It began in 1986. Congress was panicking because it felt America was losing the War on (Some) Drugs. So, it enacted the Money Laundering Control Act (MLCA).
But the law didn’t just criminalize financial transactions involving illicit drugs. It made it illegal to do business with anyone that you suspect or should have suspected of committing a crime – any crime.
Thus, money laundering isn’t a crime like murder, robbery, or rape. In these crimes, the evil act is clear. Instead, money laundering is a thought crime of motive, rather than activity. Two different people can engage in the exact same activity, with one being guilty while the other is not.
Consider this example. You deposit your paycheck into your bank account. Then you make repeated small withdrawals to pay your bills. Does that sound familiar? It should, because that’s how you probably use your bank account.
Yet, the most common form of money laundering is doing that sort of thing. A criminal takes ill-gotten gains and moves them through a sequence of transactions. Eventually, the trail blurs. The income now looks legitimate.
It’s incredibly difficult for financial institutions to detect the difference. Thus, they must watch for dozens of behavioral patterns by their customers. None of these patterns are necessarily illegal. But taken as a pattern, they could indicate criminal activity. And of course, financial institutions don’t know which customers, if any, are laundering money. Thus, all customers are subjected to pervasive, systematic, and continuous surveillance.
And it’s not just banks that need to deal with these rules. Credit unions, casinos, money transmitters, and even the Postal Service are defined as financial institutions.
Anyone Could Be at Risk
Nor is it only financial institutions that are at risk. In one case, prosecutors argued that a realtor should have known that a homebuyer was a drug dealer. After all, he drove an expensive car, wore gold jewelry, carried a cell phone, and had a tan. And he paid for the house in cash. The trial judge threw out the realtor’s conviction. But to avoid retrial, the realtor pled guilty to a lesser charge.
Another textbook example was the 2001 money laundering conviction of criminal defense attorney M. Donald Cardwell. The Drug Enforcement Administration claimed that Cardwell had laundered money for his clients for more than a decade. Prosecutors obtained a conviction that could have led to Cardwell’s imprisonment and loss of his law license. However, the presiding judge concluded, “The government’s entire prosecution was based on a mountain of skillfully crafted lies,” and he reversed the conviction.
And It Gets Worse: Increased Penalties and Forfeiture
The MLCA also converts garden-variety criminal offenses into crimes where the punishment far exceeds the penalties for the underlying conduct. By adding a money laundering charge, the government can convert a low-level felony into a crime punishable by up to 20 years in prison.
Since the penalties for laundering are so high in relation to the sentence for the underlying crime, defendants have an incentive to “make a deal” with prosecutors.
The MLCA also contains draconian forfeiture provisions. In many cases, defendants’ assets are seized in advance of trial. This leaves them indigent, which forces them to accept a public defender appointed by the court. That lawyer may have no previous experience litigating a money laundering or forfeiture case. Despite the occasional acquittal, most laundering cases result in a plea bargain.
In a civil forfeiture, no criminal conviction is required. But any property – real or personal – may be confiscated if it had facilitated or was involved in a “predicate offense” or was purchased with proceeds of that offense. (A predicate offense is the underlying unlawful activity in a money laundering prosecution.)
And Even Worse Still: Losing $99,999 for Just $1
In a criminal forfeiture under the MLCA, a conviction must occur before forfeiture is finalized. But this makes it even worse. Prosecutors can even confiscate substitute assets if the criminally tainted assets can’t be seized.
Nor is there any requirement that every dollar of the forfeited funds be the proceeds of an actual crime. If one dollar is tainted, all may be tainted. Under this reasoning, depositing $1 of “criminally derived proceeds” into a $100,000 bank account may make the entire account forfeitable. While such “ink drop” forfeitures are generally reversed on appeal, prosecutors continue to bring them before the courts.
A notorious example was the prosecution for fraud and money laundering of San Diego eye surgeon Jeffrey Rutgard. After an investigation of 20,000 patient visits to Rutgard’s office, prosecutors brought fraud charges involving fewer than 30 patients. They claimed he billed insurance companies and Medicare for “unnecessary” treatments for these patients. One-third of these charges were dismissed. Thus, 20 out of 20,000 patient visits, or 0.1%, were alleged to be fraudulent.
On that basis, prosecutors argued that Rutgard’s entire medical practice was a scheme to defraud insurance companies and the government. They claimed that the gross receipts from all Rutgard’s insurance and Medicare billings were fraudulent – virtually every dollar he had earned from his first day of practice.
A jury concluded that only $46,000 of the $16.2 million Rutgard earned from billing insurance companies and Medicare was for medically “unnecessary” treatment. But even in these cases, patients’ vision improved after surgery. Indeed, three medical experts testified that the surgeries were medically necessary. In addition, the government’s own billing expert testified that Medicare’s reimbursement procedures are ambiguous.
Despite these mitigating circumstances, the judge ordered Rutgard to pay the entire $16.2 million as “restitution.” He was also sentenced to 11 years’ imprisonment. However, his sentence was partially overturned on appeal.
The power of forfeiture encourages law enforcement to focus on what they can gain, rather than on the crime itself. The disbursement of forfeited revenues to such agencies and the reliance on forfeited proceeds as a revenue-raising device has been criticized as being equivalent to “bounty hunting.” Still, the practice continues. Indeed, in 1989, the Supreme Court declared that the government has a legitimate financial interest in maximizing forfeiture to raise revenue.
