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Banks as Spies

Mises Daily: Thursday, April 29, 1999 by

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The Washington Times

Shaking out your banking secrets?
Internet activists, conservatives, libertarians, civil liberties groups, and others trounced federal banking agencies last month. The proposed expansion of the "Know Your Customer" banking regulations were defeated by hundreds of thousands of Americans who took to their keyboards. Unfortunately, federal banking regulations continue to be profoundly intrusive - and a threat to the security and reputation of millions of innocent Americans.

The Bank Secrecy Act of 1970 effectively made it a federal crime for banks to keep secret from the government. This law required banks and other financial institutions to submit a Currency Transaction Report (CTR) to the feds for every transaction involving more than $10,000 cash. Many homebuyers have been reported to the IRS as potential money launderers when they go to a closing to buy a home with a cashier's check more than $10,000.

Between 1987 and 1995, banks and other institutions delivered 62 tons of Currency Transaction Reports to the feds - more than 77 million separate reports. But only 580 people were convicted of money laundering during that period, according to former Fed Governor Lawrence Lindsey. Twelve million Currency Transaction Reports (CTRs) were filed in 1997 alone.

This requirement floods federal agencies with paperwork, and actually undermines law enforcement: The vast majority of the CTRs are never even examined by bureaucrats. This helps explain why the feds failed to notice the suspicious actions of notorious CIA-turncoat Aldrich Ames, who was receiving wire transmissions of more than $50,000 from Switzerland. His local bank notified the government of "suspicious transactions," but the bureaucrats were so swamped by other reports they never checked it out.

During the 1980s, federal banking agencies pressured banks to enact some type of Know Your Customer program to curb money laundering and, by extension, help curb the flow of drugs. By 1990, most banks had some system of this type in place, at least on paper. But the regulations proposed last December went far beyond what any bank was already doing - and thus a routine tightening of the screws turned explosive.

The proposed regulations were a logical extension of the growing pressure on banks to become government informants. Since 1996, banks have been required to file Suspicious Activity Reports (SARs) to the Treasury Department's Financial Crimes Enforcement Network (FinCEN) on any transaction involving $5,000 or more which "has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage, and the institution knows of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction."

The feds now receive almost 100,000 SARs a year. And a federal appeals court ruled in February that banks do not need a "good faith belief" of criminal activity before filing an SAR on someone: The "safe harbor provisions" provided by federal regulators allow defamatory statements by anonymous informants against innocent citizens, thus making the reports an easy way to smear people. What's more, as Greg Nojeim of the American Civil Liberties Union observed, "Congress barred financial institutions from telling their customers that their bank had spied on them by reporting their transactions to the federal government."

The feds have chutzpah demanding more personal financial information on citizens considering their abysmal record of safeguarding the information they already collect. The comptroller of the currency issued a rule last November authorizing the release of SARs to "any supervised entity and to other persons, without a request for records or testimony." The agency's discretion in passing out titillating tidbits is effectively unlimited. The GAO reported last summer that 13 state agencies have violated federal rules for the use of SAR information they receive, and Money Laundering Alert, a leading newsletter, cited reports that "in two major U.S. cities local police departments have made SAR filings available to private investigators."

The KYC debacle signified the first time congressional Republicans have torpedoed a drug war-related expansion of government power. GOP indignation is a bit ironic, since 12 Republican senators are co-sponsoring the "Drug-Free Century Act," which urges that KYC regulations be "expedited." A money laundering bill that passed the House by voice vote last fall would have required banking agencies to speedily issue the same regulations.

The KYC episode is also a warning to all future regulators of the danger of clear English. If the banking agencies had simply proposed convoluted amendments to existing statutes - and avoided the "Know Your Customer" title - the regulations would have generated far less controversy. Since the New Deal, federal bureaucrats have become masters of subjugation through obfuscation. Leviathan has expanded through ink-storm after ink-storm of impenetrable Federal Register notices. The more complex the regulations become, the easier it is for bureaucrats to browbeat and bully their victims.

Rep. Ron Paul, Texas Republican, is sponsoring legislation to immediately abolish existing KYC regulations and block any attempt to revive or expand such intrusions in the future. Mr. Paul has 56 co-sponsors, including House Whip Tom DeLay, Texas Republican; the fate of his bill will determine whether Congress is serious about respecting Americans' privacy. The trouncing of the proposed regulations will be a hollow victory unless Congress abolishes the bad laws that already mean a federal thumb in every pie.

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James Bovard is the author of Freedom in Chains: The Rise of the State & the Demise of the Citizen (St. Martin's, 1999). This article was adapted from an article in the May issue of the American Spectator.

Copyright 1999 News World Communications, Inc.