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Ron Paul Dissenting View of Money Laundering Bills

Ron Paul Dissenting View of Money Laundering Bills

(J. Bradley Jansen was Ron Paul’s legislative staffer on these issues at the time)


The support for the passage of these bills is a recognition that the current policy has failed. These two bills, H.R. 4005, the Money Laundering Deterrence Act of 1998, and H.R. 1756, the Money Laundering and Financial Crimes Strategy Act of 1998, should be rejected. Despite the desire to appear to be “doing something” to thwart personal behavior that some find objectionable, the more justifiable position is to stand for and respect the U.S. Constitution, good economic sense, individual rights and privacy. Ours is a federal government of limited powers, restricted by the United States Constitution and the too-often-forgotten Bill of Rights preserving individual liberty and reserving certain powers to the states.

Constitutional concerns

Constitutionally, there are only three federal crimes. These are treason, piracy on the high seas, and counterfeiting. The federal government’s role in law enforcement ought to be limited to these constitutionally federal crimes. As such, the criminal laws concerning issues other than these must, according to the ninth and tenth amendments, be reserved to state and local governments. The eighteenth and twenty-first amendments are testaments to the constitutional restrictions placed upon police power at the federal level of government.

This interventionist approach (further expanded by these two bills) has not only failed to stem the flow of drugs into this country, substantially reduce the illegal drug trades’ profitability or reduce consumption of publicly disapproved-of substances, but it has introduced a new, violent element into the mix. As a result of government coercion attempting to stifle individual choice and voluntary exchange, profits on the trade of now-illegal substances are artificially high which induces some individuals to risk official retribution. Before drug prohibition and the so-called war on drugs, some individuals chose to use some drugs-just as some do today. However, the violence associated with the drug trade is a result of the failed federal government’s attempt to restrict individual liberty.

It is an irrational policy: what is the rationale behind a policy whereby morphine is legal but marijuana is not? Perhaps, following the logic of the prohibitionists, we should, by federal governmental intervention, outlaw fatty foods that allegedly harm one’s health.

Unfunded mandate and great regulatory cost

These bills will join the misnamed Bank Secrecy Act and other measures that amount to an unfunded mandate on private bankers whose only crime is to meet the needs of their customers. Such a federal government intervention in this voluntary exchange is obviously wrong and unjustified by our constitutional rights.

The costs of showing that one complies with the current forms far exceed any alleged benefit. These bills will only add to that burden. Calculations using statistics provided by the Financial Crime Enforcement Network (FinCEN) put costs of compliance at $83,454,000 in 1996 for just one law, the Bank Secrecy Act. This estimate was made by totalling only the number of forms required by the Bank Secrecy Act (multiplied by the cost of compliance of each type of form) to the respondent financial institution, according to numbers supplied in response to a September 1997 request by my office to FinCEN. Two forms were not included in the total which undoubtably would push the current total compliance cost higher: IRS 8852 had been required for less than one year, and TDF 90-2249 was not yet active.

Regulatory burdens contribute to bank mergers

Compliance costs for smaller banks are disproportionately high. According to a study prepared for the Independent Bankers Association of America by Grant Thorton in 1993, annual compliance costs for the Bank Secrecy Act in 1992 were estimated at 2,083,003 hours and $59,660,479 just for community banks. It noted that “smaller banks face the highest compliance cost in relation to total assets, equity capital and net income before taxes. For each $1 million in assets, banks less than $30 million in assets incur almost three times the compliance cost of banks between $30-65 million in assets. These findings are consistent for both equity capital and net income measurements.” In short, these regulations impose a marginal advantage to larger institutions and are a contributing factor to the rise in mergers into ever-larger institutions. These bills will only exacerbate this factor.

The Cost of Banking Regulation: A Review of the Evidence, (Gregory Elliehausen, Board of Governors of the Federal Reserve System Staff Study 171, April 1998), concurs that the new regulations will impose a disproportionately large cost on smaller institutions. The estimated, aggregate cost of bank regulation (noninterest expenses) on commercial banks was $125.9 billion in 1991, according to the Fed Staff Study. As the introduction of new entrants into the market becomes more costly, smaller institutions will face a marginally increased burden and will be more likely to consolidate. “The basic conclusion is similar for all of the studies of economies of scale: Average compliance costs for regulations are substantially greater for banks at low levels of output than for banks at moderate or high levels of output,” the Staff study concludes.

In addition to all of the problems associated with the obligations and requirements that the government regulations impose on the productive, private sectors of the economy, the regulatory burdens amount to a government credit allocation scheme. As Ludwig von Mises explained well in The Theory of Money and Credit (originally) in 1912, governmental credit allocation is a misdirection of credit which leads to malinvestment and contributes to an artificial boom and bust cycle. Nobel laureate Frederick A. Hayek and Mises’ other brilliant student Murray Rothbard expounded on this idea.

