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Jansen testimony, U.S. House Committee on Financial Services, Subcommittee on Domestic and International Monetary Policy, Trade, and Technology Hearing on Remittances: Access, Transparency, and Market Efficiency- A Progress Report

Click Here to open PDF: Jansen testimony, U.S. House Committee on Financial Services, Subcommittee on Domestic and International Monetary Policy, Trade, and Technology Hearing on Remittances: Access, Transparency, and Market Efficiency- A Progress Report  (Submitted for the record by US Rep. Ron Paul) May 17, 2007.

Remittances Testimony

Written testimony of

J. Bradley Jansen

Submitted for the record to the

U.S. House Committee on Financial Services

Subcommittee on Domestic and International Monetary

Policy, Trade, and Technology

Hearing on


Access, Transparency, and Market Efficiency-

A Progress Report

May 17, 2007

Chairman Gutierrez, Ranking Member Paul, members of the subcommittee, thank you for allowing me the opportunity to submit testimony on this important question. My name is Brad Jansen, and I am the director of the Center for Financial Privacy and Human Rights. CFPHR was founded in 2005 to defend privacy, civil liberties and market economics and is part of the Liberty and Privacy Network, a Washington, DC-based 501(c)(3) organization.
The Christian Science Monitor1 explains well how remittances from Mexicans working in the United States help students and others in Mexico. At the same time, The Washington Post reports2 on Salvadoran immigrants sending some of their earnings back home as remittances. However, the United Nations looks at estimated $2.8 billion that the Salvadoran immigrants in the United States send back home to support their families (cutting extreme poverty to only 6 percent from the 37 percent it would otherwise be) and sees a “vicious circle” that’s “only going to get worse.”3 The United Nations and its leftist allies support poverty and starvation over income inequality.4
This statement addresses the lack of access to financial services of the “unbanked” especially in light of the post-September 11th, 2001 anti-money laundering laws and their implication for monetary policy. Remittances are an integral part of the unbanked discussion.
Governmental policies regulating remittances, even indirectly, raise several areas of concern regarding monetary, trade and other public policies. Regarding monetary policy, regulations and other taxes on remittances have the effect of re-instituting capital controls to a degree. The Unites States started relaxing capital controls in the 1960s and abandoned them after the breakdown of the Bretton Woods system and the short-lived Smithsonian Agreement period immediately following it. The liberalization of the foreign exchange (forex) and other financial markets more broadly ushered in great productivity and economic utility gains. These gains alleviated poverty and raised living standards. We should not emulate North Korea and other command economies with “successful” capital controls.
Monetary and trade policy concerns

The forex liberalization enabled increased global trade in goods and services. This additional trade increased marginal specialization of production which added to global economic well-being and an alleviation of global poverty. This forex liberalization illustrates a trend toward greater economic prosperity and less national governmental control.
The academic and philosophical underpinnings of these developments is strong and growing. Nobel laureate5 economist F. A. Hayek’s “Denationalization of Money” in 19766 (and his other writings7 over the previous few decades) explored the proposition of greatly reducing national governmental control over money flows in order to increase worldwide economic welfare. His ideas are the topic of current Federal Reserve policy.8 Nobel laureate9 economist Robert Mundell10 continued with this line of reasoning that established the theoretical foundation of the establishment of the euro and the demise of European national currencies.
In the May/June 2007 issue of Foreign Affairs, Benn Steil, the director of International Economics at the Council on Foreign Relations and a co-author of Financial Statecraft, writes “The End of National Currency11” which is summarized, “Global financial instability has sparked a surge in ‘monetary nationalism’ — the idea that countries must make and control their own currencies. But globalization and monetary nationalism are a dangerous combination, a cause of financial crises and geopolitical tension. The world needs to abandon unwanted currencies, replacing them with dollars, euros, and multinational currencies as yet unborn.”

