Monday, August 23, 2010

Music As Money Laundering

A BBC News story brings up the subject of recorded music as a form of money laundering. The story provides few details, but says 12 people have been arrested and charged in a scheme that revolved around recorded music:

A gang is alleged to have created about 20 songs and uploaded them to be sold on the iTunes and Amazon online sites.

The group planned to collect royalties from their songs. That part sounds innocent enough, but according to the allegation, the group never intended to sell the songs to the public. Instead, the focus was on stolen credit cards as the source of sales for the songs. In addition, four of the 12 defendants are charged only with money laundering.

Recorded music has always been a plausible, if inefficient, form of money laundering. The owner of a small record label could send people with cash into record stores to buy the label’s latest album release. A third of this money would come back to the record label in wholesale payments for the records — too small a fraction, perhaps, to be a serious form of money laundering, but it would have two additional advantages. It brought back LPs that could be sold all over again, in new shrink wrap. At the same time, the bogus sales might improve the chart position of the record, perhaps bringing it more recognition. No one really knows how much a part of the early record business this was, though there are enough stories to say that it happened every day.

Online digital venues for music, though, typically bring at least half of the retail revenue back to the record label. This brings them within the traditional efficiency range of money laundering. It also makes them an attractive target for fraud. There are stories about iPhone apps being “sold” primarily through stolen credit cards and guessed passwords. And now, this story about the same thing happening in music. At the same time, musical ability is no longer needed to create passable music recordings. Anyone who is willing to tinker with music software for a few days can create something new that sounds like it is meant to be a record.

Online money laundering will never catch on in a big way because every transaction can be traced, at least partly. Then again, the group that was arrested last weekend in England is alleged to have managed $1 million in bogus sales prior to their arrests. Most money laundering schemes involve sums in the thousands, not the millions, so perhaps a lot of online money laundering is going on already without it being detected.

Companies involved in digital distribution don’t want any part in fraud and money laundering, of course, but they can hardly become paranoid about every content creator that comes out of nowhere to sell 5,000 downloads. These days, that pattern would describe the average band, author, or software developer. If there are any online metrics that could be used to separate the bogus products from the legitimate ones, they aren’t obvious to me.

This may be one of the puzzles of modern times. Most people would agree that a more financially efficient distribution system, in which a significant fraction of the money spent on music goes to the musicians who created it, is an improvement. Yet it brings with it the challenge of identifying, in a new arena, money laundering and other abuses of the system.