blue-hip health plan. Employees stuck around for years, knew their jobs inside and out, and had a rare esprit de corps. When they faced tight deadlines, fabricators would volunteer to come in as early as 4 or 5 a.m. so they could get a head start before the paint crew arrived at six. In December 2009 the Sparta facility was named by Industreek as a Best Plant of the year, one of the top ten in North America. In the months that followed, it won Best Plant within Philips’s global lighting division as well as the firm’s global “Lean Challenge.” That summer, plant managers invited state officials and legislators to Sparta to celebrate.

Then, one morning in November 2010, a Philips executive no one recognized drove up and walked into the plant, accompanied by a security guard wearing sunglasses and a sidearm. He summoned all the employees back to the shipping department and abruptly announced that the plant would be shut down. Though the workers didn’t know it at the time, most of their jobs would be offshored to Monterrey, Mexico. The two of them then walked out the door and drove off. “It was a shock, I’ll tell you,” Ricky Lack said more than two years later. Still brawny in his late fifties, he’d hired on at the plant in 1977, when he was nineteen years old. “My dad worked there,” he said. “Half the plant’s mom or dad or brother worked there. We still don’t know why they left.”

If you listen to any mainstream economistay, former White House economic advisor Gregory Mankiw, the author of one of the nation’s most popular economics textbooks—ou’ll learn that “productivity growth is good for American workers.” Productivity goes up, and with it comes rising prosperity for all. As Adam Davidson, the popular economics guru of Planet Money and the New York Times Magazine, wrote recently, “Productivity, in and of itself, is a remarkably good thing. Only through productivity growth can the average quality of human life improve.”

American workers are astonishingly productive. In fact, American labor productivity has grown every single year for the past three decades, according to the Bureau of Labor Statistics. US productivity zoomed up after the most recent financial crash, rising sharply from 2008 to 2009, and again from 2009 to 2010. By contrast, productivity actually shrank during this period in such industrialized nations as Japan, Germany, and the UK. Sure, a share of these productivity gains are due to American firms outsourcing and offshoring jobs to cheap labor markets, but the bulk of it comes from American workers adapting to new, more efficient technologies and working harder and faster than ever before—nd for less pay.

Politicians on both sides of the aisle tend to lean on American productivity as the solution to our current economic woes, a phenomenon in force during the last presidential campaign. “I know we can out-ompete any other nation on Earth,” Barack Obama told the nation in a weekly address in January 2011. “We just have to make sure we’re doing everything we can to unlock the productivity of American workers, unleash the ingenuity of American businesses, and harness the dynamism of America’s economy.” Mitt Romney, too, argued that “[a] productivity and growth strategy has immediate and very personal benefits,” and that “economic vitality, innovation, and productivity are inexorably linked with the happiness and well-eing of our citizens.” The idea being that if we sprinkle a little stimulus money here or some deregulation there, depending upon your orientation, American workers will somehow, through sheer grit and generous doses of Red Bull, be able to dig deep and work even faster, even harder, and even more efficiently than before—ven though they’ve been doing so for decades—hereby jump-tarting our economic engine. After that, the sky’s the limit.

So why didn’t this play out for the ferociously productive workers at Philips’s award-inning plant in Tennessee? This “engaged workforce,” in the words of IndustryWeek, had hiked production on some lines by more than 60 percent, cut changeover time between small orders by 90 percent, and reduced the number of defective parts by 95 percent, making the plant one of the most productive in America.

There is data to bolster the gospel of productivity. From the end of World War II until the early 1970s, when many policy makers were coming of age, productivity and wages rose in tandem in the United States, in a steady upward curve of prosperity so dependable that it began to seem inevitable. But since then, as economists only began to notice in the mid-990s, productivity has continued to grow while real wages have flattened or even dropped for a majority of workers; most of the real income growth in recent decades has come from households working more hours or more jobs.

During the current recovery, productivity growth hasn’t even resulted in increased hiring; rather, it has occurred in concert with massive layoffs and record long-erm unemployment. “U.S. employers cut jobs pitilessly” during the recession, noted a typical story from the Associated Press. “Yet after shrinking payrolls, many companies found they could produce just as much with fewer workers.” The result has been a recovery marked by increased productivity and record corporate profits, but with catastrophically low employment growth. Yet economists and pundits continue to chew over our “jobless recovery” as if it were an anomaly.

When Philips announced its plans to shut down the plant in Sparta, the firm was in the black, aided by $7.2 million in federal stimulus grants and contracts. Profits were even better the following year as the firm began to lay off the plant’s nearly 300 workers. Even Philips’s lighting division was doing well. By late 2010, three years into the recovery, corporate profits, in general, had bounced back decisively, reaching record highs. Yet layoffs continued apace—.4 million in 2010, 1.3 million a year in 2011 and 2012—ell above precession levels.

Among other profitable firms—ndeed, Fortune’s list of America’s most profitable firms in 2012, the year the Philips plant finally closed its gates—losures and layoffs have been widespread: Chevron lays off 103 from a New Mexico mine; Walmart shuts down a New York office, putting 275 out of work; Ford shuts down two assembly plants in Minnesota, laying off nearly 1,700; IBM lays off 1,790 from its business units; Microsoft lays off 5,000. Exxon, ranked number one in profitability by Fortunein 2012, with $41 billion in profits in 2011, shrank its global workforce by more than 15,000 between 2010 and 2012. Chevron, at number two with profits of $27 billion, added only a thousand US jobs during that period. Apple was the only one of the country’s five most profitable firms to add more than 10,000 jobs during that time (and Apple’s public disclosures don’t specify how many of those jobs were domestic). The latest Commerce Department data show that all US multinationals combined added a net total of only half a million jobs domestically between 2002 and 2011, but added 3.5 million jobs abroad, an indication of offshoring on a very grand scale.

Josh Bivens, an economist with the Economic Policy Institute in Washington, DC, said that increased productivity like that generated at Philips’s plant in Sparta could create jobs in theory, but weak demand is standing in the way. “One way you can imagine productivity gains not translating to rising demand is if more of those gains go to corporate profits, rather than wage growth,” he said. “The share of corporate-ector profits as a share of income is the highest since 1951. They’re not investing in capital, they’re sitting on piles of money. We’d see more job growth if that weren’t the case.”

One might be forgiven for asking what, exactly, all this productivity is for. “We busted our butts to get where we were at,” Ricky Lack said the first time we spoke. “We got to number one. And it didn’t matter.”

White County, Tennessee, is a verdant place, with rolling hills, lush pasture, and wheat fields that gleam in the late afternoon light. But it has a scarred history. In the late eighteenth century, early settlers fought bloody skirmishes against the Cherokee to gain control of this land. The county sat in the crosshairs of the Civil War, straddling the dividing line between Union and Confederate enclaves, and served as a base for one of the war’s most sadistic Confederate guerilla fighters, Champ Ferguson. White County is far less divided now, held together by its intense conservatism—omney won by thirty-even points here—nd its demographics—he county is 96 percent white.

After the war, White County was built up on wheat, corn, tobacco, and livestock, and later coal and timber; Sparta, the county seat, is scattered with hundred-ear-ld brick homes and aging red barns from its time as a small but bustling agricultural center. Manufacturing didn’t pick up until after World War II, when Tennessee became one of the first states in the nation to pass a “right to work” law, making it inhospitable to unions but inviting to firms in search of cheaper labor.

It was front-age news in the Sparta Expositor when Thomas Industries broke ground for a new lighting-ixture plant in 1963. Other plants set up shop around the same time—he workwear manufacturer Red Kap, the car-arts maker Wagner Electric, and Mallory Timers, a maker of appliance parts. By the late 1970s, when Ricky Lack hired on with Thomas Industries, there were enough humming plants in town working two and three shifts that he could more or less walk out of high school, walk up to the plant doors, and get to work.

By the time Philips shut it down, that lighting-ixture plant was one of the only factories in the county still employing several hundred people. Red Kap, which had been hemorrhaging jobs for years, finally closed up shop in 2000; Mallory shut its doors and moved to China just a few years later. Paul Bailey, a member of the Sparta Chamber of Commerce who was then a White County commissioner (and is now a state representative), recalls his failed efforts to engage Tennessee’s Congressional delegation in a desperate attempt to save the Philips plant. “The feeling that I got from those gentlemen was, ‘You know, it happens all the time.’” Hall, the union rep, wasn’t alone in suspecting that their indifference stemmed mostly from the fact that the Philips plant was union; Sen. Bob Corker viciously attacked Volkswagen for allowing a United Auto Workers organizing drive at its plant in Chattanooga last February (the union ultimately lost the vote); Rep. Scott DesJarlais, meanwhile, is a staunch antiunion Tea Party Republican.

Plant closings do happen all the time in the United States. More than 70,000 have shuttered over the past fifteen years—ore than twelve a day, not to be replaced. Last September, the federal Bureau of Labor Statistics stopped tracking mass layoffs, a low-riority activity sacrificed to the sequester.

Yet, as the time I spent in Sparta made clear, every one of those closures was a body blow to hundreds of families—o entire communities.

“This place, at the time, you loved going to work,” Bo McCurry, a friend of Lack’s, said of the Philips plant. “You knew everybody.” On mild evenings, he and Lack and friends would head out to the parking lot after a shift for beers on his tailgate. On hot afternoons, someone would swing by McDonald’s and pick up sweet teas. When there was a birthday, everyone ate. When there was a death, everyone grieved. McCurry’s brothers had worked at the plant and so had his sons, whose names are tattooed on his muscular right arm. It was where he met his wife, Donna. “I don’t know how many families came up in here,” Lack said of the place. “Well, all of White County.” At the plant, it seemed, you were never alone.

When I sat down with Sparta’s mayor, Jeff Young, in his auto collision shop—he area’s political and business leaders are one and the same— said I’d heard that he’d had family at the plant, too. He told me his mother was one of the first dozen hired on there, right after he was born, in 1963. “I was all through that plant as a young kid,” he said. There were gifts and a movie for the kids at Christmas, and cookouts every summer. The plant meant everything to her, he said. She worked in assembly, and he remembers her bringing home stacks of small, green, metal pans, “about like a Coney Island chili dog, I guess,” some with bits of wire, others with plastic sleeves, and “after dinner was put up and the table was cleaned, she’d sit and watch TV and we’d all put these things together. And that way when she would go into work the next day she’d have hundreds of ’em ready,” so that production could get up to full speed first thing in the morning. “I’m sort of tooting her horn,” he said, “but she wasn’t the only one who did that.”

Work at the plant wasn’t easy. “You would actually go home and your hands would hurt, your elbows would hurt, your back would hurt,” Donna McCurry told me. “As far as heat-ise, during the summer, you’d have a fan hanging on a pole, and if you was lucky it would hit you. And in the winter, there was heat, but depends upon where you stood if you would be warm or not.” Running the forklift gave Bo McCurry two herniated discs, and a piece of steel cost Jim Gray an eye. Until fifteen or twenty years ago, every pipe in the plant was wrapped in asbestos, and many workers died of lung cancer. (“But of course if you died of lung cancer it was because you smoked,” Lack said, inhaling and laughing.) Some said that the magnified safety glasses destroyed their eyesight, and for years people were allowed to work the spray booth without breathing gear, emerging, Bo recalled, like “Casper the ghost.”

But the plant is mourned like a person. It provided a good living, the kind of paycheck, in Donna’s words, “where you was proud to go to the bank.” Pay that bought homes and land and boats for the lake, even sent kids to college. The literacy and GED classes, the chance for technical certification, made the plant a place where you could learn and grow. And the union offered dignity and job security, as well as a deep sense of community.

Local elected officials and business leaders saw the plant’s closure as a profound defeat. There were the 284 laid-ff workers, plus their families. There was the hit to local suppliers—mong them the pallet company, the cardboard supplier, and Paul Bailey’s trucking business, which lost at least $1 million in annual revenue. Directly and indirectly, the plant was responsible for some 2,200 local jobs, according to an analysis by Uhrik and Norris, the plant’s top management. Unemployment in White County shot up from 9.9 percent in November of 2011, before the major layoffs began, to 11.1 percent the following February, when the bulk of the workforce was let go. The county’s labor force also shrank 1.2 percent during that time, likely reflecting the many older workers who retired early, on diminished Social Security checks, rather than look for work they didn’t believe was there. Sales-ax figures dropped, a measure of the belt-ightening that ensued. “As far as the county, yeah, it hurt us bad,” said County Executive Herd Sullivan, a tall, long-imbed man with a shock of white hair. “We’ve got some employment back in since then. But you never hardly get what you lose. You just don’t get it back.” 

There were other ripple effects. The Philips lighting plant was the last union plant in the county— loss repeated across the state, where, according to Lawrence Mishel of the Economic Policy Institute, unionization has dropped from about 25 percent in the 1970s to a mere 6 percent today. For years, negotiations over wages and benefits at the plant set the standard at other big factories in town. “We were the benchmarks,” Jim Gray, a Detroit transplant, told me one night over dinner with several other refugees from the plant. “We controlled their raises,” Lack added. Without that pressure, prospects aren’t bright in White County for what decent-aying factory jobs remain.

Back when the plant was Thomas Industries, headquartered in Louisville, Kentucky, plant veterans say it wasn’t uncommon for the owner, Lee B. Thomas, to show up on the shop floor to address his team. He invited the union in from the start. As Scott Vincent, the plant’s self-ppointed historian, explained, “In the ’60s, if you were going to sell light fixtures and it was going to be profitable, you had to have the union label on it,” because the construction trades were so strong that they would simply refuse to install nonunion fixtures. Thomas liked to say that the union kept people honest. But after the Philips acquisition in late 2007, the plant was in the hands of someone else, or rather something else, entirely.

Philips is a multibillion-ollar multinational firm that sells everything from health-are equipment to home appliances across the globe. Under Philips, the Sparta plant’s management systems were functional, Lisa Norris said, but far more cumbersome than when the plant was run by a small company specializing in lighting. Once the closure was announced, the firm was “like a headless monster,” Mayor Young told me. “I mean nobody could find the guy in charge that we could sit down and have a conversation with—hat one guy, that if you made him understand he could say, ‘Well, let’s just not do that.’”