But Only the Little Guy Is Prosecuted
As with many other criminal offenses, the worst cases of money laundering tend to be ignored or punished lightly. This is due to the political and/or financial clout wielded by the defendants. A case in point is the Standard Chartered Bank.
In 2012, this bank entered into a deferred prosecution agreement with the Department of Justice (DOJ). Standard Chartered acknowledged a deliberate and years-long conspiracy to bypass sanctions decreed by the US against Iran and other countries. This involved at least $227 million. But the DOJ didn’t seek criminal sanctions against the bank and those responsible for these actions. Instead, the DOJ agreed to impose a fine equal to the amount allegedly laundered: $227 million. For a huge bank like Standard Chartered, this was a mere slap on the wrist.
Money Laundering in Reverse
In 2001, in response to the terror attacks of 9/11, Congress passed the USA PATRIOT Act. The new law gave the government expanded authority to seize the assets of suspected terrorists. But uncovering financial transactions linked to terrorism is even more difficult than discovering those linked to ordinary criminal activity. This is because people with legitimate sources of income may finance organizations deemed to be supporting terrorism. Essentially, it’s money laundering in reverse. The funds have a legitimate source but are put to an illicit purpose.
Ferreting out that purpose requires an extraordinary level of surveillance. For instance, when the FBI tried to determine how terrorists might use the banking system, it came up with this profile: a large deposit followed by small cash withdrawals. Yet millions of Americans use their bank accounts this way just to pay their bills.
Not surprisingly, the surveillance systems put into effect to enforce the PATRIOT Act have snagged many law-abiding citizens. Consider Walter Soehnge, of Providence, RI. He found himself under suspicion of terrorist activity because he paid off a $6,500 credit card bill. Because this was much larger than his normal monthly payment, it was reported to the Department of Homeland Security (DHS) as a potentially “terrorist-related transaction.” His account was then frozen. Fortunately, Mr. Soehnge was eventually able to regain access to it.
It Could Happen to You
What happened to Mr. Soehnge could happen to almost anyone. Let’s assume that you have an average balance in your bank account of $2,500. One day, you sell your car for $7,500 in cash and deposit that into your bank account. Is the transaction suspicious? It could be, according to the regulations. The transaction exceeds $5,000, and it’s not the sort of transaction you usually make.
Is there any evidence that there is less crime – i.e., fewer predicate offenses – being committed today than there were 33 years ago before the MLCA was enacted? The answer is no. Multiple studies have concluded that the global surveillance infrastructure put in place to combat money laundering has resulted in little or no reduction in crime.
Instead, the measure of success has shifted. It’s now measured by how much money is confiscated and whether financial institutions and the countries in which they operate have implemented “best practices” published by agencies such as the Financial Action Task Force.
I’ve seen this firsthand in my role as president of a licensed trust company in the Caribbean. The anti-laundering guidelines place far more importance on boxes checked on a compliance checklist than on discovering actual wrongdoing.
My Proposal and 9 Reasons for It
Thus, I propose the total elimination of all money laundering laws, for nine reasons:
The draconian compliance regime designed to enforce the money laundering laws has not led to a measurable reduction in crime.
Money laundering is a thought crime straight out of George Orwell’s 1984. It’s wrong to punish people based on what prosecutors say they should have known but didn’t.
Money laundering laws are selectively enforced against individuals and businesses without the means to defend themselves. Multinational financial institutions that facilitate the vast majority of money laundering get off virtually scot-free.
Since money laundering laws convert everyday financial transactions into potential criminal offenses, virtually anyone conducting any financial transaction is a suspect.
Money laundering laws forbid doing business with anyone that you should reasonably suspect of being a criminal. This demeans anyone who doesn’t fit into a preconceived mold of a “law-abiding” person. Racial and religious minorities and the poor are especially vulnerable.
Money laundering laws convert low-level criminal offenses into crimes where the punishment far exceeds the penalties for the underlying conduct. The effect is not unlike imposing the criminal penalty for murder against someone convicted of assault.
Money laundering laws give incentives for police to focus on property they can seize, rather than on preventing crime.
Money laundering laws make it much more difficult for poor people and politically incorrect businesses to maintain accounts at financial institutions. If a bank perceives a customer as “high risk,” it’s safer to close their account. Or simply not let them open one in the first place.
The war on money laundering has led to a double standard favoring the richest and most powerful countries. For instance, smaller countries have been forced to implement strict “know your customer” (KYC) standards that require all corporate entities to be linked to a beneficial owner. Yet the US has no such requirement. That means states like Delaware can offer far greater secrecy than is available in jurisdictions like Panama and Switzerland that the mainstream media labels as “tax havens.”
What Will They Say?
I can only imagine the government’s reaction to my proposal. “Without money laundering laws, we would have no way to prosecute financial crime,” they’re almost certain to say.
The answer to this objection is simple. Every money laundering case must be built on an underlying predicate offense, whether it is robbery, fraud, or virtually any criminal offense under federal or state law. Instead of focusing on whether someone accused of money laundering had a criminal motive in engaging in a financial transaction, why not prosecute the underlying offense instead? Whatever happened to “innocent until proven guilty”?
That’s how crime was dealt with in the US for nearly 200 years after the US Constitution came into effect in 1789.
It’s time to go back to those roots. Today wouldn’t be too soon to begin.