Effective reintroduction of capital controls

Different public policy goals often conflict. One the one hand, liberal trade policies and liberalized financial markets have created a sophisticated, globalized economy creating unprecedented wealth and poverty reduction. On the other hand, more limited and parochial concerns threaten to undermine those gains. In this case, our anti-money laundering (AML) laws and state government policies on remittances risk re-instituting harmful capital controls.
The “unbanked” are those without established formal relationships with financial institutions. They are disproportionately poor, minority and especially immigrant. In the immigrant communities, many people may come from cultures with good reason to be suspicious of banks. Since the marginal returns for services for most institutions for the unbanked are very small, the significant increase in the regulatory burden-especially for the immigrant populations-renders these markets unprofitable; therefore, the formal financial sector increasingly cuts off services to those who need them most.
Financial institutions are increasingly subject to regulations imposed by local, state, and national governments; and by many international organizations. The International Monetary Fund, the World Bank, Organization for Economic Co-operation and Development, Financial Action Task Force and the Bank for International Settlements all claim regulatory powers. As a result, some international financial institutions are now regulated by more than four hundred regulatory bodies. While financial regulations aim to protect consumers and investors, safeguard the stability of the financial system, and prevent money laundering, these regulations all too often become means to protect financial special interests from competition.
Many financial regulations affect poor households in the U.S. and around the globe. According to Federal Reserve estimates in 200012, nearly ten percent of American families do not hold a bank account. The unbanked in the U.S. are disproportionately poor, minorities, less educated, and with younger heads of household and immigrants. Access to the formal banking sector benefits consumers, law enforcement and the financial sector.
Extending bank services to the masses is central to development in developing countries. The Federal Reserve sponsors a “Directo a Mexico” service allowing customers without Social Security numbers through participating banks and credit unions to sent money to Mexico’s central bank.13 Private banks are offering similar services.14
Anti-money laundering policies target those without established relationships with formal financial institutions, again disproportionately poor and especially immigrant communities, e.g., with Suspicious Activity Reports filings.  Since our policies aim to identify “suspicious” activities, bank tellers and others must resort to a subjective test of what is suspicious.
AML policies implemented as a result of the introduction of the USA PATRIOT Act impact financial markets in several ways that threaten to effectively re-institute capital controls. Those provisions targeting informal banking systems (hawalas, etc.) (Sec. 359) and “illegal money transmitting businesses” (Sec. 373) are almost exclusively used by immigrants where most of those transactions are international and cross currency.
The AML policies in the USA PATRIOT Act targeting gold dealers (Sec. 352) disproportionately affect the unbanked. Many immigrant cultures use a “clunky jewelry” gold standard in the absence of a formal (or uncorrupt and affordable) banking sector. Many travelers from countries with capital controls convert their local, controlled currency into gold, precious stones or other hard currencies for us in trade and commerce abroad (to the great benefit of the U.S. economy). About two weeks ago, the U.S. Department of Justice issued two dozen seizure warrants exceeding the equivalent of US$11 million against E-Gold alleging money laundering. E-Gold is one of the oldest and most successful gold-backed currencies in use to day, and founder Douglas Jackson claims to have previously and voluntarily closed accounts with suspicions of criminal activity.
The over-reach and impracticality of the AML policies in the USA PATRIOT Act target Money Service Businesses (Sec. 328, 352) forced many to start to close under the new rules which then had to be rewritten. These businesses are often the only financial services option to the unbanked.
The pattern-analysis approach of the use of our data from our AML policies unfairly targets immigrants. AML policies in the USA PATRIOT which target “bulk cash smuggling” (Sec. 371) unfairly catches legal remittances in its net. In practice, they are searching for drug money, but since nearly all US currency has trace amounts of cocaine (and is therefore selected by the dogs inspecting mail) it is subject to civil asset forfeiture (Sec. 372).
The disproportionate regulatory burden on financial institutions-now much more broadly defined under the USA PATRIOT Act (Sec. 352)-limits access to the formal financial sector by marginal communities, especially the immigrant communities. Since smaller institutions bear a greater cost, there is both a marginal incentive to consolidate industry operators and raise the barrier to new entrants. This effect limits consumer choice and raises consumer cost.
Compounding the disproportionate regulatory burden problem of our other AML policies, new provisions in the USA PATRIOT Act targeting smaller and informal businesses (Sec. 365) include civil asset forfeiture (Sec. 372).
The USA PATRIOT Act’s AML policies on verification and identification (Sec. 326), like the REAL ID debate, have been much more complicated, costly and problematic in practice than in theory. Similarly, increasing penalties (Sec. 363) increases financial institution scrutiny (especially of immigrants) which highlights our concerns. Many other sections of the USA PATRIOT Act, Title III, target international and foreign jurisdictions more likely to affect internationally-oriented businesses and individuals, disproportionately affecting the unbanked and especially the immigrant communities.