The union launched a Keep the Lights On campaign, with viral videos and an online petition drive, followed by a frigid December march from the small, blue union hall, down two-ane McMinnville Highway to the plant. County and state officials, who had already given the plant tax abatements and energy subsidies, scrambled to come up with new ways to entice Philips to stay. But at whom, exactly, were these efforts directed? Young and Sullivan and Bailey and Norris slowly went up the food chain in Philips’s North American division, but even when they got on the phone with Zia Eftekhar, then head of US operations, they still weren’t convinced that he was the one who’d made the call to close the plant. They were left, Hall said, “fighting someone over in the Nether-lands who couldn’t find Sparta, Tennessee, with MapQuest.”

Their experiences echoed my own, as Philips declined interview requests and offered only a few brief comments by e-ail, the first of which read, in part, “Philips maintains constant evaluation of all its business activities to ensure optimum performance and the decision to divest this business was made in response to the long-erm evolution taking place within luminaires manufacturing.” Calls left at two of Eftekhar’s homes (he is now retired) went unanswered. Rudy Provoost, then head of Philips’s lighting division and now CEO of Rexel, the electrical-upplies firm, also declined an interview.

Clearly, Philips slashed its labor costs by moving most of the Sparta operations to Monterrey. (A small piece of production was sent instead to a Philips plant in Tupelo, Mississippi.) A 2006 report by a Dutch labor union on Philips’s operations in Mexico found that its lighting workers in Monterrey were paid as little as $9 a day, an amount insufficient to support their basic household needs. A 2010 human-ights report also found evidence that the Monterrey plant had ushered in a company union, a way for employers to block genuine collective bargaining and suppress wages. At other Philips plants in Mexico, investigators found that workers were only allowed one bathroom break per ten-our workday and were barred from seeking medical attention unless their situation became life-hreatening. What’s more, in Mexico Philips would be free of many environmental regulations that had governed the plant in Tennessee.

Philips did, by e-ail, offer another explanation for the move: “The facility manufactured fluorescent lighting which is an older lighting technology, while the entire lighting industry is moving towards digitized LED lighting systems. The company opted to consolidate manufacturing into other existing facilities that could produce the same product.” Dutch journalist Henk van Weert, who covers Philips for the newspaper Eindhovens Dagblad, echoed that assessment, saying that Philips made a decision to charge into the LED market and was “selling off their conventional industrial footprint” to marshal resources for the fight. But this explanation doesn’t quite add up. In 2010, with buildings across the globe still switching from incandescent to fluorescent, growth in the fluorescent industry was projected at a healthy 7.9 percent a year through 2014— comfortable window for beginning to shift Sparta’s production over to LED. And Philips didn’t eliminate its fluorescent production in 2010; it simply offshored most of it.

Vincent and others at the plant tended to think that Philips bought the plant with the intent of shuttering it, in a bid to eliminate the competition. But Lisa Norris’s take seemed the most persuasive: Philips’s model is to concentrate production, and so the particulars of how well a given plant performs—ven if it’s Philips’s best-erforming plant worldwide—on’t matter. “There’s a momentum that gets in place when people say we’re going to close these plants, and it becomes a point of weakness for anyone to stand up and say, ‘No,’” she told me one evening. “No one feels strong enough to do that. Because they feel like it’s showing some sort of human weakness, that they’re making an emotional decision—hen in fact, there’s a business decision there. And so it gains a sort of momentum in an emperor-has-no-clothes sort of way. And so people are compelled to do the wrong things. And then you start adding incentives based on the execution of those plans and now you’ve got everybody marching straight off a cliff.”

Once it was clear that Philips was determined to close the plant, Norris, Uhrik, and a lean-perations expert named Nicole Belitz pulled together a detailed proposal to buy it. They knew the numbers better than anyone, and calculated that the plant, which operated at extremely healthy margins, could be solidly profitable on its own.

Team Sparta, as they dubbed themselves, did the math, calculating the full cost to Philips of moving production to Mexico, and concluded that Philips would be dramatically increasing customer lead times, which would likely reduce its market share. The team also projected that Philips would have to rely more on distribution centers, raising warehousing costs; that the firm would be shipping fixtures longer distances on worse roads, meaning higher transportation costs and more breakage; that it would be using less automation and end up with more defects; not to mention the estimated $30 million it would cost to excavate those massive machines and rebuild them in Monterrey. Factoring in those costs, Team Sparta was convinced that the local plant could sell fixtures to Philips for less than it would cost Philips to make them in Mexico and still clear at least $1 million in annual profits. 

Uhrik and Norris had no equity of their own and would need at least $12 million in start-p capital to take over the plant, a seemingly quixotic quest. But the business case was so impressive that when they brought their plan to First National Bank in Knoxville, its investment group jumped in with $4 million. “We were able to show very healthy margins, and that moving to Mexico would hurt turnaround and logistics costs,” Norris recalls, “and show that in a consumer-riven market, where a contractor suddenly needs thirty-ive troffer lights and he wants it next week, the Philips model was questionable.” The Tennessee Valley Authority and the USDA’s Rural Economic Development Loan and Grant program each independently reviewed the plan and together committed to another $3.75 million. After yet another review, this one by White County’s Local Industrial Board, the county commissioners, including Bailey, offered to come up with the rest by putting a $5 million bond on the ballot. They believed that the strapped citizens of White County, with their $30,000 average annual earnings and 20 percent poverty rate, would vote it up. “We thought we could create a model where everybody owned a piece of this,” Norris said. “That was the dream.” County officials were also convinced they’d get a solid return on their investment.

As I combed through the Team Sparta business plan, I became skeptical about whether this kind of granular analysis was ever performed by the Philips executives who decided to move the plant to Monterrey. Norris was in regular contact with Philips’s North American headquarters, and she certainly saw no evidence of it. This begged a larger question: How many of those 70,000 American plants offshored in recent decades, those millions of American jobs lost, had been the result not of a ruthless commitment to the bottom line, but of a colossal failure of due diligence? 

Even after Team Sparta ran the numbers for them, Philips executives barely reviewed the proposal. “Yeah, the plan got in front of him,” Sullivan said of Eftekhar, the head of North American operations. “They just never did try to get it to work. They never even considered it much, I don’t think.”

For something so vital to the future of the US economy, there’s disturbingly little data collected about plant closings and offshoring, let alone analysis of what goes into these decisions. Corporate annual reports and SEC filings are silent about the logic behind closings. Philips’s 2010 SEC filings, for example, reveal nothing about why the firm offshored the Sparta plant, or the many other North American plants it has shuttered, beyond a brief reference to “initiatives to structurally reduce our overall cost structure” and “transferring technologies to low-ost countries.” WARN notices, required by the Worker Adjustment and Retraining Notification Act from firms before they make mass layoffs, only contain numbers of jobs lost, not the thinking behind them, and are arduous to examine because they’re filed state by state. Until the 2013 sequester, the Bureau of Labor Statistics compiled them but only published aggregate data that lumped offshoring in with temporary layoffs. As the SEC does not require firms to break down their employee numbers by nation, multinationals, like Philips, increasingly provide only global or regional numbers in their public filings. American multinationals are required to report their total employees here and abroad to the Commerce Department each year, but the aggregate data made publicly available provides only a rough hint as to the scale of offshoring—nd, again, nothing whatsoever about the thinking behind it. A 2010 NBC News/Wall Street Journalsurvey found that more Americans—6 percent—lamed offshoring for the struggling economy than any other cause. And yet the Department of Labor tracks offshoring numbers only to the extent that laid-ff workers petition for “trade-ffected” status, which entitles them to training grants. Since few nonunion workers know to do this, the DOL numbers are definitely an undercount. Yet in 2010, the most recent data available, such petitions represented 287,000 offshored jobs, the equivalent of a thousand factories like the one in Sparta.

These are catastrophic job losses. Yet no regulatory body ever asks the firms responsible to explain why they offshored the jobs—ven when those firms, like Philips, receive substantial taxpayer subsidies.

It was left to two scholars, Kate Bronfenbrenner, of Cornell University’s School of Industrial and Labor Relations, and Stephanie Luce, of the University of Massachusetts at Amherst, to look behind the numbers. In a 2004 study, they found that offshoring, that old story from the 1970s and ’80s, was still sharply on the rise. They used detailed first-uarter data to estimate that 406,000 jobs would be offshored in 2004 (a number roughly triple the widely recognized undercount from BLS), compared with 204,000 three years earlier. More of these jobs, they found, moved to Mexico than to any other country. Other details are salient. “Once a place sells to somebody else that’s not union, you might as well shut the damn doors,” Bo McCurry said to me one afternoon, and Bronfenbrenner’s data shows he’s probably right. Though only 8 percent of private-ector workplaces are unionized in the United States, 29 percent of production shifts involved unionized facilities, implying that offshoring may be, at least in part, a union-voidance strategy. Even more interestingly, the overwhelming majority of the facilities being offshored were owned by large, profitable multinationals—ot, as one might imagine, by firms struggling to compete. And many of the closures took place soon after the plants had been acquired.

“Corporations often do things to impress their shareholders,” Bronfenbrenner said. “Everybody is offshoring and outsourcing, even though it isn’t necessarily a good financial decision. It may actually cost more, but to investors it looks like sound management. It’s just keeping up with the Joneses, where the Joneses are every other manufacturing company in the world.” 

A 2012 study by Michael E. Porter and Jan W. Rivkin of Harvard Business School, based on interviews with 1,767 executives involved in location decisions over the previous year, confirms Bronfenbrenner’s view. Porter and Rivkin found that “rigorous processes for location choices” are “far from universal” and that such decision-aking processes “have lagged behind those for virtually all other major investment decisions.” They found that companies often underestimate the hidden costs of offshoring, overlook the advantages of a US location and “fall prey to biases that work against the U.S.”

Combined, this research hints at a radical idea: that offshoring has simply become a reflex. And if that’s true, all the lean manufacturing and just-n-ime production and automation and retraining and two-ier pay scales in the world won’t be enough to save American production jobs.

So much in the Sparta story defies the familiar political scripts: Norris, the union-voidance expert, along with Bailey and Sullivan, of the Chamber of Commerce, joining hands with the IBEW to help save a union plant; small businessmen in Tea Party country championing community ownership. It became clear from my conversations that Philips’s actions had deeply offended people’s sense of decency, from the laid-ff workers to what Donna McCurry calls “the big wheels in town,” and that this sense of corporate indecency is what had brought such politically disparate people together. 

Indeed, Gallup polls show that dissatisfaction with major corporations is sharply on the rise, from 48 percent in 2001 to 61 percent in 2013—egardless of respondents’ political affiliation. Another poll found that a majority of Americans view corporate greed as a key factor in the faltering economy. “It’s tragic that companies like that worry so much about the bottom line,” Mayor Young said toward the end of our conversation at his auto shop. “I just think about myself and my business right here. Now how cruel would it be of me to close my business here and move to Lebanon or wherever just because I think I can make $25,000 more a year? To me, it just doesn’t make sense.” If Philips has lost money on the move, it makes no sense at all.

Former members of the management team at the Sparta plant have stayed in touch with several current and former leaders within Philips’s lighting division. According to conversations those managers recounted in detail, the move to Monterrey cut labor costs by more than half, but logistics costs grew by a factor of ten; lead times, meanwhile, ballooned from four to ten days in Sparta to six to eight weeks in Monterrey; and by late last year Philips had lost nearly a third of its market share on the fixtures that used to ship out of Tennessee. Philips spokesperson Silvie Casanova responded by e-ail, saying that while she “can’t get into transportation and labor costs,” the characterizations are untrue and “don’t account for the fact that part of the production was moved to Tupelo.” On the second point she said, “We do not break out lead times by product line, but our lead times have not materially changed due to location.” As for the question of lost market share, she said that it “has to be evaluated in the context of the LED transformation happening in the lighting business. Rather, it’s the rapid adoption of LEDs that is creating the shift and fluorescent technology in general is losing market share. The product lines you are referring to also have LED versions, which need to be factored into the equation.”

There is certainly no evidence that the move made Philips more profitable: According to SEC filings, income from Philips’s Luminaires division fell from $924 million in 2010, the year before the Sparta layoffs began, to $645 million in 2013, the first year operations in Monterrey were fully up and running.

Last August, more than a year after the plant closed its doors, Bo McCurry and Ricky Lack stepped out of Lack’s beat-p Ford Ranger and walked up the sloping, tree-ined drive to the plant’s padlocked gates. It was the first time either one had been back since the closure. Red mallow blossomed under a sign that still read philips professional luminaires—parta operations. Beyond the gates, a monarch butterfly floated by, and a red fox darted out into what was once a bustling loading area, now silent except for the sounds of birds.

“You see that little old blue door?” Lack asked. “Next to the steps. See the bright yellow steps over against the four roll-p doors? Inside. The shipping department. They said we’re shutting the building, closing the plant. End of story. They slipped right out that back door and got in their car and drove away, and that’s it.”

“Couldn’t believe it,” McCurry said. “Everybody was crying.”

The layoffs started in May 2011 and came in waves until, on March 31, 2012, the last employees finished sweeping the factory floor and walked out. After so much time, everyone I asked about that day still choked up and struggled, at least for a moment, to speak. Scott Vincent, hired on to assist with an environmental inspection of the vacant plant, was the very last to go. “To think about all the people that you’d spent your life with. You’d lived with ’em and watched ’em die, and watched their families die and be sick, and suddenly they were all just gone. I mean it was really a struggle to have to live with all that.”

