The nightmare began in 1970. Congress was concerned that large amounts of cash were coming into the country from narcotics transactions. So, it passed a law effectively eliminating financial privacy: the Bank Secrecy Act (BSA).
The BSA, as amended, requires American financial institutions, many businesses, and individuals to make various reports to the Treasury Department’s financial intelligence agency, the Financial Crimes Enforcement Network (FinCEN). Essentially any transaction or series of “related” transactions in currency or “monetary instruments” exceeding $10,000 comes with a reporting obligation. So does moving currency or monetary instruments across a US border or holding international financial accounts with an aggregate value of $10,000 or more.
In addition, financial institutions must file a Suspicious Activities Report (SAR) if it believes a customer might be engaging in illegal activity, or if they appear to be “structuring” cash transactions in order to avoid the $10,000 reporting threshold.
Persons willfully violating the BSA may be fined up to $500,000, imprisoned up to 10 years, and forfeit all property “involved in” or “facilitating” such violations. The forfeiture sanctions in criminal violations of the BSA can involve all property with even the most tenuous connection to the offense.
Welcome to the Snitch Society
Thanks to the BSA, the duty of discretion and care owed to customers and once exercised by financial institutions has been replaced by an overriding duty to conduct surveillance. Financial institutions must act as unpaid undercover police agents. If they fail to do so, they – and their employees – will face civil and criminal sanctions.
Objectively, the BSA created a “snitch society” – one that is now 52 years old. It also established what was perhaps the first “thought crime” in American law, stipulating that individuals who fail to report their suspicion of criminal activity are guilty of a crime.
The snitch society took a great leap forward in 1986, when Congress decided America was losing the War on (Some) Drugs. So, it enacted the Money Laundering Control Act (MLCA).
Penalties for violating the MLCA are almost unbelievably severe. You can be fined $500,000 or twice the value of the property involved in an illicit financial transaction, whichever is greater. You also face up to a 20-year prison term. In addition, any property involved in or facilitating a money laundering offense is subject to civil or criminal forfeiture.
Money laundering laws convert garden-variety criminal offenses into crimes where the punishment far exceeds the penalties for the underlying conduct. A single financial transaction connected to what the MLCA refers to as “specified unlawful activity” – essentially a violation of any state or federal criminal offense – can result in a laundering conviction and/or forfeiture. By adding a money laundering count to an indictment, the government can convert a low-level felony into an offense punishable by up to 20 years imprisonment and forfeiture of “all funds” connected to or facilitating the offense.
The MLCA also makes it illegal to do business with anyone that you suspect or should have suspected of committing a crime. That’s true even if you don’t know the specific illegal act that person committed. Thus, like the BSA, money laundering is a thought crime. If you should have suspected something, but didn’t, you’re a criminal.
Under the MLCA, 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. That’s the way most people use their bank account.
Yet, the most common form of money laundering involves criminals taking very similar steps. They deposit ill-gotten gains into an account and move 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 might 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.
It’s no wonder that the vast majority of the financial reporting and suspicious activity reporting (SAR) forms sent to FinCEN are never acted upon. For instance, banks and other regulated financial institutions file around 2.2 million SARs with FinCEN each year. Only about one in 25 of them result in any follow-up from law enforcement. And a far smaller number lead to an eventual arrest or conviction for money laundering or other crimes.
The Terrorist Excuse
But the pervasive surveillance state built from the foundation of the BSA and MLCA wasn’t enough for Congress. After the 9/11 attacks, it created a whole new level of surveillance courtesy of the PATRIOT Act.
Thanks to this law, it’s no longer sufficient for financial institutions to unearth assets of criminal origin, as they must do under the MLCA. Instead, they must now trace all assets, legitimate or otherwise. This is because individuals with legitimate sources of income sometimes contribute to organizations deemed to be supporting terrorism.
