Jansen Speaks at Cato Forum: Global Money, Sovereignty, and Privacy filling in for US Rep. Ron Paul
October 6, 2000
(Full forum transcript here in PDF)
Watch the video of the full forum at the Cato website here.
CATO INSTITUTE POLICY FORUM
GLOBAL MONEY, SOVEREIGNTY, AND PRIVACY
Friday, October 6, 2000
Bradley Jansen, Legislative Director for Banking and Monetary Affairs, Office of Representative Ron Paul (R-Tex.);
Dr. Muhammad Abdul Ghaffar, Ambassador of Bahrain;
Adrian Day, Editor, Adrian Day’s Global Analyst; and
Bill Tucker, former Section Chief, Organized Crime Narcotics Division, Federal Bureau of Investigation
The Cato Institute F.A. Hayek Auditorium
1000 Massachusetts Avenue, NW Washington, D.C.
MR. LUCAS: Before I introduce our speakers, however, I want to note with regret that Representative Ron Paul was unable to be with us today due to a last-minute family medical situation. From his position on the House Banking and Finance Committee, Representative Paul has been one of the most outspoken critics of U.S. counter money-laundering efforts and an articulate spokesman for the importance of personal financial privacy protection.
The good news, however, is that Bradley Jansen, a member of Representative Paul’s staff, was able to fill in for him at the last minute. So, he will be speaking to us.
Our next speaker is Brad Jansen. Bradley is Representative Ron Paul’s Legislative Director for Banking and Monetary Affairs. He initiated and led opposition to last year’s failed FDIC “Know Your Customer” rule, and has been actively involved in opposing global “Know Your Customer” legislation this year.
He covers a range of other issues for Representative Paul, including financial modernization, civil asset forfeiture, bankruptcy, financial privacy, corporate welfare, insurance, and on and on into other regulatory issues.
He holds a B.A. in international studies from Miami University in Oxford, Ohio, and has also studied in South America, Chile, and some other universities that I won’t even begin to pronounce their names. So, I will just turn it over right now to Brad Jansen.
BRADLEY JANSEN, LEGISLATIVE DIRECTOR FOR BANKING AND MONETARY AFFAIRS, OFFICE OF REPRESENTATIVE RON PAUL (R-TEX.)
MR. JANSEN: I want to start off by thanking Aaron and everyone at the Cato Institute for putting this together. It is an important topic, and we need more debate on this to find out where our common ground is and where we still disagree.
I also want to apologize for Dr. Paul’s absence. His wife, Carol, had emergency surgery and he is at her side in the hospital in Texas. I did want everyone to know that she is doing well and everything is expected to be fine, but we had a little scare for a while.
I want to start off first by commenting on some of the remarks of the previous speaker. Citing personal bias, again, part of my job as a legislative staffer for Congressman Paul, I go down to the District and I visit with the bankers in our district and listen to their concerns and complaints. Unsolicited, I have gotten complaints about the Bank Secrecy Act, compliance and problems, at every meeting I have had with the bankers.
Our district is a rural district. It is 22 counties. It is mostly community banks. And I kind of explain what is going on in Congress and then open it up for questions. Even before “Know Your Customer” became an issue, even before money-laundering became as high a priority in the legislative arena, it never failed that one of the bankers would bring up problems with the regulatory burden, compliance and many other issues involving the Bank Secrecy Act.
So, my personal experience has been that it doesn’t work, that the bankers have complained that there is very little feedback that any of the information that they are giving to law enforcement is of any use to law enforcement. The regulatory burden is severe and, for community banks especially, disproportionately hard for them to comply.
Most recently, just over the August recess, I spent a couple of weeks dealing with an emergency situation for one of the bankers, where it’s a small, start-up community bank to handle some of the agricultural loans that the larger banks wouldn’t take. It is in Matagorda County, an agricultural area of our district.
A woman walked out of the bank so offended by the intrusiveness of the questions that were mandated by the Bank Secrecy Act Currency Transaction Report forms — and this is not even the more intrusive Suspicious Activity Reports — she walked out of the bank, threatening to close personal and corporate accounts because of the privacy violations that she felt.
The bank called us. They called the regulators. They got conflicting responses. They called us in D.C., because they knew that we were more knowledgeable on this question and that we had been very helpful to them in the past.
And this is the president and CEO of a bank who is calling me. He understands this. He has spent a lot of money on training and compliance for his employees, and he thought that, for all of the burden that he has gotten and for all of the work that he has done to comply with these, he shouldn’t be losing customers because of it.
It was explained to him that what was required at his bank was a more onerous requirement for his community bank than it was for the local branch of a bank holding company. When he called Dallas, because one is regulated by the FDIC and the other by the Fed, they were given different answers. And this is to comply with the same law. There is not supposed to be any discrepancy. And in fact, if you call FinCen they will tell you that the law is the same and it applies to all of the financial institutions equally. This is what they lecture us here in Washington, D.C., and I think this is what most of the regulators in D.C. believe.
What actually happens in the field is very, very different. There was a difference in interpretation between the different regulatory agencies themselves and a difference of opinion between the Dallas Regional Branch and the D.C. branches, and a different opinion in some of the details entirely from FinCen, which was supposed to have been the final say.
Needless to say, for all of the benefits of competition that all of us here that believe in the free market like, the idea of customers being able to choose which bank they want by getting around money-laundering laws is not, I think, the approach that Bill Tucker and others in law enforcement are suggesting would be the best approach.
Because of that, I have to believe that even though there is a denial by a lot of the regulators and law enforcement officials that this is not a privacy issue, it is emphatically a privacy issue. When you have customers walking out of banks threatening to close personal and corporate accounts, this is a privacy issue.
