Federal regulators announced last December 7, Pearl Harbor Day, a brazen scheme to convert banks into conspirators against their depositors. The “Know Your Customer” rules were a landmark in the history of the attempted subversion of American privacy and property rights. But enough Americans rallied — at least temporarily — to block this power grab.
The proposed rules vastly expanded the number and types of private activities that bankers must report to federal overseers. Law-abiding citizens would have been treated like drug kingpins. Under the proposed rules, a bank would have had to “determine its customers’ sources of funds, determine, understand and monitor the normal and expected transactions of its customers, and report appropriately any transactions of its customers that are determined to be unusual or inconsistent.”
The purpose of the rules, as announced in the Federal Register, was to let the government better “combat illicit activities.” But since Congress has criminalized so many different types of private behavior, efforts to “combat illicit activities” could justify providing the government information on almost any bank transaction of private citizens.
Any bank failing to report “unusual or inconsistent” behavior by its depositors would have faced major investigations and an array of sanctions. Thus, the regulatory sword of Damocles would have hung over the head of any bank official who hesitated to “drop a dime” on any customer.
In fact, the standards for violations were so vague that anyone who has a one-time surge in income — from selling a car or receiving a bonus at work, for example — could be reported as a suspected drug dealer. Barry Steinhardt of the American Civil Liberties Union warned that “every time little Billy gets a large gift from his grandmother, there’s going to be a suspicious-activity report. It turns banks into cops, into police spies for the government.”
The proposed rules would have obliged bankers to allow the feds to see private financial records within 48 hours of a request — no search warrant necessary . Money Laundering Alert newsletter reported that the “big winners” from the “revolutionary” proposed rules will be “U.S. law enforcement agencies.”
Many citizens may shrug off the proposed regs because they think that they have nothing to hide. But the Justice Department is adamant that criminal intent is not necessary for a citizen to be a criminal under banking laws. In 1994, the Supreme Court overturned the money-laundering conviction of an elderly couple who had paid off their Nevada casino debts in large cash payments. (The couple did not know that it was a federal crime to pay off their debts in chunks of less than $10,000 a shot.) The Justice Department responded to that decision by racing to Capitol Hill and persuading Congress to revise the law by removing any requirement that a citizen have willfully violated the law before being convicted and sent to prison. Treasury undersecretary Ron Noble proclaimed at the time that that law would “further the growing partnership between the banking industry and law enforcement.”
The proposed regs were a vast expansion of the existing Currency Transaction Reports (CTRs) that banks must file for any customer who deposits or withdraws more than $10,000. That requirement floods federal agencies with paperwork: 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 in excess of $50,000 from Switzerland. His local bank notified the feds of “suspicious transactions,” but the bureaucrats were so swamped by other reports that they never checked it out. While the FBI and other agencies were devoting massive resources to undercover money-laundering stings, they totally neglected the stark evidence of Ames’s guilt.
The money-laundering laws are popular with law enforcement because they make it easy to entrap average citizens suffering from normal greed and stupidity. The U.S. Sentencing Commission estimates that almost 90 percent of money-laundering convictions not involving drug money have been achieved by government sting operations. The FBI and the D.C. police set up elaborate scams to purchase automobiles for cash in Washington, D.C., and elsewhere. After some of the auto dealers failed to file a Currency Transaction Report, easy convictions were secured — and the government could pretend that locking up some polyester-suited Oldsmobile salesman was a great victory in the war on drugs. Federal prosecutors conceded during the trial that the D.C. police were aware of no illegal activity among the car salesmen they targeted prior to launching their sting operation.
The proposed regs are another example of the feds’ responding to their failures in the drug war by creating broad new classes of criminals who have nothing to do with narcotics trafficking. The “Know Your Customers” regulations were largely a response to the failure of federal money-laundering statutes, which are largely a response to the failure of drug laws to curb the flow of drugs. The Congressional Office of Technology Assessment concluded that federal laws have been nearly totally ineffective at preventing the laundering of illicit money through wire transfers.
Can government be trusted with more information that it could use to punish citizens? Consider the pretexts that government uses to confiscate cash from people on the street or driving their cars. Federal, state, and local police routinely seize money from people whom they stop and search — merely because the cash causes a police dog to “alert” to some trace of cocaine on the money. But a federal appeals court noted in 1995 that more than 75 percent of all circulated currency is “contaminated with drug residue.” Thus, the court noted, “it is extremely likely a narcotics detection dog will positively alert when presented with a large sum of currency.” Though prosecutors know that most American currency is tainted with cocaine residue, they still invoke the “tainted currency” claim in order to steal as much as they can. Is there any reason to believe that prosecutors would use information turned in from banks with any more fairness than that with which they currently use the evidence they gather from government canines?
One federal banking official whined to the Associated Press that “anti-government groups” were to blame for the backlash against the proposed regulations. Actually, the rout was achieved by an unlikely combination: the WorldNet Daily website (which first targeted the regs), the Libertarian Party (which gathered more than 150,000 signatures that it delivered to the FDIC), Wired magazine, the American Civil Liberties Union, the Christian Coalition, and other organizations and activists. Paul Weyrich’s Free Congress Foundation, along with columnist Phyllis Schlafly, played a decisive role in galvanizing opposition on the right. And it appears that privacy may be the new rallying ground for activists of both left and right.
On March 23, the proposed regs were withdrawn — though banking officials made it clear that they might issue a new proposed reg or simply announce “guidelines” or a “policy statement” — which could still bind banks but would not stir the public furor. The agencies issued a joint statement: “The Agencies’ withdrawal of the proposed rule does not diminish in any manner our long-standing support for the anti-money laundering provisions of the Bank Secrecy Act. Over the past 15 years, banking organizations and law enforcement authorities have forged a vital partnership to fight financial crime.” But it is hardly a “partnership” when the government has a wide array of screws it can turn on bankers to compel them to subvert the privacy of their customers. A senior Treasury Department official told American Banker that the government “did not want to see the pendulum [against regulation and government control] be permitted to swing the other way, so that legitimate law enforcement” tools are destroyed.
The proposed regs were only another stepping stone to far greater control. No system of federal control and intrusion is ever imposed in one fell swoop. Instead, the new regs would have been a launching pad. Banking regulators and prosecutors would have had an incentive to bitterly complain about the “loopholes” that supposedly exist in the regulations — and thus to demand more sweeping penalties and reporting requirements.
Federal agencies issue more than 800 notices of proposed or final regs, rulings, announcements, et cetera each week in the Federal Register. Unfortunately, the average congressman may not know the Federal Register from the Washington phone book. If a cadre of a few hundred thousand — or a few million people — begin paying attention to what the government is doing — begin noticing and denouncing each new fetter the government seeks to attach — then politics could get interesting. Most of the Washington press corps docilely feeds from the trough of government press offices. But it is now easier than ever before for concerned citizens to go directly to the source of threats to their freedom.
Rep. Ron Paul (R-Tex.), who courageously led the fight against the regs in Congress, summarized the lesson of the “Know Your Customer” clash: “The Internet will be the musket of the 21st century, for it will provide freedom-loving Americans with the tools to keep government power in check.” It remains to be seen whether the “Know Your Customer” battle was the equivalent of Lexington and Concord, heralding the rise of decisive, informed citizen cadres who can rattle the federal cage — or merely another sideshow along the road to serfdom. At a minimum, the cost of federal power-grabs in the future could be much higher than in the past.