In addition to the federal rules, laws and regulations addressed here, there are several state initiatives (mostly tied to the immigration debate) that affect the remittances issue. Some of these are direct such as fees and other taxes on the remittances themselves. Other regulatory, state and local initiatives concerning identification policies, etc., are related more indirectly.
As I testified before the Eminent Jurists Panel15:
“It is my belief that we need to scrap our current AML policies and start over. Instead of policies attempting to vacuum up as much data as possible to look for ‘profiles’ based on incomplete, outdated and often inaccurate data, we should aim to reduce greatly the amount of reports filed.
“By scraping our Currency Transaction Reporting requirements of $10,000 or more and replacing them with reporting of aggregate capital flows, we would give law enforcement the information they are trying to glean from our CTRs, reduce the regulatory burden bringing more people into the formal financial services sector, and protect consumer financial privacy.
“Similarly, the burden should be on law enforcement to identify more specifically what it considers suspicious behavior or trust the financial institutions to do their jobs. Our current policies are too often doing more harm than good.”
CFPHR aims to address the legitimate security concerns of our anti-money laundering laws while protecting consumer financial privacy, improving effectiveness of policies and protecting access to financial services (especially for the unbanked) by addressing disproportionate regulatory burden, identification verification programs, and other policies that limit the poor, minorities’ and immigrants’ access to financial services.
Many of the regulations imposed on financial institutions do not meet reasonable cost-benefit tests and have the potentially perverse effect of leading to more criminality—and less effective law enforcement—by inadvertently forcing more people into the cash economy. The added cost to them for using Money Service Businesses and other alternatives amounts to a “ghetto tax” according to a recent Brookings Institution report16. The post-September 11th, 2001 rules significantly increased the regulatory burden and forced the closure of many MSBs and other legal avenues for the unbanked.
Our proposal focuses on protecting the access to financial services of the unbanked segment of the US population crucial to the future of democracy and the economy of our country. We seek to make it possible for them to become active participants and consumers in the US economy. We think that helping public policy makers more aware of the effects of current and proposed regulations would better protect the unbanked’s access to financial services which will make them become more active participants to the US economy and more engaged in the democratization process of their host country.
As more potential customers drop out of the formal sector, law enforcement fails to gain any benefit from the loss of reporting. The effect is to increase the opportunities for terrorists and others seeking to skirt the law since it increases the market for informal-and often illegal-money services.
In the wake of September 11, 2001, the federal government enacted new rules to protect the country against terrorists and the illegal funding of their activities. While some of those rules adequately address the threat of terrorism, others have had a detrimental impact on the unbanked and immigrant communities. New rules regulating financial data and money transfers to prevent money laundering and illegal fundraising by terrorist organizations have had the unintended consequence of preventing many immigrants from participating fully in the economy as consumers by, e.g., denying them access to credit or making it very difficult to send money back home to help their families in need. In response to the new rules many businesses offering services to the unbanked closed their doors while other depository institutions ceased offering services vital to the unbanked.
Despite these challenges, the poor, minorities and immigrants still are eager to engage themselves in political debates and become actors of the US economy in their own rights. The reality is that they are a legitimate and vital force of that economy and in the political landscape: businesses need them because they constitute a substantial part of its labor force, and politicians seek their votes. Businesses, state and federal governments, and others have shown an interest in helping immigrants integrate at a social, economical and political level.
Financial institutions have an incentive to “overfile” BSA forms in order to protect themselves during regulatory exams. This problem is well established with law enforcement repeatedly calling for policymakers to address the “defensive filing” problem.17 Flooding law enforcement with thousands of forms of Americans going about their law-abiding ways merely adds to the haystack making the search for the needle that much harder.
In short, I recommend examining these issues from a cost/benefit analysis. If rules are not meeting explicit and measurable goals, they need to be amended or repealed. Law enforcement is ill-served by the deluge of “defensive filings” of AML reports. It remains important to respect consumer financial privacy. The unjustifiably high regulatory burden on the private sector harms the economy and limits consumer choice. In addition, the monetary and broader economic aspects of remittances need to remain foremost in the discussion.
If you have any questions or need additional information, please do not hesitate to contact me at 202-742-5949 ext. 101 or by email at [email protected].