The unintended consequences of the passage of this bill, as written, will be to stifle the formation of new financial institutions, to consolidate current financial institutions into larger ones better able to internalize the cost of the additional regulations, and to lower productivity and economic growth due to the misallocation of credit. This increased burden must ultimately be passed on to the consumer. The increased costs on financial institutions these bills impose will lead to a reduction of access to financial institutions, higher fees and higher rates. These provisions are anti-consumer. The marginal consumers are the ones who will suffer most under these bills.

Little benefit for great cost

Despite the great costs this interventionist approach imposes on the economy, the alleged benefits are poor. Let all of those who believe that the current anti-money laundering laws work stand up and take credit for the success of their approach: drugs are still readily available on the streets. The proponents of these bills need to explain how the additional burden that these bills will impose will meet their objectives. They have failed to justify the costs.

“The drive to stem these flows has imposed an enormous paperwork burden on banks. According to the American Bankers Association, the cost of meeting all the regulations required by the U.S. government may total $10 billion a year. That might be acceptable if convictions for money laundering kept pace with the millions of documents banks must file each year. But the scorecard has been disappointing,” reads the Journal of Commerce (December 10, 1996).

Referring to the same Justice Department figures cited in the Journal of Commerce article, Richard Rahn, president and CEO of Novecon, LTD, writes, “In the ten year period from 1987-1996, banks filed more than 77 million Currency Transaction Reports (CTRs) with the U.S. Treasury. This amounts to approximately 308,000 pounds of paper . . . 7,300 defendants were charged but only 580 people were convicted, according to the Justice Department. Environmentalists take note: this works out to about 531 pounds of paper per conviction [America the Financial Imperialist, to be presented at the Cato Institute Conference, Collateral Damage: The Economic Cost of U.S. Foreign Policy, June 23, 1998].”

Mr Rahn cites arguments by former Federal Reserve Board Governor Lawrence Lindsey who explains that money laundering laws discriminate against the poor. Mr Rahn’s paper elaborates, “[The poor] are the least likely to have established relationships with banks and the most likely to operate primarily with cash. Hence, they are the first to be targeted, and this even further discourages bankers from wanting their business.”

Legal liability questions not adequately addressed

These laws open the financial institutions up to a new area of legal liability. These bills do not adequately address these concerns. Responding to the Treasury Department money laundering proposal, John J. Byrne, the American Bankers Association’s money laundering expert, said the industry opposes plans that impose onerous record-keeping requirements and banks fear being sued by the government or another company if they incorrectly certify that a customer has not committed any illegal acts (American Banker, November 11, 1997). These regulations effectively deputize bank tellers as law enforcement officers.

The Independent Bankers Association of America (IBAA) has called for FinCEN to establish a “safe harbor” in these regulations. In nearly all cases, the bank has acted in good faith and should not risk being punished. Says a January 1998 IBAA letter to FinCEN, “If a bank has acted in good faith, knowing that there is some protection from liability will encourage banks to use the exemption process. For many banks, especially smaller banks which do not experience as many large currency transactions, it is much simpler to file a CTR. Many are concerned about the possible liability attached to incorrect usage of the exemption list. To avoid any hint of liability, and to avoid criticism from examiners, bankers avoid using the exemption process. A safe harbor from liability would go a long way to encourage them to use exemptions, and to cut down on the number of CTRs.” Banks filed 12.75 million currency transaction reports in 1996, nearly double the number only six years earlier without any appreciable reduction in the drug trade.

Infringes on right to privacy

Subtler and more far-reaching means of invading privacy have become available to the government. Discovery and invention have made it possible for the government, by means far more effective than stretching upon the rack, to obtain disclosure in court of what is whispered in the closet.
US Supreme Court Justice Louis Brandeis (1928)

A Winston Smith, or any other average citizen, would have good reason to be even more concerned with the technological reach of a not so fraternal, big government agency. In his opening statement before the Subcommittee on General Oversight and Investigations, House Banking and Financial Services Committee, Hearing to Review the Department of the Treasury’s Proposed Rules for Money Service Businesses, Chairman Spencer Bachus championed privacy rights saying, “We have to be cognizant that rules often have unintended consequences . . . These rules will require a huge increase in the amount of information on private citizens that will be provided to federal law enforcement. We need to know whether this creates a potential for abuse, either by those in the industries that do the reporting or by those in government that receive the information . . . this is not an insignificant concern.”

At the same hearing, John Byrne of the American Bankers Association trumpeted our tradition of common law rights of privacy and supported “meaningful, consumer-friendly” frameworks based on self-regulating privacy regimes. That is a much preferred approach.

It is proposed that some banks like the Bank Secrecy Act because of the safety and soundness concerns associated with “illicit” funds. The problem lies with the government’s interventionist drug policies. Would those same proponents of the money-laundering laws still argue about safety and soundness of deposits from beer and wine wholesalers and distributors?