The night before, I’d met up with Brent Hall, the union rep, along with McCurry, Lack, Vincent, and a couple other long-imers, many of whom had rotated in and out of the shop’s union leadership over the years. I’d arrived in town just as their extended unemployment was running out and asked how everyone was getting by. Of the five of them, only two had found jobs. Only Vincent had found a decent manufacturing job, with full-ime hours and health benefits. Lack, fifty-ive, was working as a tree pruner, his skin now a deep mahogany from long hours spent in the sun. His hourly pay wasn’t as good as it was at the plant, and it wasn’t steady work—nly three or four days a week, without paid time off or benefits. Lonnie Barlow had given up on finding work, and went into early retirement at age sixty-ix, turning his attention to the few head of cattle he kept on his patch of land. Jim Gray, the one who lost an eye to the plant, was using state and federal grants for trade-ffected workers to go back to school, studying, at fifty-ight, among a classroom of eighteen- and twenty-ear-lds, how to program industrial equipment. He wasn’t especially optimistic about his chances for getting a decent job afterward, but his unemployment benefits would continue during his schooling, so he figured it was something to keep him going while he looked for work. He spoke wistfully about an electrician job he’d been up for some months back at the Volkswagen plant in Chattanooga, an hour and a half away, that would have started at about $17 an hour—he same plant where the widely watched unionization battle would later take place. He guessed that all of the other finalists were in their fifties or sixties, too, all urgently looking for work. One had driven all the way from Detroit to take the practical test.

The others I spoke with were faring no better. As the unemployment checks dried up, I heard of people selling their boats, their ATVs, and even their houses. Marriages were falling apart. People had started drinking. Jerry Pryor, fifty-our, got manufacturing work, making car mirrors, but he had a miserable shift—:30 to 10:30 a.m.—nd was driving twenty-ive miles each way, burning up gas, for less than he got at Philips. Donna McCurry, forty-ix, tried her hand as a CNA at a local nursing home, earning just a dollar above minimum wage, and then left that job to take over a small car-epair shop. She and Bo had bought the shop with the life-insurance money she got after her son died in a car accident, along with some of their serverance pay from the plant. But she was barely making ends meet.

She and Bo, fifty-ight, had recently split up. He was still out of work when we caught up, though now and again he found a temporary placement—e’d just done a few weeks at Unipres, a car-arts plant 100 miles away in Portland, for less than $9 an hour, minus the $100 a week he paid into a carpool to get there and back. At one point a temp agency said it had a permanent placement for him at the S&S Screw factory in Sparta, but before his start date they called to cancel. He and almost everyone else I spoke with from the Philips plant were sure it was because of the union. Bo was serving as president at the time of the plant closing, so he was interviewed on local television and in the Expositor, making him an easy target. Word was S&S hadn’t hired on a single union member from the plant, same as over at THK Rhythm, an auto-arts maker, afraid they’d try to organize the place. Ten years earlier, someone they knew had tried to organize S&S, Bo said, “and they fired his ass on the spot.” (Neither firm returned calls for comment.) He couldn’t seem to figure out how to get a job. When he was younger, he said, you got a job through a friend or relative or neighbor at a plant; now you have to apply through a computer, if you can find someone who has one, or drive twenty minutes to a temp agency in Cookeville. “I probably couldn’t get a job at Walmart as a door greeter,” he told me, defeated. Not only out of work but uninsured, he had to take out a $9,000 bank loan in May to pay for an operation on his herniated discs, what he called “a deal with the devil,” leaving him to pay out $80 a month pretty much forever.

The stories I heard in Sparta gave life to some of the most troubling data about the nature of the economic recovery. Decent paying jobs, like the ones at the Philips plant, where workers were pulling in as much as $16 an hour, have disappeared, replaced by jobs with poverty wages. A 2014 study from the National Employment Law Project found that mid-age jobs comprised 37 percent of recession job losses, but only 26 percent of job growth during the recovery. The low-age jobs—onna’s $8.25-n-our nursing-ome job; Jerry’s $8.50-n-our starting wage at his new factory job—ere the opposite, constituting 22 percent of job losses and 44 percent of job growth. Some of the nation’s fastest-rowing job sectors, such as home health care, have seen the sharpest drops in pay.

There will also be fewer actual jobs. The Bureau of Labor Statistics has projected a 23 percent growth in temporary employment between 2010 and 2020, outpacing most other sectors. The American Staffing Association, which represents temp agencies across the country, sees this as one sign of a “fundamental shift in the role of staffing services in the economy,” with companies only wanting to “use talent” on an “on-emand basis.” I stopped by a couple of Cookeville’s many temp agencies. Most of them are located in strip malls, and nearly all are within yards of a storefront offering, by means of massive bright yellow billboards, car title or payday loans. Women at two agencies told me that the vast majority of their temp placements are now in manufacturing, and that in most cases these plants have outsourced their entire hiring process to agencies like theirs. Angela Atkins, of @Work Personnel Services, told me that after her cut, the factory hires are paid anywhere between $7.25 an hour—ederal minimum wage—nd $12 an hour. “Most of the time it’s temp-to-hire,” she said. “Other times it’s temp all the way, and they can keep ’em for years.” When laid-ff workers come in having earned $15 an hour or more, she asks them, “What are your expectations?” Meaning, it’s time to lower them.

I returned to Sparta in October, to overcast skies and light rain. People’s bitterness about the unjustified closing seemed buried under resignation. Lack introduced me to another friend from the plant, Judy Phifer, who met me one frigid day in a parking lot near the plant where she now worked, a faded pink fleece pulled around her grease-tained T-hirt. A single mother, widowed when her son was only three, she’d been at the Philips plant for nine years, working, by the end, on one of the incentive lines, bringing in good enough money—lmost $14 an hour—o send her kid to Tennessee Tech. Just a few years ago she was confident enough to take out a home-quity loan to replace her roof and central heating system. Now, at fifty-ine, she wasn’t earning enough to keep up on the payments and had put up for sale the home where her husband died and where she’d raised her son.

She tried hard to be upbeat, saying of her impending move, “I guess everybody needs a change and it may do me good.” But times were tough. She was out of work for almost a year after the Philips plant closed down, and she’d been building alternators at the LTD plant for about ten months. Once a union shop, LTD now depended heavily on temp workers. Phifer got hired through an agency in Cookeville called Trustaff, and after Trustaff took its cut, she got only $8.50 an hour, barely north of minimum wage, with no benefits, not even sick days. She had to beg the plant manager not to fire her for taking a day off—npaid—o attend her son’s graduation. She said she works tired and she works sick; she was long overdue for a mammogram but couldn’t afford to pay out of pocket for the test, and couldn’t risk taking the time off to get one anyway. “I’m human just like everybody else,” she said. “I have problems just like anybody else has ’em. But where if you take off to do your problem, you’re going to lose your job, you know?” As we parted ways, she expressed a small flash of anger. “I don’t think the government should let temp services hire people out,” she said. “It’s like being a slave.”

The next day, I stopped by Donna McCurry’s repair shop, and she was faring no better. A tidy, businesslike woman you might mistake for a grade-chool principal, she was only bringing in enough at the shop to pay her mechanics, not herself. So many people in town were out of work that they had to put off car repairs, or when they couldn’t—hen, say, their brakes were completely shot—hey had to stretch out the payments. But after her experience at Philips, McCurry refused to lay off anybody. So she was now back to working overnight shifts at the nursing home for $8.25 an hour, not much more than half of what she earned at Philips, and still putting in six days a week at the shop. There was a futon in back where she grabbed two to three hours of sleep when she could, and that’s all she got. She was giddy with exhaustion the day we spoke, but having just worked three shifts in a row at the nursing home, she was about to get a night off. “It’s sad,” she said, “when you get excited over getting to sleep!” She giggled, and then laughed long and hard. Most days, she would close up the shop, get supper on the table and get the kids to bed, and then head off to the graveyard shift to clean and care for twenty-wo residents, including one ornery man who tended to bruise her up and a few obese residents she had to turn by herself. “As far as their life, it’s normal,” she said of her kids. “My life’s not.”

Like Phifer, she was surviving without healthcare—ennessee is one of twenty-our states that have rejected Medicaid expansion to cover the working poor—nd she had put off a stress test to monitor a chronic heart condition because the $1,000 price tag wasn’t even within reach. She’d been instructed to avoid caffeine, but said she couldn’t make it through the day anymore without a steady stream of coffee and tea.

She was worried about what was next for her teenage daughters. “There’s nothing here in Sparta,” she said. “They’re not going to stay here and have anything in life.” She recalled when Philips and Red Kap had two shifts going, and Mallory had three. “There was jobs. But now the jobs are not here.”

No one had seen her ex-usband Bo in weeks, and he didn’t answer my calls. Lack had quit drinking—n part, he said, because he simply couldn’t afford it—ut told me that Bo’s drinking had gotten worse. As the months ticked by, his job prospects were getting worse, too. According to a recent study out of Northeastern University, employers prefer workers like Bo who have deep experience and a history of low job turnover. But being unemployed for more than six months eliminates those advantages, putting the long-erm jobless on par with applicants who lack any industry experience at all.

There’s a term labor economists use when measuring workforce participation— “discouraged worker.” These are adults who want to work, who are ready to work, but who have given up looking for work. They no longer count as “unemployed,” and so don’t figure into the unemployment numbers. They are nearly invisible. According to analysis of the latest data by the Economic Policy Institute, there were, as of April 2014, 6.2 million of these invisible workers—PI’s number also includes unofficially “discouraged” workers, such as recent grads who find job prospects so bleak they’ve yet to even start looking for work. That’s enough to make the real unemployment rate 9.9 percent, rather than the official 6.3.

The Bureau of Labor Statistics counts “discouraged workers” as those who were recently looking for work but stopped because “they believed no jobs were available for them or there were none for which they would qualify.” They are counted by means of a monthly BLS household survey, and the day a job seeker answers the phone and says he’s given up, he slips from “unemployed” to “discouraged.” I called up economist Jared Bernstein, a former economic advisor to the Obama White House, now a senior fellow with the Center on Budget and Policy Priorities in Washington, DC, to ask him about this group, the Bo McCurrys of the American economy. “It’s like a game of musical chairs,” he said. “The music stops and there’s nowhere to sit down.” I asked whether there might be an emotional component to this measure, a question of whether you’re still able to hold on to a shred of optimism about your prospects—r not. “I think that’s fair,” he said. “There’s a subjective aspect to this. What’s your assessment of how likely it is for something to come along for you.”

According to the data, the American mood is quite dark. BLS statistics show “an unrelenting fall in the share of the population in the labor force,” in Bernstein’s words, a trend that is “extremely persistent and unresponsive to what growth we’ve had.” In particular, among prime-ge men twenty-ive to fifty-our— revealing demographic because they’re unlikely to be in school and aren’t part of the decades-ong trend of women entering the workforce—“you see a long-erm structural decline that most people relate to a hollowing out of job opportunities.” Bo McCurry once thought he’d retire from the Philips plant, with his home paid off and a nest egg. The last time I spoke with him he told me he was probably going to have to clean out his 401(k) to survive.

Almost every conversation I had with people in Sparta—ith laid-ff workers, with the marginally employed, the broke, and the just-etting-y, with the “big wheels” who’d tried and failed to lure Philips into staying—ircled around at some point to the question of what the future held. Could any of them imagine a thriving industrial base returning to White County? 

“It don’t come back,” Lack told me. “And just because you relocate don’t mean you’ll get a job. You could go to Alaska and still not get a job.”

The editor of the Sparta Expositor suggested, vaguely, that the town economy could be rebuilt around tourism. Paul Bailey, who owns the trucking business, was the most bullish on the potential “reshoring” of jobs. Companies, he said, “they’re looking at communities—ay, for example, Sparta—hat has a good workforce, that’s maybe had a plant like Philips shut down. They’ll come back into this market.” Fewer freight costs, the likelihood of local tax incentives, and “when you’re looking at an area that has 13 or 14 percent unemployment, they’re assuming that they can get a good labor market but yet they can pay a lower wage.”

The math just might work. A 2012 study by Boston Consulting Group found that more than a third of American manufacturers with sales of more than $1 billion were considering reshoring jobs from China—ainly because of rising Chinese labor costs. It’s a grim sort of optimism, that after a brutal restructuring of the US economy, the massive birds of prey might come circling back to pick at the carrion.

Last October I met Dwayne and Darla Pendergraph, both in their midthirties, and their eight-ear-ld daughter, Madison, on the corner of Darla’s father’s land in McMinnville they call home, along with a donkey, two dogs, and three rabbits. They’d already been through three plant closings or major downsizings—ach time, the jobs were offshored to Mexico—y the time Dwayne got hired on at Philips at age thirty-ne. He was brought on to work one of the new automated lines the union had allowed in during the 1990s; at $10.25 an hour, it was a $5 pay cut from his last job, at auto-arts maker Mahle Tennex. So the Philips job wasn’t as good as it was for the old-imers I’d spoken to, and he was far less surprised when the shutdown was announced.

His dream job, the one he imagined retiring from, was several years behind him, at Carrier, a manufacturer of air conditioners. His wiry frame sprawled out on a lawn chair behind their trailer, Dwayne told me that he earned $15.50 an hour there driving a forklift, plus plentiful overtime, making nearly $60,000 a year—ery good money in these parts. “It was a job worth fighting for,” he said. Darla worked at the plant, too, along with her dad; Dwayne and Darla met there. She was three months pregnant when the Carrier shutdown was announced—ll of the family income lost with a baby on the way. They’d nearly burned through their savings and 401(k)s when he finally got the Mahle Tennex job and she got one for $19 an hour at Rich Products, a supplier of baked goods. 

He recalled that the older workers at Carrier, who’d been there for thirty years, took the closure badly. “It was all they knew,” he said. “There were several of them who just did not believe it.” Within a year or two, he said, several of them had died, not an uncommon occurrence— recent study by the Chicago Federal Reserve found that mortality rates increased dramatically for older, high-eniority men in the year after a layoff. “But it just—t didn’t freak us out,” Dwayne said. “For whatever reason, we kept on going.”

When Darla joined us, the two of them talked about how folks at Carrier discouraged them from dating. “Don’t get your honey where you get your money,” they said. Dwayne and Darla used to laugh about it, because things had worked out so well for them. But Darla had decided it wasn’t a good idea to work at the same plant after all. “I just don’t want to take the chance of us both losing our jobs at the same time again,” she said.

Beyond that one precaution, though, she didn’t worry too much. “I knew whether I had went to a job making $10 an hour or $7 an hour, I had to do what I had to do.” They’d scraped by on unemployment; surely they could scrape by on minimum wage. They lived on her dad’s land; they’d paid off their trailer; they didn’t have a lot of shiny new toys. “We don’t try to live above our means,” she said. “We’re not overwhelmed by a bunch of debt. So we know we can make it.”