Respectfully submitted,

J. Bradley Jansen, Director

J. Bradley Jansen is the director of the Washington, D.C.-based Center for Financial Privacy and Human Rights. Previously at the Free Congress Foundation, Brad testified before Congress on the USA PATRIOT Act proposal, National ID and other issues, and works safeguarding privacy and other Constitutional liberties. While working for U.S. Rep. Ron Paul, he initiated and lead the opposition to the “Know Your Customer” proposal. Brad’s experience in Peru under then-President Alan Garcia sparked his interest in the human effects of monetary and financial policies before he went on to edit a newsletter forecasting foreign exchange rates.

CFPHR comments on FinCEN rule to lower reporting requirements on wire transfers:

August 21, 2006

Robert W. Werner, Director
[email protected]
P.O. Box 39
Vienna, VA 22183
Attn: Regulatory Identification Number (RIN) 1506-AA86

Jennifer J. Johnson, Secretary
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, N.W.
Washington, DC 20551
Attn: Regulation S, Docket No. R-1258

Re: Comments of the Center for Financial Privacy and Human Rights on Regulatory Identification Number (RIN) 1506-AA86 and Docket No. R-1258 concerning the Threshold for the Requirement to Collect, Retain, and Transmit Information on Funds Transfers and Transmittals of Funds

To Whom It May Concern:

The Center for Financial Privacy and Human Rights is a public interest research center in Washington, D.C. Established in 2005, CFPHR is part of the Liberty and Privacy Network, a 501(c)(3) organization, and focuses on privacy, civil liberties and human rights including economic rights.

We submit the comments below on the review by the Financial Crimes Enforcement Network (FinCEN) and the Federal Reserve to determine whether to lower or eliminate the threshold for collecting and retaining information on funds transfers and transmittals of funds. Currently, the threshold is $3,000, but FinCEN and the Federal Reserve are considering decreasing that amount to $1,000 or less.

The lowering or elimination of the reporting threshold must meet the “high degree of usefulness” standard set out by the Bank Secrecy Act. This proposal outlines no metrics to justify the presumption that it meets that standard. CFPHR suggests that proposal must explain the metrics used to determine how, or if, the proposal would meet the high degree of usefulness standard.18 Explicit benchmarks must be established, and that the proposal should be abandoned within a predetermined time period if those benchmarks were not realized.

Additionally, the proposal provides insufficient information about the usefulness of the current reporting system. How many reports initiate law enforcement or regulatory investigations? What percentage of the reports are used in criminal convictions, etc.? What successes can be identified by the ten years of wire transfer reporting requirements? The lack of basic usefulness information renders impossible an analysis and recommendations of the considered marginal benefits of lowering or eliminating the reporting threshold compared to the marginal costs.

Given that the current $3,000 reporting threshold was established ten years ago and never adjusted for inflation, there has already been a substantial reduction in the real value reporting threshold. What marginal benefits-and marginal costs-have already been realized over the course of the decade? The dearth of information itself to justify the high degree of usefulness standard of the Bank Secrecy Act requires that the proposal be resubmitted for public comment with appropriate information to evaluate the proposal.

A great deal of personally-identifiable information is collected, retained and transmitted to third parties of law-abiding customers going about their legal financial transactions. Given the legitimate concerns of identity fraud, the selling and sharing of information without their true informed consent and other issues, efforts should be made to minimize the required amount of information collected, retained and transmitted-not to increase it unjustifiably.