FinCEN’s blemished record safeguarding our privacy

The mere existence of the databases holding confidential information on private individuals opens up the possibility of abuse. Unfortunately, it is not just an unfounded fear based on hypotheticals. In fact, the employees of FinCEN itself cannot always be trusted. In 1993, one employee took the liberty of using the resources at his disposal to do a little digging into the (assumed to be) private records of the mother of his girlfriend. In the same year, another employee of FinCEN left her desk unattended with the opportunity available for others to access privileged information-and someone else used the opportunity to pursue personally-motivated independent research.

FinCEN defends itself in a fax to our office in response to our inquiries saying “our system of security controls is . . . obviously working. Because of the controls we have in place, the two violations which occurred were picked up right away and dealt with immediately.” Neither employee was prosecuted nor fired. No systemic changes were made to safeguard privacy.

The General Accounting Office has criticized FinCEN for failing to keep Congress adequately informed. The agency has missed congressionally-mandated deadlines and sometimes implemented fewer than one-half of the provisions of congressional acts, according to one recent GAO report (Money Laundering: FinCEN Needs to Better Manage Bank Secrecy Act Civil Penalty Cases, June 1998).

Computer vulnerability to hackers is another concern expressed by a major trade group. “The Independent Bankers of America said the Treasury Department’s Financial Crimes Enforcement Network needs to do more to make sure that reports on questionable bank transactions are not vulnerable to anyone with a computer, a modem and some spare time,” reports The American Banker (November 30, 1995).

“By requiring the disclosure of detailed information on customers and their transactions, the proposed regulations would conflict with the confidentiality inherent in encrypted communications in electronic banking and commerce,” writes Thomas E. Crocker (The American Banker, September 23, 1997) in an editorial entitled “Broadening Bank Secrecy Act Is Risky.” He wrote opposing Treasury Department’s proposal to expand the BSA’s reach into electronic commerce, but the comments are valid in a broader context as well.

No government agency can be trusted to safeguard adequately our privacy.

Barr amendment would reduce privacy safeguards

The sense of Congress amendment offered by Mr. Barr would make a bad situation worse. Since current safeguards have proved insufficient, we must not reduce what little protection our constituents have. “The government has tremendous information resources at its disposal in data base centers, like the Financial Crimes Enforcement Network (FinCEN) . . . FinCEN has literally everything there is to know about you-tax records, postal addresses, credit records, banking information, you name it-and if more taxpayers knew about it, they would be outraged [emphasis added]” claimed Grover G. Norquist, president, Americans for Tax Reform, in a statement to the House Judiciary Committee at the hearing on “Security and Freedom Through Encryption.”

FinCEN, in a written response to questions concerning his testimony, said “FinCEN has no access to income tax data of any kind . . . The only tax records to which FinCEN has access are property tax records of the kind that any citizen may view in any courthouse . . . FinCEN does obtain from credit agencies certain basic identifying information for individuals as permitted by the Fair Credit Reporting Act. Finally, it has no general access to banking records but only to reports of large currency transactions and suspicious activity.”

Mr. Norquist was ahead of his time. This bill gives FinCEN access to income tax records. In addition, the Treasury Department has tried to lower the threshold for “large currency transactions” to only $750. Of course, if you look “suspicious,” let’s make it only $500, they say. “Suspicious activities” by customers is inherently subjective and open to abuse. Mr Norquist is right to point out that taxpayers should be outraged. In addition, the so-called “know your customer” amendment adopted by the committee further infringes on the right to privacy.

Not every citizen is a crook

In Supreme Court Justice William O. Douglas dissented in California Bankers Assn v. Shultz, 416 U.S. 21 (1974), questioning the Constitutionality of the Bank Secrecy Act, writing:

“First, as to the recordkeeping requirements, their announced purpose is that they will have ‘a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings,’ 12 U.S.C. 1829b . . . It is estimated that a minimum of 20 billion checks - and perhaps 30 billion - will have to be photocopied and that the weight of these little pieces of paper will approximate 166 million pounds a year. . .It would be highly useful to governmental espionage to have like reports from all our bookstores, all our hardware [416 U.S. 21, 85] and retail stores, all our drugstores. These records too might be ‘useful’ in criminal investigations.

“One’s reading habits furnish telltale clues to those who are bent on bending us to one point of view. What one buys at the hardware and retail stores may furnish clues to potential uses of wires, soap powders, and the like used by criminals. A mandatory recording of all telephone conversations would be better than the recording of checks under the Bank Secrecy Act, if Big Brother is to have his way [emphasis added]. The records of checks - now available to the investigators - are highly useful. In a sense a person is defined by the checks he writes. By examining them the agents get to know his doctors, lawyers, creditors, political allies, social connections, religious affiliation, educational interests, the papers and magazines he reads, and so on ad infinitum. These are all tied to one’s social security number; and now that we have the data banks, these other items will enrich that storehouse and make it possible for a bureaucrat - by pushing one button - to get in an instant the names of the 190 million Americans who are subversives or potential and likely candidates.