I remembered a conversation I’d had with Herd Sullivan, the White County executive and a leader of the local chamber of commerce, in which I’d asked him about the future of American manufacturing.

“I don’t know what to tell you on that one, whether things ever get back to the same as they were or not,” he said, and then paused for a while. “Probably not. Probably not. This country maybe got a little more advanced over the world as far as income and there probably is a point where things will get a little more equalized, maybe. I don’t know.” Even with his enormous frame, he seemed depleted.

Dwayne and Darla Pendergraph live in that dystopic America, but without Sullivan’s sense of loss. Theirs is an America where you live modestly, dream modestly, hedge your bets, and plan for hard times. Where you go out hunting on your day off, and if you’re lucky, get some venison for the freezer. Where your eight-ear-ld darts around the green yard, picking leaves to feed the rabbits, the still afternoon air broken only by the distant bark of a dog, and the donkey braying out what sounds like a warning.

Esther Kaplan

Esther Kaplan is editor of the Investigative Fund at the Nation Institute, an award-winning nonprofit journalism shop, and was the 2013 Josephine Patterson Albright fellow at the Alicia Patterson Foundation. She has written for the Nation, the American Prospect, the Village Voice, and other publications, and is the author of With God on Their Side: George W. Bush and the Christian Right (New Press, 2004).

David M. Barreda

David M. Barreda is the visuals editor for ChinaFile, an online news magazine, and was previously a photographer at the Miami Herald, the Rocky Mountain News, and the Valley News, and a photographer and multimedia producer at the San Jose Mercury News. He holds a master’s degree from the University of Missouri School of Journalism.

Ink technology underestimated in ATM and CiT

Mark Ellis


Jens Eberhardt, Managing Partner and founder of Cash Infrastructure Projects and Services GmbH.

State of cash technology is proceeding 

Risk Management for cash supply chains shall assure secure and efficient processes. Ink-dye technology is a smart alternative to protect cash inventories and transport of cash instead of armoring and weapons. The implementation of ink technology systems will be a step forward to optimize cost of cash handling in more and more countries. The additional investment in ATM technology is justifyable as banks/IAD`s will redically reduce the risk of physical and gas attacks against ATMs. Improved cash logistics based on soft-skin vehicles with ink protection will increase profitability of CIT companies as well. The results are outlined in the latest feasibility studies.

Ink technology as future standard

Ink staining of banknotes is an accepted standard to protect cash inventories against criminal acts in many European countries. IBNS (Intelligent Banknote Neutralization System) technology activates ink staining of banknotes, if an unauthorized access to cash is detected. If banknotes inside ATM vaults or transport cassettes are protected with ink-dye, criminals will think twice before taking the risk. Sweden and Belgium introduced ink-dye protection beginning of this century with striking success. The unedifying growth in physical and explosive attacks towards ATMs and armored trucks was significantly reduced. Similar experiences were reported from France and Chile after the introduction of the IBNS technology.

So why are banks and CiTs so reluctant to implement ink technology?

Ink technology for ATM inventories

In Germany, ATM gas attacks are on a raise from 38 in 2011 to 89 in 2013, peaking at 132 attacks in 2015! But instead of investing in new ink technology the banks rather close ATM locations over night and accept to ruffle feathers of their customers. The investment cost into ink technology is apperently the prime reason of banks to lose sight of the risk and possible cost implications of a potential attack. Recent studies outline a monetary damage of $63’000 (international average) caused by an attack with explosives considering the collateral, but not the image damage for the bank. In Germany as of the higher cash inventories the monetary damage is reaching an average between 70’000€ and 90’000€.

A feasibility study of Cash InfraPro for Mexico comes to the result, that banks can improve their security in ATM locations by introducing IBNS technique. Even an investment in IBNS technology by only 25% of the locations - focussed on high risk areas - will result in a drop of attacks by 75% within next 18 months. Similar experiences are reported from Sweden and Chile. Translating these facts for a bank with an installed base of approx. 6’000 units, ATM attacks can be reduced from todays 400 to 50 per year resulting into a saving potential of $25MM for next two years. In consequence an investment in IBNS technology will amortize in 6 months considering initial investments, on-site installation cost as well as the maintenance of ink equipment during its lifespan, training of staff and adequate project management for planning and implementation. Overall a lucrative investment.

Ink technology for cash logistics

CiT companies are constantly challenged by customers to take over full liability for transport and cash processing for a competitive price. On the other hand risk management means to implement best practices to avoid external attacks and eliminating internal losses. The success of ink technology in “high risk” countries initiated a debate about the pros and cons of the IBNS technique vs. armored trucks plus weapons for the personnel. The main argument is that the investment for organizational reengineering overburdens the financial strengths of CiTs, which have no longtime commitment from their customer base. In addition the CiTs are struggling with the quality of installed ink systems, which shows a high failure rate in the past. This results in a trust-less commitment of CiT organizations for IBNS technology, even if a business case is feasible.

But CiTs neglect the competitive advantage of the latest IBNS generation. Swiss based company VILLIGER is leading todays quality benchmarks for IBNS technology. With continuous development of modular IBNS equipment with outstanding reliability and robustness in day to day operation, VILLIGER is able to bring failure rates in operation constantly below 1% p.a. Compared to the reported rates of more than 9% in Belgium a tremendous improvement with positive impact to Total Cost of Ownership (TCO) and Return of Investment (ROI) for VILLIGER customers, beside a lifetime warranty on the ink staining equipment. The transformation from “armored transport” to “soft-skin vehicles with IBNS” can get concluded and is feasible for developed as well as for emerging markets.

Improved business case for CiT logistics with ink technology
(for Western Europe, Australia, New Zealand)

The operational cost comparison outlines an extensive advantage for soft-skin vehicles vs. armored trucks in countries with higher wages. Depending on stop density per route the cost benefit allocates between 20% and 35% for Western Europe, Australia and New Zealand. Starting with similar investments in vehicles the benefits for IBNS protected soft-skin vehicles show effect in reduced personnel as the IBNS takes over the role of one crew member - protecting the truck during stops. In consequence routes with low stop density, e.g. express services or retail collection routes with long stop times at shopping malls will reflect highest cost benefits. Explicitly about 30% of the armored truck fleet could be replaced by soft-skin vehicle with IBNS. At least an improved risk mitigation through ink technologies lowers the insurance fees.

These results are irreversible around the world, there the traffic increases and traffic jams avoid high stop densities. Further light transport vehicles using IBNS contribute to “green technology initiatives” of respective CiT companies.  

Conclusion for smart IBNS implementation

Banks and CiTs recognize step by step the advantages of IBNS technology. First movers will have a competitive advantage due to beneficial cost structures. For risk mitigation ATMs should be by default equipped with IBNS technology. Ink technology is the only proven security element that protects cash inventories inside ATMs (stationary mode), and which can be enhanced for end-to-end transportation of cash. Successful market players set a high expectation on well-designed concepts and smart implementation with experienced project management. The reengineering of the processes with the qualified technology partner will be a success factor. The requirements for IBNS technology should assume i.e.:

  • best reliability ratios with proven failure rates in operation
  • multi-vendor technology for different ATM types and operation modes
  • IT integration with other security features, e.g. for ATMs with electronic vault locks, gas sensors, data management for cassette tracking and tracing
  • safe staining quality of banknotes according to Central Bank regulations 

Do you want to know more about IBNS technology and smart implementation, please contact us.


ATMIA survey; Frankfurter Allgemeine Zeitung; Cash InfraPro feasibility studies 

Bring On the Cashless Future

Mark Ellis

JAN 31, 2016 5:00 PM EST

By Editorial Board

Cash had a pretty good run for 4,000 years or so. These days, though, notes and coins increasingly seem declasse: They're dirty and dangerousunwieldy and expensive, antiquated and so very analog.

Sensing this dissatisfaction, entrepreneurs have introduced hundreds of digital currencies in the past few years, of which bitcoin is only the most famous. Now governments want in: The People's Bank of China says it intends to issue a digital currency of its own. Central banks in Ecuador, the Philippines, the U.K. and Canada are mulling similar ideas. At least one company has sprung up to help them along.

Much depends on the details, of course. But this is a welcome trend. In theory, digital legal tender could combine the inventiveness of private virtual currencies with the stability of a government mint.

Most obviously, such a system would make moving money easier. Properly designed, a digital fiat currency could move seamlessly across otherwise incompatible payment networks, making transactions faster and cheaper. It would be of particular use to the poor, who could pay bills or accept payments online without need of a bank account, or make remittances without getting gouged.

For governments and their taxpayers, potential advantages abound. Issuing digital currency would be cheaper than printing bills and minting coins. It could improve statistical indicators, such as inflation and gross domestic product. Traceable transactions could help inhibit terrorist financing, money laundering, fraud, tax evasion and corruption.

The most far-reaching effect might be on monetary policy. For much of the past decade, central banks in the rich world have been hampered by what economists call the zero lower bound, or the inability to impose significantly negative interest rates. Persistent low demand and high unemployment may sometimes require interest rates to be pushed below zero -- but why keep money in a deposit whose value keeps shrinking when you can hold cash instead? With rates near zero, that conundrum has led policy makers to novel and unpredictable methods of stimulating the economy, such as large-scale bond-buying.

A digital legal tender could resolve this problem. Suppose the central bank charged the banks that deal with it a fee for accepting paper currency. In that way, it could set an exchange rate between electronic and paper money -- and by raising the fee, it would cause paper money to depreciate against the electronic standard. This would eliminate the incentive to hold cash rather than digital money, allowing the central bank to push the interest rate below zero and thereby boost consumption and investment. It would be a big step toward doing without cash altogether.

Digital legal tender isn't without risk. A policy that drives down the value of paper money would meet political resistance and -- to put it mildly -- would require some explaining. It could hold back private innovation in digital currencies. Security will be an abiding concern. Non-cash payments also tend to exacerbate the human propensity to overspend. And you don't have to be paranoid to worry about Big Brother tracking your financial life.

Governments must be alert to these problems -- because the key to getting people to adopt such a system is trust. A rule that a person's transaction history could be accessed only with a court order, for instance, might alleviate privacy concerns. Harmonizing international regulations could encourage companies to keep experimenting. And an effective campaign to explain the new tender would be indispensable.

If policy makers are wise and attend to all that, they just might convince the public of a surprising truth about cash: They're better off without it.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at

Cash remains tops in many consumer spending categories

Mark Ellis

Jan. 19, 2016

When they need to repay someone, 4 out of 5 Americans prefer to use cash.

This and other findings from a new Cardtronics Inc. study reveal that despite having a wide array of choices in payment methods, U.S. consumers continue to use cash for expenses ranging from P2P payments to convenience store purchases to tipping and more.

The survey also uncovered surprising facts about how millennials use cash, according to a press release from the company.

The study was compiled using results from a Cardtronics-sponsored survey conducted in late 2015 that polled more than 1,000 U.S. adults.  

"Our survey data clearly shows that in a competitive payments environment, cash is a predominant payment form and sits atop multiple spending categories," Cardtronics CMO Tom Pierce said in the release.

When asked what type of payment they'd used in various situations over the past year, respondents named a variety of methods, with cash ranking No. 1 in a number of scenarios. Consumers' first and second preferences were as follows:

  • paying someone back: cash, 78 percent; check, 18 percent
  • convenience store purchases: cash, 63 percent; debit, 41 percent
  • snacks away from home: cash, 67 percent; debit, 37 percent
  • grocery store: cash, 52 percent; debit, 51 percent
  • small business: cash, 49 percent; credit, 43 percent
  • restaurant: cash, 53 percent; credit, 48 percent
  • tipping: cash, 78 percent; credit, 27 percent

The Cardtronics survey findings also provided insights into how different demographic groups use cash.

"There is a myth in the marketplace that millennials have abandoned cash in favor of mobile and other digital payments," Pierce said. It's simply not true. ... Millennials take an open-minded view of payments and cash plays a pivotal role in their payment choice mix."

While more than half (57 percent) of millennials reported using a variety of payment methods, nearly half (45 percent) said that they're more likely to pay more with cash now than they did a few years ago.

The survey also found that women are more likely than men (39 percent vs. 29 percent) to use cash as a means to manage their budget.

Big Banks to America’s Firms: We Don’t Want Your Cash Profit-crunching low interest rates have banks judging cash too costly to keep

Mark Ellis


Updated Oct. 18, 2015 8:50 p.m. ET

U.S. banks are going to new lengths to ward off a surprising threat to their financial health: big cash deposits.

State Street Corp., the Boston bank that manages assets for institutional investors, for the first time has begun charging some customers for large dollar deposits, people familiar with the matter said. J.P. Morgan Chase & Co., the nation’s largest bank by assets, has cut unwanted deposits by more than $150 billion this year, in part by charging fees.

The developments underscore a deepening conflict over cash. Many businesses have large sums on hand and opportunities to profitably invest it appear scarce. But banks don’t want certain kinds of cash either, judging it costly to keep, and some are imposing fees after jawboning customers to move it.

The banks’ actions are driven by profit-crunching low interest rates and regulations adopted since the financial crisis to gird banks against funding disruptions.

The latest fees center on large sums deemed risky by regulators, sometimes dubbed hot-money deposits thought likely to flee during times of crises. Finalized last September and overseen by the Federal Reserve and other regulators, the rule involving the liquidity coverage ratio forces banks to hold high-quality liquid assets, such as central bank reserves and government debt, to cover projected deposit losses over 30 days. Banks must hold reserves of as much as 40% against certain corporate deposits and as much as 100% against some deposits from hedge funds. 

“At some point you wonder whether there will be a shortage of financial institutions willing to take on these balances,” said Kelli Moll, head of Akin Gump Strauss Hauer & Feld LLP’s hedge-fund practice in New York, saying that where to hold cash has become an increasing topic of conversation as hedge funds are shown the door by longtime banking counterparties.

The push comes as the globe is awash in cash, reflecting soft economic growth and low interest rates that limit investment. Some asset managers have been increasing the amount of cash they are holding in their portfolios, in part because of an increased focus by the Securities and Exchange Commission on liquidity management in mutual funds.

