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Banks as Spies

April 29, 1999

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

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.

* * * * *

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.

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