“It is, I submit, sheer nonsense to agree with the Secretary that all bank records of every citizen
‘have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings.’ That is unadulterated nonsense unless we are to assume that every citizen is a crook, an assumption I cannot make,” Justice Douglas concluded.

Operation Casablanca worsens situation

The police “sting” operation has caused international problems since such operations are illegal in Mexico with some referring to it as “a debacle for U.S. diplomacy.” Rosario Green, Mexico’s foreign minister, says, “This has been a very strong blow to binational cooperation, especially on matters of drug trafficking.” (Wall Street Journal, May 28, 1998) U.S. banks named in the investigation were left untouched. She claims to have evidence that U.S. agents broke Mexican law and Mexico may demand their extradition; she termed the operation a “violation of national sovereignty.”

The illegal sting operation will make only a paltry dent in money laundering activities. Since it is estimated that $300 billion to $500 billion is cycled through the U.S. financial system on an annual basis, the operation will have little real effect. Federal officials expect to seize as much as $152 million in more than 100 accounts in the United States, Europe and the Caribbean (Washington Post, May 20, 1998).

“In general, U.S. government sting operations have failed to produce many convictions. Of 142 cases filed and 290 defendants charged as the result of bank stings between 1990 and 1995, only 29 were found guilty,” the Journal of Commerce (December 10, 1996) article continues. And drugs are still available on the schoolyard.

Oppose regulations of gold as money

The Financial Action Task Force (FATF) on Money Laundering (based at the Organization for Economic Cooperation and Development), 1997-1998 Report on Money Laundering Typologies (12 February 1998), suggested expanding still further the reach of governmental police intervention-this time in the gold market. “The FATF experts considered for the first time the possibilities of laundering in the gold market. The scale of laundering in this sector, which is not a recent development, constitutes a real threat.

“Gold is a very popular recourse for launderers because of the following characteristics:
— a universally accepted medium of exchange;
— a hedge in times of uncertainty;
— prices set daily, hence a reasonably foreseeable value;
— a material traded on world markets;
— anonymity;
— easy changeability of its forms;
— possibility for dealers of layering transactions in order to blur the audit trail;
— possibilities of double invoicing, false shipments and other fraudulent practices.”

The FATF report continued, “Gold is the only raw material comparable to money.” While the FATF experts are clearly right in concluding that gold is money, we should steadfastly oppose the report’s consideration of an expanded governmental reach to control gold.

“It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights,” Ludwig von Mises wrote in The Theory of Money and Credit.

Congress should safeguard our freedoms and privacy

In Supreme Court Justice Thurgood Marshall’s dissent in California Bankers Assn v. Shultz, 416 U.S. 21 (1974), he wrote:

“As this Court settled long ago in Boyd v. United States, 116 U.S. 616, 622 (1886), ‘a compulsory
production of a man’s private papers to establish a criminal charge against him . . . is within the
scope of the Fourth Amendment to the Constitution . . . ‘ The acquisition of records in this case, as we said of the order to produce an invoice in Boyd, may lack the ‘aggravating incidents of actual search and seizure, such as forcible entry into a man’s house and searching amongst his papers . . .,’ ibid., but this cannot change its intrinsic character as a search and seizure. We do well to recall the admonishment in Boyd, id., at 635:

”It may be that it is the obnoxious thing in its mildest and least repulsive form; but illegitimate and unconstitutional practices get their first footing in that way, namely, by silent approaches and slight deviations from legal modes of procedure.”

First Amendment freedoms are ‘delicate and vulnerable.’ They need breathing space to survive . . . More importantly, however slight may be the inhibition of First Amendment rights caused by the bank’s maintenance of the list of contributors, the crucial factor is that the Government has shown no need, compelling or otherwise, for the maintenance of such records. Surely the fact that some may use negotiable instruments for illegal purposes cannot justify the Government’s running roughshod over the First Amendment rights of the hundreds of lawful yet controversial organizations like the ACLU. Congress may well have been correct in concluding that law enforcement would be facilitated by the dragnet requirements of this Act. Those who wrote our Constitution, however, recognized more important values [emphasis added],” Justice Marshall explained.

“Congress should block the proposed regulations and repeal the Bank Secrecy Act, under which such rules are possible,” wrote Richard Rahn, president of Novecon Corp. and an adjunct scholar at the Cato Institute (Investor’s Business Daily, August 12, 1997). “Our freedoms and our privacy are much too important to be compromised merely to make money-laundering more costly and inconvenient for criminals.”
I agree.