Domestic deposits at U.S. banks in the second quarter hit $10.59 trillion, up 38% from five years earlier, Federal Deposit Insurance Corp. data show. Loans outstanding at U.S. banks as a share of total deposits tumbled to 71% from 78% in 2010 and 92% in mid-2007, before the financial crisis, the data show.

Jerome Schneider, head of Pacific Investment Management Co.’s short-term and funding desk, which advises corporate and institutional clients, said that as a result of the bank actions, he and his customers have discussed as cash alternatives boosting investments in U.S. Treasury bonds, ultrashort-duration bond funds and money-market funds.

When it comes to cash, Mr. Schneider said, “Clients have been put on warning.”

Auctions for one- and three-month Treasury bills last week sold bills at zero yields, reflecting outsize demand for the securities.

Few banks disclose how much in “nonoperating” deposits they hold. Credit Suisse Group AG analysts estimated in August that the top four U.S. banks by assets hold roughly $650 billion in those deposits that require the highest levels of reserves.

Banks are struggling to generate returns for investors. A low-interest-rate environment squeezes bank profits by narrowing the spread between the rate they lend at and their borrowing, or funding, cost.

Some analysts have been predicting rates would rebound, likely boosting bank profits, but that hasn’t happened. This year, slowing growth in China and recessions in some major emerging-market nations have dimmed expectations that the Federal Reserve will raise interest rates this year. 

The KBW Nasdaq Bank Index of large commercial banks has dropped about 9% since July as rate-increase expectations waned.

Deposit fees are particularly significant at State Street because its primary business is custodying client assets, including holding cash for clients rather than seeking to lend out those funds, as other banks typically do. 

State Street customers earlier were told that fees were possible on accounts whose nonoperational balances had grown, the people familiar with the matter said. There is no minimum deposit size that triggers the fee, which varies and is applied case by case to new and existing clients, the people said.

“The persistence of the current rate environment requires that we take action consistent with prudent financial management with certain accounts that continually maintain significant excessive cash balances,” State Street said in a statement to The Wall Street Journal.

BNY Mellon and Northern Trust haven’t yet begun charging to hold clients’ cash, people familiar with the matter said. A Bank of New York spokesman said the bank hasn’t ruled out doing so in the future. The fees at J.P. Morgan don’t apply to clients of its custody business, a person familiar with the bank said.

Northern Trust has been taking a “transaction by transaction approach” to accepting very large deposits from clients approaching the bank, said Chief Financial Officer S. Biff Bowman on the bank’s second-quarter earnings call in July. A Northern Trust spokesman declined to say whether charges were a possibility in the future.

State Street and others have charged clients on some large euro deposits for more than a year, reflecting a negative interest rate on overnight deposits at the European Central Bank.

In 2011, BNY Mellon set plans to charge a small number of clients for holding their cash, reflecting in part a large flow of deposits triggered by investors’ flight to safety that summer. The bank rolled back the plan without imposing fees after some clients pulled money.

Since last year, Bank of America Corp. has told some institutional clients that they will need to move their deposits or pay to keep them at the bank, people familiar with the matter said. Top executives decided to approach clients that didn’t do other business with the bank.

—Christina Rexrode contributed to this article.

Does virtual currency's past dictate its future?

Mark Ellis

by Tom Harper, president and CEO, Networld Media Group

After almost 20 years in the payments industry, I've learned to appreciate its history. That's why, with the growing popularity of virtual currency over the past couple years, I decided to do some digging into its past.

What I found changed my thinking on where the cryptocurrency market is going.

A turbulent path

Do you remember Digicash? It started 25 years ago as an anonymous cryptocurrency. It partnered with major European banks and created some of the technology still used for encrypting transactions. The problem was that banks wouldn't allow anonymous accountholders, and Digicash went bankrupt after eight years.

In '94, CyberCash made a splash with a $300 million public offering that jumped 79 percent on its first day. But the company lost millions as it tried to market itself as an anonymous payments alternative to credit cards, and it fell victim to Y2K and other technical problems. It went bankrupt in 2001, and part of it was sold to Verisign, which itself later sold to PayPal.

A company called Beenz sprouted up in '98 and withered in 2001. It was a global online couponing program calling itself "virtual currency" and it raised $100 million from big-name investors. It failed because not enough Beenz (Beenzes?) made it into circulation.

Flooz had an even shorter lifespan — from '99 to '01. This online currency's claim to fame TV advertising that featured Whoopi Goldberg. But it sank when cyberthieves in Russia and the Philippines stole hundreds of thousands of dollars worth of coupons. lived and died during the same time, dissolving during the dot-com collapse. The company developed Web-based electronic cash that verified transactions without using credit cards.

E-Bullion launched in '01, backed by real-world gold and silver and complete with its own currency exchange. The service managed to survive for eight years before shutting down without warning when owner James Fayed was arrested for running an illegal money transfer business — and for orchestrating the murder of his wife and business partner, Pamela Fayed. He was found guilty of paying three hit men to stab her to death and is currently sitting on death row. All of E-Bullion's assets were seized by the government, and users wound up empty-pocketed.

And then there was E-gold, which emerged a few years after E-Bullion, and was also backed by gold and silver. When its founder was convicted of money laundering in 2009, the whole thing shut down.

Launched in '03 in Toronto, Dexit was a rechargeable, contactless, stored-value smart key tag used for electronic payments. Although it formed several partnerships with banks, retailers and mobile companies, the currency never caught on, and in 2006, Dexit removed its payment terminals from stores and gave back all funds.

Short memories, big dreams

The consumer media seem to have forgotten this history. Just consider the following quote from The Wall Street Journal on corporate curiosity over bitcoin:

The interest is most evident on Wall Street, where there's a sense that the bank-dominated, centralized pathways through which international finance passes are long overdue for the kind of Internet-driven cost savings that have affected other industries. (MoneyBeat, March 30, 2015)

On the contrary, Internet-driven cost savings in finance, particularly in the payments space, is anything but "long overdue."

Consider Web-enabled ATMs and POS devices, mobile payments, online bill pay, cross-border remittance, dynamic currency conversion and a host of other payment innovations that leverage the Internet.

I could go on about the rampant lack of technical and historical understanding in the tech media, of all places. But let me take you back even further to the mid-1930s.

When cards were the Next Big Thing

This was the era when card-based payments first reached the masses. Department stores, restaurants and other merchants issued their own charge cards, which doubled as loyalty cards. Customers received credit from the store and paid off the balance every month.

In 1946, Flatbush National Bank of Brooklyn issued one of the first bank credit cards in its "Charge-It" program between bank customers and local merchants.

In 1950, Diners Club issued its first credit card in the U.S.  Frank McNamara, the card's creator, wanted to help salespeople schmooze their clients at dinner. A customer could eat without cash at any restaurant that accepted the card. Diners Club would pay the restaurant and the cardholder would repay Diners Club.

The company went competition-free for eight years, until American Express issued its first card in 1958, the same year that Bank of America issued BankAmericard (which eventually became Visa).

By the early '60s, more companies offered credit cards, advertising them as a time-saving device rather than a form of credit. American Express and MasterCard became huge successes overnight.

Bitcoin: Toward new lands

I believe bitcoin is just another stop on the way to an exciting destination — and that we will get to this destination because of bitcoin.

No other digital currency history has stirred up so much venture capital and media madness. There seems to be a sort of rebellion among the digerati, a revolutionary fervor reminiscent of other countercultural movements. In online and social media, there's a sense that we're at the start of a new "Big Thing."

Juniper Research finds that the number of active bitcoin users worldwide will reach 4.7 million by the end of 2019, up from just more than 1.3 million last year. I call that a "Big Thing."

The Digital Currency Council reports that in the past 12 months, almost 1,000 new merchants began accepting bitcoin each week. That's huge, too.

Many corporate giants are investing millions in their quest to capture the digital payments flag. Companies such as Facebook, Apple, Microsoft, PayPal, Amazon, Alibaba, Google, MasterCard, Visa and others are vying to be the company to bring virtual and mobile money to the masses.

Five thoughts on the future

Following are five quick virtual currency reality checks that give us a roadmap to perhaps the next five years:

  1. Regulatory and tax issues are a big concern for merchants. Because laws are just starting to evolve, many changes and updates are coming. Now that California has legalized virtual currency use, we'll likely see more loosening up by other states.
  2. Bitcoin's price volatility must be solved. The swings in bitcoin value have made merchants and consumers nervous. Some startups have begun mitigating the risk, but volatility is the very nature of bitcoin, and this leaves the door open for more stable virtual currencies.
  3. Most early-adopter merchants are attracting younger demographics by promoting bitcoin acceptance. This adds to a brand's cachet with millennials, whether they actually use bitcoin or not. If a store accepts virtual currency, the thinking goes, it must be cool.
  4. Nearly half of bitcoin exchanges have failed since 2010. Can you imagine living in a world where half of the banks had gone under in the past five years? It says something that bitcoin has survived and continues to grow, but it also begs caution. We're in the Wild West of virtual currency, where anything can happen.
  5. Virtual currency as a category will catch on when consumer comfort with it and desire for it reach critical mass. Isn't that true for any new technology? When consumers "get" a new tech product and see an obvious use case, mass adoption erupts. Just look at the iPod, followed by iTunes and then the iPhone. History is replete with successful new products that at one time seemed unnecessary.

No doubt our financial future includes virtual currency — 25 years of history has established this. But how the newest iteration of digital money will be tracked, acquired and spent are all fair questions.

What could be cooler than new payment rails built on an open-source, immutable ledger? The bitcoin-blockchain combo is an exciting technological breakthrough that promises to transcend current closed-loop payment models — even if bitcoin gives way to other kinds of currency.

Now that a new wave of financial innovation has been born, and a zealous user group has emerged, the next chapter of virtual currency's history is becoming reality.

Tom Harper is CEO of Networld Media Group, the publisher of ATM Marketplace, Mobile Payments Today and Virtual Currency Today. He a founding director and past chairman of the ATM Industry Association and the coauthor of "Cash Box: The Invention and Globalization of the ATM."

Banks Increasingly Refuse Cash Withdrawals – Switzerland Joins the Fun

Mark Ellis

The war on cash is proliferating globally. It appears that the private members of the world’s banking cartels are increasingly joining the fun, even if it means trampling on the rights of their customers.

Yesterday we came across an article at Zerohedge, in which Dr. Salerno of the Mises Institute notes that JP Morgan Chase has apparently joined the “war on cash”, by “restricting the use of cash in selected markets, restricting borrowers from making cash payments on credit cards, mortgages, equity lines and auto loans, as well as prohibiting storage of cash in safe deposit boxes”.

This reminded us immediately that we have just come across another small article in the local European press (courtesy of Dan Popescu), in which a Swiss pension fund manager discusses his plight with the SNB’s bizarre negative interest rate policy. In Switzerland this policy has long ago led to negative deposit rates at the commercial banks as well. The difference to other jurisdictions is however that negative interest rates have become so pronounced, that it is by now worth it to simply withdraw one’s cash and put it into an insured vault.

Having realized this, said pension fund manager, after calculating that he would save at least 25,000 CHF per year on every CHF 10 m. deposit by putting the cash into a vault, told his bank that he was about to make a rather big withdrawal very soon. After all, as a pension fund manager he has a fiduciary duty to his clients, and if he can save money based on a technicality, he has to do it.

A Legally Murky Situation – but Collectivism Wins Out

What happened next is truly stunning. Surely everybody is aware that Switzerland regularly makes it to the top three on the list of countries with the highest degree of economic freedom. At the same time, it has a central bank whose board members are wedded to Keynesian nostrums similar to those of other central banks. This is no wonder, as nowadays, economists are trained in an academic environment that is dripping with the most vicious statism imaginable. As a result, withdrawing one’s cash is evidently regarded as “interference with the SNB’s monetary policy goals”. Thus SRF reports:

“Since the national bank has introduced negative interest rates, pension funds in the country are in trouble. Banks are passing the negative rates on to them. This results in the saved pension money shrinking, instead of producing a return. A number of pension funds are therefore thinking about keeping their money in an external vault instead of leaving it in bank accounts. 

One fund manager showed that for every CHF 10 m. in pension money, his fund would save CHF 25,000 – in spite of the costs involved in vault rent, cash transportation and other expenses.

However, as our research team has found out, there is one bank that refuses to pay out money in such large amounts. The editorial team has gotten hold of a letter from a large Swiss bank in which it tells its customer, a pension fund:

“We are sorry, that within the time period specified, no solution corresponding to your expectations could be found.

Bank expert Hans Geiger says that this “is most definitely not legal”. The pension fund has a sight account, and has the contractual right to dispose of its money on demand.

Indeed, although we all know that fractionally reserved banks literally don’t have the money their customers hold in demand deposits, the contract states clearly that customers may withdraw their funds at any time on demand. The maturity of sight deposits is precisely zero.

So how come the unnamed “large bank” (they should have named it, just to see what happens…) is so bold as to break the law by refusing to pay out funds in a demand deposit? Note here that it is indeed breaking the law, as there is nothing in Swiss legislation that states that banks are allowed to refuse or delay servicing withdrawals from demand deposits upon request.

The answer is that it has probably received a “directive” from the Swiss National Bank. Note here that these directives are not legally binding. SFR further:

“The president of the pension funds association ASIP, Hanspeter Konrad, has been irritated for weeks that pension funds are suffering from negative interest rates. He says: “We simply cannot understand that the banks are butting in here”. Konrad suspects that the National Bank is exerting its influence.

Indeed, the SNB confirms that it doesn’t like to see the hoarding of cash to circumvent its negative interest rate policy. “The National Bank has therefore recommended to the banks to approach withdrawal demands in a restrictive manner.”

Hans Giger, professor eremitus at the University of Zurich, says to this that the question how far the SNB can go is legally complicated. While the SNB is not allowed to influence the contract between a bank and a pension fund, it can however “issue directives to the banks in the collective interest of the Swiss economy”. What banks do with the SNB’s directives is however up to them.

In other words, large depositors in Swiss banks have now become victims of collectivism. Collectivism is of course precisely what informs all central planning endeavors. Obviously, property rights count for nothing if the central planners can revoke them at the drop of a hat.


