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Ron Paul Statement on Current Trends in Money Laundering

Ron Paul Statement on Current Trends in Money Laundering

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

Opening Statement of
Rep. Ron Paul
Hearing on Current Trends in Money Laundering
House Committee on Banking and Financial Services
April 15, 1999

Thank you for holding this important hearing. In light of the public outcry against the violation of financial privacy in the Know Your Customer rule, it is no small wonder that consumers are now protesting the existing Know Your Customer policies under the Bank Secrecy Act compliance manual and calling for the review or repeal of the Bank Secrecy Act itself.

In a letter to financial regulators regarding the ill-fated Know Your Customer proposal, the Consumer Federation of America, Consumers Union and U.S. Public Interest Research Group wrote a joint letter urging not only the immediate withdrawal of the proposal but added, “we believe that, additionally, the underlying current regulations of the Bank Secrecy Act need review as well.” Passing HR 518, the Bank Secrecy Sunset Act, would accomplish that goal by forcing a three-year debate of the issue. The group letter asked, “Why is the burden on the consumer to explain his or her life to the satisfaction of the bank’s inspector of the bank’s computer, when he or she has done nothing wrong? No warrant would be required, no court order, no probable cause.” The American Association of Retired People (AARP) wrote to the financial regulators about its concern with the “wholesale breach of the firewall protecting the individual’s right to financial privacy.”

The American Bankers Association (Financial Privacy in America: A Review of Consumer Financial Services Issues, June 1998 report) explained that consumers are “increasingly well-informed and aggressive in addressing perceived risks to their personal privacy” such as the current “Know Your Banker” campaign being launched by some citizens groups. It adds, “For businesses to succeed, they must satisfy consumer needs and demands as efficiently and accurately as possible. This is a ‘market’ check on privacy.” Congress should review current laws and regulations accordingly.

This violation of privacy imposes a great cost with little benefit. The Independent Bankers Association of America’s letter to regulators regarding the Know Your Customer proposal read, “There has been no indication of instances when these reports have been successfully utilized in the prosecution of criminal activities . . . Therefore, given the lack of demonstration of benefits from any prior reporting that has been required under the Bank Secrecy Act, it is clear to the IBAA that the costs of the proposal would outweigh any minuscule benefits many thousand times over . . . The IBAA and others have encouraged law enforcement officials to share the results of these efforts with banks, but there has been little evidence that would convince banks that their compliance with the Bank Secrecy Act is providing useful information leading to prosecution and conviction of criminals.”

American Bankers Association surveyed their members (“Money Laundering Deterrence and Bank Secrecy Act Research Report,” 1990) and found that after nearly two decades of reporting requirements and with 86% of responding banks already having a Know Your Customer policy in place (and with a ninefold increase in Currency Transaction Report filings in the previous four years), only 7% of responding banks were “aware of any prosecution cases that resulted from their filing of CTRs, or from their reporting of a suspicious currency transaction.”

The Law Enforcement Alliance of America reports that between 1987-1996 banks filed more than 77 million Currency Transaction Reports with the U.S. Treasury. From this, 7,300 defendants were charged in 3,000 money laundering cases, but only 580 were convicted. This is less then one/1,000 of 1%! More than 99.999%of those that had their privacy invaded were law-abiding citizens going about their own personal financial business, referring to a Journal of Commerce article, 10 December 1996, which cites Department of Justice figures.

Referring to the same 1987-1996 data, Larry Lindsey, former Federal Reserve Board member now at the American Enterprise Institute, compared in a recent Financial Times article (“Invading financial privacy”) the usefulness of these reports to the “proverbial needle in a haystack” with a ratio of 25,000 reports to one case brought and 0.2 convictions. After quoting from the fourth amendment to the constitution, he added, “It would seem clear that the current money-laundering practices are the kind of blanket search that the writers of the constitution sought to prohibit. Somehow ‘probable cause’ does not seem to mesh with the one-in-25,000 odds that the currency transactions reports provide.”

Responding to justifications of such a gross violation of the Founding Fathers’ intent, Mr. Lindsey explained, “freedom has been buried under the kind of convoluted reading of plain English that George Orwell warned about…Logic that amounts to ‘criminals use money, therefore the use of money should be suspect’ sounds somewhat Orwellian.” He ending by saying he had no answer when a woman asked him, “You people in Washington think we’re all criminals, don’t you?”

Of course, “suspicious” activity is inherently subjective and prone to abuse. Georgetown University law professor David Cole compiled a list of characteristics included in the “drug-courier profiles” used by U.S. law enforcement officers. These included: Arrived late at night. Arrived early in the morning. Arrived in afternoon … One of first to deplane. One of last to deplane. Deplaned in the middle … Bought coach ticket. Bought first class ticket … Used one-way ticket. Used round-trip ticket … Traveled alone. Traveled with a companion … Wore expensive clothing. Dressed casually. In short, everyone anywhere at any time could fit a “suspicious profile” according to U.S. customs officials.

Even use of currency laced with cocaine should not be suspect when one considers Federal Bureau of Investigation Laboratories showing 90% of money samples in selected cities contaminated with cocaine (Discover magazine, October 1998). The Journal of Forensic Sciences, May 1998, found that close to 93% of its sample-and 100% of $20 bills-tested positive for cocaine, “In fact, most Americans handle small amounts of cocaine every day, not as packets sold by drug dealers but on dollar bills that line their pockets.” Yet such specious implications of guilt of money laundering are used by law enforcement in the pursuit of civil asset forfeiture.

Consider the increasing abuse of asset forfeiture. Explains Judge John Yoder (in The End of Money and the Struggle for Financial Privacy by Richard W. Rahn), “When I set up the Asset Forfeiture Office, I thought I could use my position to help protect citizens’ rights, and tried to ensure that the US Department of Justice went after big drug dealers and big time criminals, rather then minor offenders and innocent property owners. Today, overzealous government agents and prosecutors will not think twice about seizing a yacht or car if they find two marijuana cigarettes in it, regardless of where they came from. I am now ashamed of, and scared of, the monster I helped to create…Today, asset forfeiture laws are also more likely to be used to intimidate someone who is innocent, than to go after someone who is a big time criminal or drug dealer.”

It is argued that one need not worry if one “isn’t doing anything wrong.” Hosep Krikor Bajakajian and his wife know better. While attempting to board an international flight, Mr. Bajakajian was arrested. His only “crime” was failing to report carrying more than $10,000 in legally-obtained money. Despite the fact that the maximum fine for not reporting such behavior to the proper authorities was only $5,000, the U.S. Customs officials sought to confiscate the entire $357,144 he was carrying!

While the U.S. Supreme Court ruled last summer in U.S. v. Bajakajian (No. 96-1487) that the forfeiture of the entire amount of money “would be grossly disproportional to the gravity of his offense,” it illustrates one of the perils of our money laundering statutes for law-abiding citizens. “When the government confiscates a person’s home or business, the person is often harmed far more than if they had been given a brief jail sentence,” explains Tom Gordon of Forfeiture Endangers American Rights (FEAR). “The safeguards against government overreaching should be just as strict for protecting property as they are for protecting liberty.”

An increasing number of Americans are becoming wrapped up in this Kafkaesque policy and point out the abuse of asset forfeiture, intimidation and disproportionate penalties. At a minimum, we should reduce the regulatory burden (especially on small, rural community banks), eliminate the felony possibility where one acts without criminal intent, and restore public confidence in our financial system. The best approach is to repeal the Bank Secrecy Act which would free banks to tailor policies against fraud and embezzlement best suited to its community rather than conform to the one-size-fits-all approach from Washington beltway financial assaults on our privacy.