Essentially, financial institutions must track clean money to determine if it’s being used for an illegal purpose. It’s money laundering in reverse. Discovering the illicit purposes to which funds with a legitimate origin are directed requires an extraordinary level of surveillance. Banks and other financial institutions must now investigate all assets and transactions, legitimate or otherwise, to determine if funds might possibly be used for some terrorist purpose.
Not surprisingly, the surveillance systems put into effect to enforce the PATRIOT Act have snagged many law-abiding citizens. Consider Walter Soehnge, of Providence, Rhode Island. 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 as a potentially “terrorist-related transaction.” His account was then frozen. Fortunately, Mr. Soehnge was eventually able to regain access to it.
Is there any evidence that there is less crime – i.e., fewer predicate offenses – being committed today than there were before the MLCA was enacted? The answer is no. Multiple studies have concluded that the surveillance infrastructure put in place to combat money laundering has resulted in little or no reduction in crime. A 2018 analysis published in the journal, Policy Design and Practice called anti-money laundering laws and regulations “the world’s least effective policy experiment.” It concluded that compliance costs for businesses responsible for enforcing anti-money laundering laws were 100 times larger than the criminal funds recovered under those laws.
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-money laundering guidelines place far more importance on boxes checked on a compliance checklist than on discovering actual wrongdoing.
But the costs are enormous. In the United States, the direct costs of complying with financial crime laws (primarily the BSA, MLCA, and PATRIOT Act) now come to more than $35 billion annually.
The indirect costs are even higher. Tens of millions of US citizens or businesses are unable to open or maintain bank accounts due to a profile that bears an unacceptably high risk. Not to mention countless numbers of people targeted by ambitious prosecutors anxious to prove they’re tough on crime.
A textbook example was the 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 reversed the conviction.
But as with many other criminal offenses, the worst cases of money laundering tend to be ignored or punished lightly. A case in point is Wall Street powerhouse Goldman Sachs. In 2020, the company was fined $2.3 billion in the United States and $2.5 billion in Malaysia for its role in the 1Malaysia Development Berhad (1MDB) scandal in which a former Malaysian prime minister and other insiders channeled approximately $4.5 billion out into their personal accounts. Goldman Sachs admitted that senior management at its Malaysian subsidiary was complicit in bribery, money laundering and flagrant misuse of funds by their clients.
Fines totaling $4.8 billion might sound like a big number – and it is – but it represents only about three months of profits at Goldman Sachs. Despite its size, it’s really just a slap on the wrist.
Your Last Chance to Buy Art Privately?
And it’s about to get worse. In June, the House of Representatives passed next year’s defense bill – the National Defense Authorization Act. Buried in this legislation is the “ENABLERS Act.” The proposal would amend the BSA to require individuals and companies that facilitate financial transactions or create corporate structures and trusts to comply with the same anti-money-laundering rules that financial institutions must follow.
Accountants, lawyers, financial advisors, and investment managers would all be covered by the new rules. So would art dealers. Like financial institutions, they’ll be required to secretly file SARs with FinCEN. And since none of them know which clients, if any, are engaged in illegal activity, all of them will be subjected to pervasive, systematic, and continuous surveillance.
The ENABLERS Act appears likely to become law in coming months. No one in Congress wants to be accused of being “soft on defense.” And the Biden administration has added its support to the initiative.
Frankly, we don’t anticipate the ENABLERS Act will be any more effective at reducing financial crime than the draconian system that’s already in place. And it will lead to an even higher level of financial surveillance.
Almost exactly three years ago, we published what is perhaps the most controversial article we’ve ever written, arguing that all money laundering laws should be repealed. We argued that the compliance regime that’s evolved to enforce these laws is largely ineffective and that it tends to target largely powerless defendants.
The objection to abolishing money laundering laws, of course, is that without them, there would be no way to prosecute financial crime. But that’s simply not true.
Every money laundering case must be built on an underlying predicate offense, whether it is robbery, fraud, or some other criminal offense 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 United States for nearly 200 years after the Constitution came into effect in 1789.
It’s time to go back to those roots. Today wouldn’t be too soon to begin.