It is undoubtedly a huge red flag when in one of the countries considered to be a member of the “highest economic freedom in the world” club, commercial banks are suddenly refusing their customers access to their cash. This money doesn’t belong to the banks, and it doesn’t belong to the central bank either.

If this can happen in prosperous Switzerland, based on some nebulous notion of the “collective good”, which its unelected central planners can arbitrarily determine and base decisions upon, it can probably happen anywhere. Consider yourself warned. As the modern day fiat money system inevitably cruises toward its final denouement, individual rights will come increasingly under attack as the world’s ruling elites and centrally directed banking cartels begin to batten down the hatches.

Better continue stacking, and keep a pile of this within grabbing distance – after all, it can be purchased at a generous discount these days.

Fighting the "War on Terror " by Banning Cash

Mark Ellis

MARCH 22, 2015Joseph T. Salerno

It was just a matter of time before Western governments used the trumped up "War on Terror" as an excuse to drastically ratchet up the very real war on the use of cash and personal privacy that they are waging against their own citizens.   Taking advantage of public anxiety in the wake of the attacks on Charlie Hebdo and a Jewish supermarket, France has taken the first step.  It seems the terrorists involved partially financed these attacks by cash, as well as by consumer loans and the sale of counterfeit goods. What a shockeroo!  The terrorists used CASH to purchase some of the stuff they needed--no doubt these murderers were also shod and clothed and used  cell phones, cars, and public sidewalks during the planning and execution of their mayhem.   Why not restrict their use?  A naked , barefoot terrorist without communications is surely less effective than a fully clothed and equipped one.  Despite the arrant absurdity of blaming cash and financial privacy for these crimes,  French Finance Minister Michel Sapin brazenly stated  that it was necessary to "fight against the use of cash and anonymity in the French economy."  He then announced extreme and despotic measures to further restrict the use of cash by French residents and to spy on and pry into their financial affairs.

These measures, which  will be implemented in September 2015, include prohibiting  French residents from making cash payments of more than 1,000 euros, down from the current limit of  3,000 euros.  Given the parlous state of the stagnating French economy the limit for foreign tourists on currency payments will  remain higher, at 10,000 euros down from the current limit of 15,000 euros. The threshold below which a French resident is  free to convert euros into other currencies without having to show an identity card will be slashed from the current level of 8,000 euros to 1,000 euros.  In addition any cash deposit or withdrawal of more than 10,000 euros during a single month will be reported to the French anti-fraud and money laundering agency Tracfin.  French authorities will also have to be notified of any freight transfers within the EU exceeding 10,000 euros, including checks, pre-paid cards, or gold.

How Apple Pay and Google Wallet actually work

Mark Ellis


Many companies are part of your credit card transactions; few know what they do.

by  Megan Geuss -  Oct 29 2014, 1:00pm EDT

It's hard to have a meaningful discussion about Apple Pay (iOS' most recent foray into mobile payments) and Google Wallet (Android's three-year-old platform that's had tepid success) without talking about how the systems actually work. And to talk about how those systems work, we have to know how credit card charges work.


We took an iPhone 6 out and found that mobile payments have grown up—a little.

It seems like a simple thing, especially in the US—swipe your card, wait a second or two for authorization, walk out of the store with your goods. But the reality is that a complicated system of different companies handles all that transaction information before your receipt ever gets printed.

The four-party system

If you're using a so-called “universal” card like Visa or MasterCard, there are typically four parties involved: the merchant, the payment processor, the merchant acquirer, and the issuer. Their roles are as follows:

  1. The merchant is the person offering goods or services that you (the customer) want to buy.
  2. The card issuer distributes cards to customers, extends lines of credit to them in the case of credit cards, and bills them.
  3. The merchant acquirer signs up merchants to accept certain cards and routes each transaction to the card network's processor.
  4. The processor then sends the transaction information to the correct card issuer so the funds can be taken from the customer's account and delivered to the merchant.

Visa and MasterCard are considered card networks in all of this. And as umbrella organizations, card networks aren't explicitly counted in that four-party system, but they facilitate the system's operation and often have ties to other parties involved.

MasterCard SVP & Group Head for Digital Channel Engagement Sherri Haymond explained the company's role to Ars. "MasterCard sits in the middle: we have a franchise that financial institutions apply to join," she said. From MasterCard's perspective, "acquirers bring merchants into the system, and issuers bring consumers into the system. MasterCard's role is to set rules and standards, and we facilitate movement of money, in most cases from the issuer to the acquirers."

From "Merchant Acquirers and Payment Card Processors: A Look inside the Black Box" by Ramon P. DeGennaro. Economic Review. 2006.

For our purposes, we'll look at Visa- and MasterCard-like relationships, specifically. Just know that some companies—like American Express, Discover Card, and Diners Club—can play the role of the card issuer and merchant acquirer at the same time. And cards issued by companies like Macy's or Sears will likewise have a somewhat simpler system behind the transaction, because these “private label” cards are generally only accepted by one merchant.

Of course, things aren't always so straightforward in practice. According to a paper written by Ramon P. DeGennaro for the Federal Reserve Bank of Atlanta [PDF], “The payment card industry comprises many different entities that perform various tasks, and because many of them have formed alliances, the lines between them are often blurred.”

DeGennaro writes that the most important institutions in this four-party system are the merchant acquirer and the payment processor. Despite their importance, customers often never interact directly with these two entities. The functions of acquirers and processors can be performed by the same company, although many acquirers usually re-sell the services of a third-party processor.

What happens when you buy something

When a transaction takes place, two major processes occur: the card gets authorized, and the transaction is then cleared.

DeGennaro describes the authorization phase best:

The terminal sends the merchant’s identification number, the card information, and the transaction amount to the card processor. The processor’s system reads the information and sends the authorization request to the specific issuing bank through the card network. The issuing bank conducts a series of checks for fraud and verifies that the cardholder’s available credit line is sufficient to cover the purchase before returning a response, either granting or denying authorization. The merchant acquirer receives the response and relays it to the merchant. Usually, this process takes no more than a few seconds.

Once the card has been authorized, the second part of the transaction is clearing it, or getting the goods to the customer and the money to the merchant's bank. The merchant sends transactions to the merchant acquirer, and the merchant acquirer sends that information along to the merchant accounting system, or MAS, that supports an individual merchant's account. DeGennaro says that the distinction between the merchant acquirer and the MAS can be muddy. "In some cases, the MAS is a part of the merchant acquirer; in others, it is a different entity." DeGennaro continues:

The MAS distributes the transactions to the appropriate network—Visa transactions to the Visa network, MasterCard transactions to the MasterCard network, and so forth. Next, the MAS deducts the appropriate merchant discount fee (to cover the costs of the merchant acquirer’s activities) from the transaction amount and generates instructions to remit the difference to the merchant’s bank for deposit into the merchant’s account. The MAS sends these instructions to the automated clearinghouse (ACH) network, which is a computer-based system used to process electronic transactions between participating depository institutions.

Merchants typically pay what is called a Discount Rate and a Transaction Fee, which are tied to what is called an Interchange Fee, which is determined by the payment card network (again, Visa or MasterCard). According to a Quora post by CEO of 1st American Card Service Brian Roemmele, republished on Forbes, 85 percent of this Interchange Fee is paid to the card's issuing bank (like Chase, or Bank of America, for example). These fees usually amount to about two percent of the purchase price on credit card purchases and are a profit driver for the issuing bank. They also help cover fraud costs and fund reward programs.

This system is complicated, and it is growing increasingly fraud-prone, especially when card information is stored on a merchant's terminal or is sent insecurely. To keep this article (relatively) short, we won't discuss Card Not Present (CNP) transactions, which usually occur online or over the phone and require a customer to input her or his card's security code (those digits on the back of the card).

In a quick note, however, because CNP transactions are much less secure than transactions where the card is present, CNP transactions usually demand higher Interchange Fees from merchants. But although NFC transactions on an Apple Pay or Google Wallet-enabled phone don't physically require a card to be present, they transmit information as if the card was present, so fees aren't higher for merchants that choose to enable NFC on their terminals.

The little-known Google Virtual Wallet Card

The important thing to know about Apple Pay and Google Wallet is that neither payment platform was first to develop tap-and-pay transactions. In fact, a number of stakes holders, especially Visa and MasterCard, had been doing research and development, running pilot programs, and issuing contactless payment-capable credit cards for years by the time Google Wallet entered the scene in 2011. MasterCard, especially, with its growing PayPass platform, had been working with retailers to make RFID, and later NFC (Near-field Communication) chips—which allow two-way communication between the chip and the terminal—readable by terminals at major retailers like Macy's, Whole Foods, and McDonald's.

That said, Google Wallet was the first major deployment of a mobile phone-based NFC payments system. When it debuted, Google Wallet was only available on the Sprint Nexus S 4G, and its official partners were MasterCard and Citi Bank. You could also buy a prepaid card through Google. With its limited number of partners, Google originally stored credit card information directly on the phone's Secure Element—an isolated chip in the phone that has very limited interaction with the rest of the phone's OS. When the phone came close to an NFC reader, Google required a four-digit PIN to be entered before the chip transmitted the card information to the terminal. Since 2014, Google no longer uses a Secure Element, instead relying on Host Card Emulation, which makes it easier for third-party app developers to take advantage of Android phones' NFC capabilities. Four-digit PIN authentication is still required for payments to take place. From there, the transaction proceeds as any normal credit card interaction would. With the four-digit PIN, users are prevented from, say, accidentally buying something.

But the small number of partners made Google Wallet adoption stall. In 2012, the company tried to bring more users into the fold by issuing an update that permitted “all credit and debit cards from Visa, MasterCard, American Express, and Discover” to be uploaded to Google Wallet's cloud-based app. That didn't mean that Google developed partnerships with these companies necessarily (American Express notably balked at the announcement), but Google's new scheme opened the payments system up to greater mobile payments adoption than ever before. That scheme, which remains intact as per Google Wallet's Terms of Service (TOS), last updated in July 2014, is facilitated by issuing the customer a Google Wallet Virtual Card. This Virtual Card is issued by Bancorp Bank through Google, and it essentially acts as an intermediary between the customer's preferred card and the merchant.

Google Wallet users may not know that they're actually using a Virtual Card to make transactions.

“To enable your use of the Google Mobile Wallet Service via your NFC mobile device, GPC [Google Payment Corporation] has arranged for Bancorp to provide you with access to a MasterCard®-branded virtual prepaid debit payment card product, the Google Wallet Virtual Card, which is stored on your mobile device,” Google writes in its TOS. “By requesting the Google Mobile Wallet Service on your NFC enabled mobile device, you are requesting the issuance of the Google Wallet Virtual Card in order to facilitate your use of the Service.”

This setup naturally makes the four-party payments system more complicated. Instead of having your Chase-issued Visa card information sent from the merchant's terminal to the merchant acquirer, the Google Wallet Virtual Card requests the funds from your preferred card, and the Virtual Card information is then sent to the merchant, who subsequently sends it on to the payments processor. From there, that information is processed as a traditional card's information would be.

As Google describes a transaction: “When you place your mobile device near the merchant's NFC reader, your Google Wallet Virtual Card information will be transferred from your NFC mobile device to the merchant for use in processing the Payment Transaction. The Google Wallet Virtual Card is a prepaid debit card that can be used to make purchases when you use the Google Wallet Mobile Service at a merchant location that accepts contactless payments, even if the issuer of your registered debit or credit card is not a Google Wallet partner for NFC transactions. The Google Wallet Virtual Card is different from your debit or credit card registered in Google Wallet. The merchant will not receive your registered debit or credit card information.”

This setup is good for the customer, but it's a little less positive for Google. On the one hand, using a virtual card is considered a card fraud mitigation technique that has been around for quite a while—using pseudo-fake data to separate your real card information from the transaction process is a good idea. It also hands more power to Google and its customers, who now have more choice when it comes to supported cards. “Google sits in the middle of its Wallet transactions, rather than just passing through plastic credentials to an NFC enabled smartphone,” American Banker writes.

This setup also removes credit card information from the phone itself, although your real credit card information is still stored on Google's servers. As the company writes in its FAQs: "Your actual credit card number is not stored. Only the virtual prepaid card is stored and Android's native access policies prevent malicious applications from obtaining the data. In the unlikely event that the data is compromised, Wallet also uses dynamically rotating credentials that change with each transaction and are usable for a single payment only. Finally, all transactions are monitored in real-time with Google’s risk and fraud detection systems."

Google also offers a robust fraud protection program that "covers 100 percent of verified unauthorized Google Wallet transactions reported within 120 days of the transaction date," the company says.

On the other hand, this setup makes transactions more complex, requiring Google to shoulder part of the burden in securing those card numbers stored on its servers. It might even be costing Google a bit of moneyUniBul Credit Card Blog noted that Google's Virtual Wallet system involves two issuers—the customer's preferred card issuer and the virtual card issuer (Bancorp Bank). Recall that when a payment is made, the card issuer collects an Interchange Fee that's usually around two percent. But with a "real" card and a virtual card involved in the interaction, interchange fees will be charged for both issuers. “From the merchant’s stand point, the transaction is completed using the virtual card,” UniBul writes. “After all, that is the only card the merchant sees. So the interchange will be paid by the merchant, through its acquirer, and collected by the virtual card’s issuer—The Bancorp Bank, Google Wallet’s partnering bank. However, right after this transaction is completed, Google will transfer the sales amount from the card that was actually selected by the user to the virtual card. And now the issuer of the ultimate payment source will also have to collect its interchange fee. This time Google will have to pay for it, and it doesn’t seem like the search giant can offload the interchange to anyone else.”

When the movement to virtual cards occurred in 2012, American Banker wrote that “some analysts believe that, while Google's intentions are unknown, it's unlikely that they'd want to start collecting interchange [from merchants that support Google Wallet]—at least until the search engine company first [starts] to profit from advertising revenue associated with a person's use of Wallet.” It's unclear whether Google has turned a profit from Wallet, but it does seem apparent that Google's goal in its mobile payments endeavor is the same as with the rest of its free services—to collect as much data as possible from its customers.

