Mónica in comments is gobsmacked by the amount of money that Wachovia handled in wire transfers from Mexico without “applying the proper anti-laundering strictures.” $373.6 billion over three years, reported the Guardian last April. What does that number mean?
Well, as Mónica surmised, it means less than one might think. What happens when somebody in Mexico goes to a casa de cambio and gives it a dollar to wire to the United States? The casa de cambio acquires the dollar bill. The casa de cambio has an asset: the dollar. Double-entry accounting means that it creates a corresponding liability: it owes $1 to whomever gave it that dollar to send.
Now it wires the dollar to Wachovia. It gets an asset: a $1 deposit at Wachovia. It also gets a liability: Wachovia will at some point want that dollar bill, or some corresponding dollar-denominated liability. (The deposit at Wachovia then cancels the $1 owed to the customer, since the customer receives the deposit account. But the other asset and liability generated by the transaction remain.) In other words, that $373.6 billion is a gross flow: the change in the casas’ liabilities generated by wire transfers to the U.S.
Is that gross flow big or small? Clearly a lot of money sloshes back and forth between the U.S. and Mexico. But even more money sloshes around within Mexico. For example, in the first quarter of 2012 the Mexican payments system processed about $193 billion in checks and $1.2 trillion in other transactions. Over three years, that would be almost $15 trillion. (Wow!) Given that baseline, the cross-border figures do not seem out of line. Rather, what is surprising is the implication that Wachovia (and its 22 correspondents in Mexico) appear to have captured so much of the business. Even so, there is an explanation for that: the DOJ indictment against Wachovia mentions that other banks were getting out of dealings with the casas de cambio precisely to avoid problems with illicit transfers.
The indictment also says that these transfers occured on behalf of the customers of the casas de cambio, but I suspect that much the flow consisted of the casas’ own accounts. After all, they probably wanted to earn interest on their dollar balances, and this was a way to do it.
What was the net flow, then? After all, whenever the casas needed dollars the process would go into reverse. Fortunately for us, Wachovia offered two services to the casas de cambio to help them net things out when the time came for them to make good on the claims against their dollars. First, it helped them physically move dollar bills to the U.S. That came to $4.7 billion over the period. (See page 5 of the indictment.) Second, it allowed the casas to accept checks, travellers checks, and other dollar-denominated liabilities, digitize them, and use the digitized documents to effect settlement in the United States. Those transfers came to $47 billion.
In other words, the net flows were a lot smaller. $52 billion over three years is still a lot of money, but remember that is only a net flows from the point of view of the casas de cambio. From the point of view of Mexico as a whole, they are still gross flows. The Department of Justice, in fact, found that only $110 million of the flows were clearly crime-related. (The link goes to the settlement agreement.) Wachovia failed to monitor its activity, but the bank retroactively analyzed its transaction: little suspiscious was found.
The amount Wachovia processed is staggering. And the bank did a lousy job of real-time checking. But the amounts are not out of line for two adjacent countries with economies as large as the U.S. and Mexico. And neither the amount nor the malfeasance implies that most, or even 99.9% of it, is illicit or criminal. After all, how much money to you think Mexican drug cartels want to transfer into the United States?