CFPHR shares the view of the Independent Community Bankers of America (and that of most financial institutions and most other observers) that the unintended consequences of the regulation would add an increased incentive for potential customers of the formal financial sector covered by this rule to migrate their business to the informal sector (which would suffer not suffer the increased intrusiveness or regulatory burden).19 In truth, lowering-or worse eliminating-the reporting threshold would jeopardize access to financial services to those with the fewest options since they are usually the least profitable customers. 20 Thus, in this way, law enforcement would be relatively worse off than under the current reporting regime if more transactions took place in the informal sector without reporting regimes.

The increased reporting requirements would dramatically increase the problems associated with law enforcement complaints of the current “defensive filing” problem of the Suspicious Activity Report requirements.21 Making the haystack bigger makes the needle harder to find. The increase in reports would, nearly certainly, increase the delay of the input of the information from all of the reports thus postponing the potential benefits to law enforcement of the possibly time-sensitive information.

Other ways could (and should) be employed to address important law enforcement concerns without the negative unintended consequences of this proposal. Such efforts should stem from clearly-and narrowly-identified law enforcement concerns. How to address those concerns should be left to the individual financial institutions covered by the rule as much as possible in order to avoid the “fatal conceit” explained by Nobel laureate economist F.A. Hayek.22

Eliminating the reports altogether should be considered. Substituting different reports tailored to the specific needs of law enforcement might provide a win, win, win situation for law enforcement, financial institutions and consumers. Consider having covered financial institutions report only aggregate capital flow information coupled with expanded safe harbor to report violations of specified important laws or suspicious transactions. The aggregated capital flow reports would offer law enforcement the information used to track marginal changes in capital flows useful for investigations such the Colombian Black Market Peso Exchange case. At the same time, it would better protect sensitive consumer financial privacy concerns. This proposal would reduce the regulatory burden on covered institutions and likely increase the share of transactions in the formal banking sector reporting information useful to law enforcement. Reporting of aggregate capital flow information would ameliorate the concerns of law enforcement that money launderers and terrorist financiers of their “structuring” transactions to avoid reporting requirements.

Again, CPFHR shares the view outlined by the Independent Community Bankers of America concerning the burden to the public. Some geographic and other populations would be disproportionately adversely affected by the lowering, or elimination, of the reporting threshold.

The “unbanked,” who are disproportionately poor, minority and immigrant, would likely suffer most by this proposed change. Such harms contradict other public policy concerns.23 The marginal effect of increasing the cost of sending remittances abroad increases the marginal benefit of bringing family along for immigrants (legal or otherwise) working in this country.24


The negative effects to law enforcement, the increased cost of the regulatory burden, and the increased loss of consumer financial privacy and access to formal financial services for the unbanked would likely outweigh any alleged benefit to law enforcement by lowering, or eliminating, the reporting requirement threshold. The termination of the BSA Direct Retrieval and Sharing Project by FinCEN for exceeding costs and failing to meet expectations augurs well for a long-overdue consideration by the regulatory agencies of the “high degree of usefulness” standard mandated by the Bank Secrecy Act.25

The regulatory agencies cannot legitimately consider the alleged marginal benefits of lowering, or eliminating, the wire transfer reporting threshold without first outlining the means of evaluating the current requirements and analyzing its costs and benefits. The failures of the current system at the root of the concern for this proposal indicate that scraping and replacing the failed system with one designed to address current needs, concerns and capabilities would be better.

The current system was designed to stop illegal drug use, among other things, but has failed: no one believes it is now impossible to obtain illicit drugs nearly everywhere in this country. The current reporting requirements were designed to report “bad money” such as profits from illegal drug sales. Instead of expanding the reporting regime to find legitimate money that may in the future be used for bad purposes (such as terrorism financing), we should design a system for current goals balanced with current expectations of regulatory burden and consumer issues including financial privacy and access to financial services-especially for the unbanked. In short, the Center for Financial Privacy and Human Rights opposes lowering or eliminating the threshold for reporting wire transfers.

Thank you for the opportunity to comment. If you have any questions or need additional information, please do not hesitate to contact me at 202-742-5949 ext. 101 or by email at [email protected].

Respectfully submitted,

J. Bradley Jansen, Director
Center for Financial Privacy and Human Rights

Complete hearing report here
Remittances Hearing Report