Apple gets buddy buddy with banks

Although much of Apple's integration into the card payment system is obfuscated by secret deals the company has with the various players, three different sources told Bloomberg recently that Apple would actually be collecting a percentage of every transaction made on Apple Pay from certain issuing banks.

In other words, Apple was reportedly able to convince JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., and others that it deserves a cut of each purchase made on the iPhone 6 or 6 Plus, because customers will spend more using the phone than they would with a regular credit card. According to Bloomberg, “Under deals reached with banks individually, Cupertino, California-based Apple will collect a fee for each transaction, said one of the people, who requested anonymity because terms aren’t public."

Apple also may have been able to convince the banks that its platform could reduce fraud and thus reduce the associated costs to the issuing bank (allowing the bank to keep more of that Interchange Fee).

Like with Google Wallet, making a contactless payment using Apple's phone requires the user to verify the payment on the phone before it can go through. Whereas Google Wallet uses a four-digit PIN, Apple Pay requires the customer to verify using TouchID, which reads the user's fingerprint.

On top of that, Apple has introduced tokenization into its payment system. Like Google Wallet's Virtual Card, this obfuscates the user's actual credit card number, but it does so using a security standard developed by various standards groups and big-name card networks like Visa. It all happens without having to go through another bank as an intermediary supplier of a virtual card. While many card networks and banks have experimented with ways to implement tokenization security, Apple's method goes to lengths to keep a user's card data out of Apple's hands and off its servers, except during setup.

 You can snap a photo of your credit card to avoid having to key-in all 16 digits. The photo is not stored on your phone.

When you first set up Apple Pay, you can either manually input your card details or take a photo of the front of the card. If you choose to snap a photo, the photo isn't stored on your phone. All the information is, according to Apple, encrypted and sent to the company's servers, where they decrypt the data and determine the card network or card issuer. Apple then “re-encrypts the data with a key that only your payment network can unlock,” as the Apple Pay support page details. Apple next “sends the encrypted data, along with other information about your iTunes account activity and device (such as the name of your device, its current location, or if you have a long history of transactions within iTunes) to your bank. Using this information, your bank will determine whether to approve adding your card to Apple Pay.” In a sense, this setup process is like the initial authorization in a traditional credit card payment. In a simple credit card transaction, card details are sent to the bank for authorization, and an approval comes back to the merchant that lets the transaction go through.

The Apple Pay setup, however, appears to be the first and only time your real credit card information is passed around between Apple and an issuer. Once the information gets to the card network, it's decrypted, and the card network issues a token called a Device Account Number (DAN). The DAN is device-specific. The card network sends this DAN to Apple along with other information “such as the key used to generate dynamic security codes unique to each transaction,” according to Apple's support page.

The blog Bank Innovation explains this “dynamic security code” scheme a bit, noting that in EMV transactions (and Apple Pay does use the soon-to-be-adopted-in-the-US EMV standard), the chip in the phone (or in the card, in a traditional EMV transaction) interacts with the merchant's terminal to “generate a cryptogram—the transaction’s security key—and attach it to the consumer’s personal account number (PAN). The cryptogram is generated, in part, by the chip on the card, which was previously given to the consumer by the issuer. The cryptogram is then sent back to the issuing bank, which processes the transaction. Because the issuer—in other words, the banks that work with the card networks—gave the consumer his card, the issuer is responsible for the quality and security of the cryptogram.”

So using this method, Apple not only uses a token as a proxy for a real credit card number that is device-specific and ideally should not be able to be replicated across another device, but it also offloads responsibility for the security of the token and the cryptogram to the card issuer. The token and the cryptogram are both encrypted with the card network/issuer and are then sent back to Apple. The company claims it cannot decrypt this information, and it simply adds it to the Secure Element on your device. As Apple claims, on the Secure Element your token and its accompanying cryptogram are “isolated from iOS, never stored on Apple Pay servers, and never backed up to iCloud. Because this number is unique and different from usual credit or debit card numbers, your bank can prevent its use on a magnetic stripe card, over the phone, or on websites.”

So when you go to make a payment with Apple Pay, you bring the phone up to an NFC-enabled terminal (which will only read devices that are a matter of inches away) and the phone will ask you to authenticate the payment with TouchID. That authentication signals to the phone that it can transmit the Device Account Number and its accompanying “transaction specific dynamic security code” to the merchant's terminal, and the transaction then proceeds as a normal credit card transaction would. The only difference is the bank network or issuer verifies that your payment information is coming from the correct device and has not been duplicated.

All in all, it seems like a good deal for Apple. The company is not carrying a lot of sensitive information on its servers, and, at the same time, it reportedly receives a cut of the Interchange Fees that banks make on each purchase. Apple itself has promised not to charge customers or merchants for using or supporting Apple Pay, although it's still unclear whether costs might be passed down to users in another way. As MasterCard's Sherri Haymond described, "What Apple's role is here is they're the technology platform provider, they're interacting with the consumer, but they're not in the middle of the payment flow at all. All they're doing is facilitating their assets to be transferred."

So what's the deal with mobile payments?

As stories of rampant fraud being discovered at giant retail chains like Target, Home Depot, Michael's, Neiman Marcus, and more continue, it's clear that the magnetic stripe-based payments system in the US is pretty vulnerable. And although fraud detection efforts made by issuing banks can be helpful, sometimes those same techniques are very, very unhelpful. Both Google Wallet and Apple Pay are steps forward because they require secondary authentication (either through the entering of a PIN or verification through TouchID) before initiating a transaction. And Apple Pay has taken some pretty impressive steps to minimize the amount of user data Apple holds while implementing security schemes that are on the forefront of what's possible today.

That's not to say Apple Pay and Google Wallet are fraud-proof. Where there's a will there's a way, and the creativity of malicious actors knows no bounds when money is available for the taking.

"Los Angeles Has Become the Epicenter of Narco-Dollar Money Laundering," Fed Says

Mark Ellis

Wed, Sep 10, 2014 at 2:09 PM

By Dennis Romero

Federal raids on downtown Los Angeles Fashion District businesses and related bank accounts turned up a whopping $65 million, much of it in cash, that authorities say was drug money headed to the Sinaloa drug cartel in Mexico, the U.S. Attorney's Office in L.A. announced today.

The whopping seizure of bank funds and currency, the latter of which was put on display for the press, was part of three cases against various fashion businesses, including lingerie and maternity concerns, that investigators say took drug money and exchanged it for imported goods so that the money would seem legit as it traveled south to the narco lords of Sinaloa.

In one case, feds allege, a business laundered $140,000 paid for the to release a man held hostage because 100 kilos of cocaine he was supposed to distribute were intercepted by authorities in the United States. 

The U.S. Attorney's Office says the American was taken to a ranch in Culiacan, Sinaloa and "beaten, shot, electrocuted and waterboarded" before the dirty cash set him free.

Authorities say the Fashion District schemes to funnel south millions of dollars paid on this side of the border for drug shipments eliminated the risk of backpacking bills back across the border.

Here's how the "black-market peso exchange" scheme was described in a statement:

In a BMPE scheme, a peso broker works with an individual engaged in illegal activity, such as a drug trafficker, who has currency in the United States that he needs to bring to a foreign country, such as Mexico, and convert into pesos. The peso broker finds business owners in the foreign country who buy goods from vendors in the United States and who need dollars to pay for those goods. The peso broker arranges for the illegally obtained dollars to be delivered to the United States-based vendors, such as the stores in the Fashion District, and these illegally obtained dollars are used to pay for the goods purchased by the foreign customers. Once the goods are shipped to the foreign country and sold by the foreign-based business owner in exchange for pesos, the pesos are turned over to the peso broker, who then pays the drug trafficker in the local currency of the foreign country, thus completing the laundering of the illegally obtained dollars.

Nine suspects were arrested as cash was seized and bank accounts were taken over in raids that involved 1,000 law enforcement agents and dozens of search warrants today, feds said.

One of three cases wrapped into today's announcement involved the kidnapping. 

According to authorities, downtown's QT Fashion, Inc., doing business as QT Maternity and Andres Fashion, worked with Maria Ferre S.A. de C.V. in Mexico in order to  funnel ransom money through 17 other Fashion District businesses.

Suspects connected to QT—56-year-old Andrew Jong Hack Park (a.k.a Andres Park) of La Canada-Flintridge, 36-year-old Sang Jun Park of La Crescenta, and 49-year-old Jose Isabel Gomez Arreoloa (a.k.a. Chabelo) of downtown—were arrested in today's raids.

They have been charged with suspicion of conspiracy to launder, conspiracy to operate an unlicensed money-transmitting business, and operating an unlicensed money-transmitting business, according to the U.S. Attorney's office.

Three suspects on the Mexican side of the scheme were still outstanding, feds said.

A second case involved members of a Temple City family—55-year-old father Xilin Chen, 24-year-old son Chuang Feng Chen (a.k.a. "Tom"), and 28-year-old daughter Aixia Chen, authorities said.

They face charges connected to suspicion of conspiring to launder monetary instruments, money laundering, and "various immigration offenses," according to the U.S. Attorney's statement.

Father and son were arrested in today's raids, but Aixia Chen remained on-the-loose, authorities said. An indictment alleges the trio's businesses, Yili Underwear and Gayima Underwear, laundered "bulk cash" for the cartel.

The third case involves four suspects connected to Pacific Eurotex, Corp.—55-year-old CFO Hersel Neman of Beverly Hills, 54-year-old brother and CEO Morad Neman of the Westwood, 45-year-old brother-in-law Mehran Khalili of Beverly Hills, and 52-year-old Alma Villalobos of Arleta, feds said

They have been charged with suspicion of "conspiracy to launder money, conspiring to illegally structure currency transactions to avoid a currency transaction reporting requirement, structuring currency transactions to avoid currency transaction reporting requirements, and failing to file reports of currency transactions over $10,000,"the U.S. Attorney's office stated.

Officials said the four accepted hundreds of thousands of dollars in bulk cash delivered by an undercover agent.

Most of the defendants in all three cases face decades behind bars if they're successfully prosecuted.

Robert E. Dugdale, an Assistant U.S. Attorney, said:

Los Angeles has become the epicenter of narco-dollar money laundering with couriers regularly bringing duffel bags and suitcases full of cash to many businesses. Because Los Angeles is at the forefront of this money laundering activity, law enforcement in Los Angeles is now at the forefront of combatting this issue.

Send feedback and tips to the author. Follow Dennis Romero on Twitter at @dennisjromero. Follow LA Weekly News on Twitter at @laweeklynews.

Does the $100 bill need to go?

Mark Ellis

By Patrick M. Sheridan   @CNNMoney August 15, 2014: 5:06 PM ET

Is the $100 bill more trouble than it's worth?

Influential Harvard professor Ken Rogoff thinks so.

Rogoff ought to know. He was also once the chief economist at the International Monetary Fund.

Nearly 80% of the $1.3 trillion currency in circulation is in the form of $100 bills, Rogoff wrote in a  paper earlier this year. The sheer number is far more than anything that can be traced to legal use in the U.S. economy. In other words, the U.S. "Benjamin" is a favorite of criminals.

Law enforcement agents agree. Criminals tend to prefer $100 bills because its easier to carry more money in less space, said Stuart Tryon, deputy special agent in charge of the criminal investigative division of the U.S. Secret Service.

"Internationally, the $100 is the most commonly counterfeited note there is," said Tryon.

Earlier this week, the Secret Service broke up a ring believed responsible for bringing in $77 million in sophisticated counterfeit $100 bills into the U.S. from Israel over the past 15 years.

Related: Flawed new $100 bill, $110 billion Fed headache

The counterfeiters had even started producing high quality bills at a new plant in New Jersey.

Criminals would pay about 40% of the face value of the bills for a "10 stack," or $10,000 worth of the bills, and then use the notes at local  CVS (CVS) drugstores, car washes or Lowe's (LOW) home improvement stores. Most of the bills were circulated along the Interstate-95 corridor in the East.

Related: New $100 bill debuts

The $100 bill also caused the U.S. government headaches because of a rash of printing problems that occurred when a brand new version was introduced a few years back. At the time, $110 billion in new $100 bills had to be isolated and kept out of circulation because of small blank spaces on the notes.

In an effort to make the bills hard to counterfeit, the new bill included new technological improvements, like 3-D security ribbons. However, tricky criminals are always cracking these codes and figuring out ways to thwart even the best efforts of Uncle Sam. 

First Published: August 15, 2014: 12:31 PM ET


Mark Ellis



JUNE 12, 2014

            Good morning.  It is a pleasure to be joining all of you today for this event.  I would first like to thank the State Bar of Nevada’s Gaming Law Section, the American Gaming Association, and UNLV’s International Gaming Institute, for sponsoring today’s event.

            The fact that today’s conference is sold out tells me there is a clear need for more programs like this one.  It also tells me that the casino industry has a strong interest in developing a deeper understanding about these issues.  And I am very glad I could be here to be a part of the discussion.

            Let me start by recognizing the obvious:  Casinos, like other financial institutions, are increasingly spending time and money to comply with the Bank Secrecy Act.  And we are committed to working with you to maximize our ability to be effective partners.

            As you likely already know, the Bank Secrecy Act, or “BSA,” is the common name for a series of statutes and regulations that form this country’s anti-money laundering and countering the financing of terrorism laws.  Nearly every country around the world has similar laws in place at this point.  These laws are meant to protect the integrity of the financial system by leveraging the assistance of financial institutions to make it more transparent and resilient to crime and security threats, and by providing information useful to law enforcement and others to combat such threats. 

            Indeed, the threats that we face in the United States are quite serious and provide the context for why we must work effectively together.  The information that casinos and other financial institutions provide is used to confront terrorist organizations, rogue nations, WMD proliferators, foreign grand corruption, and increasingly serious cyber threats, as well as transnational criminal organizations, including those involved in drug trafficking, and massive fraud schemes targeting the U.S. government, our businesses, and our people. 

            With this backdrop, I want to focus my remarks today on the importance of the casino industry understanding and embracing a risk-based approach to anti-money laundering (AML) efforts.  I will also discuss trends in the casino industry that are of concern to us at FinCEN, revisit the importance of a strong culture of compliance within the casino industry, and discuss our ongoing efforts to further strengthen our partnerships in this industry and with law enforcement and federal regulators.

            First, let’s discuss why a risk-based approach is so important, and why I think casinos are uniquely positioned to make effective use of this approach.  Casinos are no stranger to the concept of risk.  You calculate the risk of losing money as part of your business operations.   You safeguard yourselves from cheating and theft.  You look out for those who attempt to game the system.  Illicit actors are also looking to game the system so that they can move or hide funds among the many cash and non-cash transactions you conduct daily.  In this way, casinos are well suited to, and should, employ this same concept of risk to their AML programs. 

            We often hear the refrain “just tell us what to do” when we explain why a risk-based approach to AML is needed.  I can appreciate that a prescriptive yes-or-no/check-the-box exercise may seem easier.  I can also appreciate that a risk-based approach can create some uncertainty.  Unfortunately, there is no one-size-fits-all approach to AML.  Every financial institution – from its products, to its customers, to its internal procedures – is different.  So every financial institution needs to consider its own products and practices and assess its own risks, to develop a program that works best for that financial institution to mitigate its particular risks.  FinCEN’s mission is to safeguard the financial system from illicit use.  The most effective way the financial industry can help us is to understand and address the unique risks faced by their industry.  

            I recognize that casinos offer far more than financial services.  Understandably, the entertainment component is a significant driving force behind the decisions your casino makes as a business. 

            But casinos are not simple cash intensive businesses.  They are not arcades.  They are complex financial institutions with intricate operations that extend credit, and that conduct millions of dollars of transactions every day.  They cater to millions of customers with their bets, markers, and redemptions.  And casinos must continue their progress in thinking more like other financial institutions to identify AML risks.  Not only is this thinking necessary to safeguard your corner of the financial sector, but it is also something that should be good for your individual business too. 

            Think about what happens each time a customer enters your casino.  Often, the first thing a customer does is conduct a financial transaction – they buy chips.  And the last action a customer takes is usually also a financial transaction – they cash out those chips.  And while the vast majority of these transactions are purely for entertainment purposes, casinos can serve as the vehicle for the use, movement, and concealment of ill-gotten gains.  This is a risk inherent in all financial institutions.

            Casinos have the same responsibility as more traditional financial institutions to file reports about certain financial transactions.  For example, casinos need to report currency transactions by any person of more than $10,000 in cash each day.  In addition, casinos are required to report suspicious activity when they know or have reason to suspect that a financial transaction, or attempted transaction:
            (i) involves funds derived from illegal activity or is an attempt to disguise funds derived from illegal activity; 
            (ii) is designed to evade regulations promulgated under the BSA, or 
            (iii) lacks a business or apparent lawful purpose.

            This is where the substantial investment in technology that casinos have made can be extremely helpful.  Casinos invest heavily in sophisticated monitoring tools to track a wide range of customer activities and to understand their customers’ preferences.  These same kinds of monitoring and customer service capabilities can and should be leveraged for AML purposes.  I would ask those of you here today to think about the systems you already have in place and how you can adapt these systems so that you can use all available information to assess risk more effectively and improve monitoring on the AML side.

            Building upon the importance of a risk-based approach, I would like to clarify the obligations casinos have concerning the source of funds.  I believe there may have been some confusion caused by recent press reports on this issue.

            For example, one article stated, in part, that existing rules do not require casinos to “vet” the source of funds, and that rulemaking would be forthcoming to address this issue.  That, however, is not entirely accurate.  Casinos are required to be aware of a customer’s source of funds under current AML requirements.

            Specifically, under existing regulations, a casino is required to develop and maintain a robust risk-based anti-money laundering program.  In fact, the regulations explicitly state that casinos must implement reasonably-designed procedures for “using all available information to determine… the occurrence of any transactions or patterns of transactions required to be reported as suspicious.”

            Among the various reporting and recordkeeping obligations imposed on casinos is the obligation to identify and report suspicious activity.  Meeting this obligation relies largely upon the casino’s ability to understand with whom it is doing business.  FinCEN expects that casinos, like other financial institutions, inquire about source of funds as appropriate under a risk-based approach. 

            Significant amounts of money coming in from jurisdictions reported to have high crime or corruption present greater risks to you.  Under a risk-based approach, these situations represent times when you may need to learn more about your customer and his or her source of wealth to identify suspicious activity.

            Think about what it means when you are dealing with money that comes to you from overseas.  This happens, for example, when you are affiliated with or have relations with a casino in an overseas jurisdiction, such as Macau, or when you are receiving patrons through overseas junket operators.  In these situations, you need to be concerned about potentially illicit sources of funds issues and the strength of AML controls in the originating overseas jurisdiction.  In particular, you should be paying attention to: 

  • Source of Funds:  Where precisely are the funds coming from?  High-risk jurisdictions with weaker controls and reputations for higher corruption?  Foreign casinos with weaker controls, including those that allow luxury goods stores on property to front cash for fabricated goods sales?
  • Customer Due Diligence:  Have the customers been linked to negative news reports, such as links to crime or failing businesses?  Are they politically exposed persons?  In this vein, it is important to keep in mind that bad actors are more than just drug dealers and the money laundering predicates include a wide variety of illegal activity.
  • International Money Transfers: How are customers or junket operators moving the funds to and from the United States?  Are they utilizing third parties or possibly unregistered money services businesses?
  • Pass Thru Activity:  Are funds being passed through casino accounts without engaging in much gambling activity?  Are the funds forwarded to third parties or used to purchase assets like real estate?
  • Dormant Accounts:  Are accounts being used to park funds for an extended period of time?

            In addition, with respect to junkets, casinos are reminded that they are required to implement risk-based procedures for ensuring compliance with the requirement to report suspicious transactions.  A casino is required to implement procedures for identifying the junket representative and each member of the junket, obtaining other information on these individuals, and conducting due diligence, for front money accounts.  (This is spelled out in one of the Frequently Asked Questions guidance documents FinCEN put on its website two years ago.)

            I want now to revisit the importance of a culture of compliance, which is an issue we raised when I spoke here in Las Vegas last September.  A strong culture of compliance within any institution is key to its ability to comply with the BSA.  From purely a business side, you understandably want to be the casino that has the best reputation for catering to your guests.  You pride yourself in knowing what kind of wine a high-roller drinks, or his or her favorite music.  Your intelligence operations and the knowledge of your hosts, when it comes to pleasing your guests, are second to none. 

            You have a culture of hospitality and entertainment that enables you to grant every request a customer makes.  To be sure, proper business etiquette suggests that the customer is always right – although that might be true in many things, it certainly isn’t true in everything.  You could jeopardize your reputation and run afoul of the law in an effort to please your customer.  A casino’s capability for knowing its customers’ preferences and credit information, combined with your security technology, can and should be leveraged to piece together relevant information to understand your customers’ source of funds.

            Another aspect of the culture of compliance relates to information sharing.  As in other financial sectors, for a casino’s compliance culture to be truly strong and effective, it should promote appropriate information sharing to help achieve AML goals.  Casinos should think about the information that they have on an enterprise-wide basis and how to ensure it gets to the right people in their compliance unit.  In addition, FinCEN will continue to work with industry to find opportunities to increase the amount of information sharing that can occur within the industry among financial institutions and between casinos and the government.

            On that point, I’d like to emphasize the need for information sharing across financial institutions.  Just like other FinCEN-regulated financial institutions, casinos have the ability to share information with one another and with other regulated financial institutions, such as banks, when they suspect that the information may relate to the proceeds of unlawful activities, and thus be relevant to money laundering or terrorist activity. 

            The 314(b) safe harbor provisions permit financial institutions to share information under the 314(b) program as it relates to transactions involving proceeds of foreign corruption offenses and other specified unlawful activities (SUAs), the predicate offenses for money laundering, if the financial institution suspects there is a nexus between the suspected foreign corruption, or other SUA, and possible money laundering or terrorist financing activity.  And I can tell you as a former money laundering prosecutor, anytime you have funds that you suspect are related to foreign corruption or another SUA in or moving through your casino, you should also be suspicious that transactions made with those funds may involve money laundering. 

            FinCEN’s website has details on how to take advantage of this program and the benefits of doing so.  While section 314(b) information sharing is a voluntary program, FinCEN strongly encourages all financial institutions, including casinos, to participate.

            To address concerns the casino industry may have about the potential disadvantages of sharing such information directly with competitors, the industry may consider the utility of 314(b) sharing through a third-party association that may register with FinCEN, which has been done in other financial sectors.

            FinCEN also has another information sharing process called the 314(a) program.  Under this program, FinCEN, of its own accord – or at the request of law enforcement – regularly asks industry to identify any accounts to help law enforcement locate financial assets and recent transactions involving subjects that may be involved in terrorism or money laundering activity.  Presently, we send requests out to roughly 43,000 contacts primarily in the banking and securities sectors, but we have branched out to certain institutions in other industries as well.  We have been discussing the utility of a similar approach for such requests to the casino industry.  I can’t overstate the importance of this program – based on feedback we received from law enforcement, we estimate that approximately 95% of 314(a) requests have contributed to arrests or indictments.

            Finally, at the request of the casino industry, FinCEN is working on guidance that will enable casinos filing SARs to share such reports within their domestic corporate structures, similar to guidance that we have already issued with respect to the banking and securities sectors.

            One very simple aspect of a culture of compliance is to make sure that your institution and your industry take the requirements very seriously.  Violating the BSA can result in FinCEN imposing civil penalties against the casino itself, as well as its employees, partners, officers, and directors.  It can also result in the U.S. Department of Justice imposing criminal penalties.  So I would encourage you to make sure that the business side of your casinos takes AML controls just as seriously as it treats its high-rollers.

            That being said, I am very encouraged by the very productive discussions FinCEN has engaged in over these past many months with the American Gaming Association (AGA).  We have met with representatives to discuss a variety of issues and we look forward to continuing the active dialogue.  Our participation in today’s conference is an example of how we are reaching out to industry to provide more information about the BSA and regulatory expectations.

            In addition to working with industry, FinCEN regularly works alongside IRS BSA examiners, who serve as FinCEN’s examiners for casinos and card clubs (as well as other entities, such as money services businesses).  We speak with one voice on these issues.  Your IRS BSA examiner is an important source of information on whether your AML program is on the right track.  FinCEN also coordinates and maintains an open line of communication with the Nevada Gaming Control Board who we have found to be a valuable partner over the years.  Moreover, FinCEN conducts investigations alongside criminal law enforcement partners, including IRS - Criminal Investigations (CI), FBI, U.S. Attorneys’ Offices, state authorities, and other regulatory and law enforcement partners.  These civil investigations run parallel to criminal investigations with such agencies.  In fact, I understand that at the end of today’s program IRS-CI will be discussing some of the trends they are seeing on the exploitation of the casino industry by bad actors.  I encourage all of you to stay and listen to their feedback. 

            An active and open dialogue among everyone – industry, law enforcement, and regulators – is important.  For example, one issue we have been discussing with the IRS BSA examiners, as well as the AGA, is chip walking.  Chip walking in and of itself may not be suspicious.  We know there can be legitimate reasons why a patron would leave a casino and take chips with him or her, but there may also be less innocent reasons.  A customer who walks out of your casino with a large amount of chips, or stores them on-site in a lock box for an extended period of time, may be trying to hide their funds or structure.  This might be the kind of activity that you should report.  Again, this speaks to the need for casinos to have procedures in place to monitor for this kind of activity to help mitigate risk.  It also speaks for the need of government to understand from you the particulars of your business models and the precise areas of risk.  That comes through continuing engagement. 

            In closing, I want to thank each of you for being here today to be a part of these discussions.  The public has entrusted you with providing an entertainment service in an area where we know that there are certain risks.  We are counting on you to control for those risks. 

            I have also learned a great deal during my time here this week.  For me, building these partnerships – and learning from each of you – is truly the most rewarding and inspiring part of my job.  Being here today, where we can all learn how to better work together, is so important.  Keeping this dialogue going will benefit all of us.


Israel Eyes Becoming a Cashless Society

Mark Ellis

I found this an interesting approach while I am not too comfortable with another government tracking device.  While I do not believe a truly cashless society will ever happen (will everyone begin trading gold coins again?), there is an economic issue at hand.  Is the tax burden borne by all people or do many sidestep taxes by using cash?  Infamously Mitt Romney stated that 47% of the U.S. citizenship do not pay any Federal taxes.  Is using cash any different?   Unethical, yes.  Immoral, I am not so sure.  TW

Israel Eyes Becoming a Cashless Society

A special committee headed by Prime Minister Benjamin Netanyahu’s chief of staff, Harel Locker, has recommended a three-phase plan to all but do away with cash transactions in Israel.

The motivation for examining a cash-less economy is combatting money laundering and other tax-evasion tactics, thereby maximizing potential tax collection and greatly expanding the tax base. This is important considering the enormous strain put on Israel’s national budget by the army, healthcare system and other public services.

The committee estimated that the black market represents over 20 percent of Israel’s GDP, and cash is the facilitating factor. Cash enables tax evasion, money laundering and even financing terrorism.

“According to estimates by the Tax Authority, about one-fifth of economic activity in Israel is not reported, i.e. it is a black market,” said Locker. “As a result of this black market, Israel loses tax revenues in the neighborhood of 40–50 billion shekels ($11-$14 billion) annually. This is an amount equal to the individual annual budgets of the Ministry of Defense, the Ministry of Health and the Ministry of Education.”

What the committee would like to see happen, pending government approval, is greater restriction on the use of cash, limiting the use of checks as a means of payment and exchange for cash, and promotion of the use of electronic (and therefore verifiable) means of payment.

The following guidelines were set out by the committee for the short-term:

  • Limit business transactions done in cash or by check to NIS 7,500 ($2,150) immediately, and reduce that further to NIS 5,000 ($1,433) one year from the date of legislation;
  • Limit private transactions done in cash or by check to NIS 15,000 ($4,300);
  • Any violation of these limits would be a criminal offense warranting a stiff fine.

In conjunction with these new restrictions, Israeli banks would be required to provide all account holders with debit cards to further promote electronic payments.

The committee found that Israelis are already prone to choose electronic payments methods, and so hopes the shift to a cashless society would be a good fit for the Israeli economy.