Mr. Tucker talked about how it is undermining the rule of law and the safety and soundness, implicitly, in the financial system. These money-laundering laws undermine public confidence and public trust in the financial system. And it is the undermining of that public confidence that is threatening, in part, the safety and soundness of the institutions, especially at a time when they are as highly leveraged as they are today.
These are not concerns that I am trying to exaggerate the effects of, because obviously there are other parts of the economy that are doing well and the banks are offering great service to their customers. But when we are isolating out this particular regulation, we need to know that the net effect is a detriment to the financial system itself, because it undermines the public confidence that the customers have in their institutions. And it is that public confidence that the banks rely on for their business.
We are jeopardizing this relationship for very little benefit for the banks, and even less benefit, I would argue, for law enforcement itself. An argument is made by some of the regulators that the profiling monitoring is to the benefit of the customers and also to protect the financial system. They use the analogy of credit card companies monitoring your Visa transactions to detect fraud.
I lived in Adams-Morgan for a while and had a credit card stolen from my mailbox. It was a new card so I didn’t know that it had arrived yet. They ran up over $8,000 in charges over eight days. And I got a call from the Visa company saying, we suspect that there is something wrong going on. It was a great deal of paperwork getting it corrected, but I was not liable for any of that, and it was to the benefit of me that they were able to cancel the card before there were further charges incurred.
This is something that financial institutions are doing to protect their customers and to build and maintain that public confidence. When the banks are deputized as law enforcement agents to do police work for law enforcement against their customers, this analogy does not hold.
The profiling of customers, as mandated by the Bank Secrecy Act, which the compliance manual of the Fed for the Bank Secrecy Act still requires, it still requires them to look for a “Know Your Customer” policy, which has been explained as a couple of things. The banks need to identify their customers which most of us would want the banks to do, though it did impose a new regulatory burden on that; to determine the source of funds for transactions; and to determine a profile of their “regular and expected transactions.”
That profile was determined not by that individual customer’s personal banking history, but by what regulators determined that profile should be based on that individual’s geography and income and other characteristics. Anything violating that profile of regular and expected transactions would have required the banks to fill out a Suspicious Activity Report meant as an indicator to law enforcement that this had “no obvious lawful purpose.” I believe that is the phrase.
It is these types of questions that are undermining the public confidence that the customers have in their banks. I would argue that there is very little benefit to law enforcement with these.
Larry Lindsay was here at the Cato Institute last time on money-laundering and gave a long list of figures that he had gotten from the Justice Department. I won’t go through all of the numbers since he has already done them, but what it boiled down to is less than one-1,000th of one percent of the forms mandated by the Bank Secrecy Act are ever even used in an investigation.
Of the thousands of investigations that are pursued by law enforcement, the conviction rate is very, very small. What this means is that 99.999 percent of the forms that are filed by the banks against their customers, violating their privacy expectations, are reports filed on law-abiding citizens going about their regular financial transactions.
The TRAC, the Transactional Records Access Clearinghouse, filed a Freedom of Information request and got updated information from the Department of Justice. Since the implementation of the Suspicious Activity Reports in 1986, they have been tracking the number of forms and how useful they are. What they have found is that the number of money-laundering charges fell by 20 percent in the four-year period after the adoption of the last round of forms in 1994.
Law enforcement is requiring more and more forms with less and less utility for law enforcement. There is a new bill out. We have dubbed it the Global Know Your Customer Bill, H.R. 3886, which, in addition to all the privacy violating aspects that we would expect for the anti-money-laundering campaign, it gave a great deal of discretion to the executive branch against the legislative branch.
The Secretary of the Treasury, at his own personal discretion, can make new requirements on financial institutions; can prohibit whole classes of international transactions. He could prohibit all international financial transactions with certain institutions or prohibit all international financial transactions with certain countries.
I would argue that the lack of probable cause and other Common Law and constitutional expectations of privacy, voluntary exchange and free markets, are not well served by this approach.
In the Bank of New York case that he cited, there are good indications that a lot of the money that was laundered was from the IMF. What we need here is “Know Your Customer” for government employees, not private citizens. In the Bank of New York case, no Suspicious Activity Reports were filed until after they were notified by the FBI that these accounts were under investigation.
The Bank Secrecy Act forms do not work for law enforcement. The FBI did not initiate its investigation into the Bank of New York until they were asked to do so, and there was a delay of many, many months by law enforcement in Britain investigating a criminal kidnapping case.
In the Aldrich Ames case we had a double agent working for the United States Government, who was on the take for the Soviet Union depositing, routinely, amounts into his checking account far beyond what he should have earned in his salary at the CIA. Suspicious Activity Reports were filed in this case repeatedly. These SAR’s initiated no investigation into Mr. Ames.
For those of us who believe in privacy, limited government, the rule of law, and prosperity through free trade, there is hope in this multilateral attack on financial privacy. If the United Nations and the other multilaterals are as successful in their war on bank secrecy as the U.N. is at keeping the peace and the IMF is at preventing financial crises, I think our financial privacy, globally, is going to be pretty well secure for a while.
In conclusion, I would urge that we recognize Common Law expectations of privacy. And there is an interesting note here that when Congress passed the Graham-Leach-Bliley Act, they added, for the first time in Federal statute, an explicit Federal expectation of privacy rights. These privacy rights may help close some of the premises by which two Supreme Court cases enabled the money-laundering statutes, California Bankers Association v. Saltz and United States v. Miller. In these cases they found that you didn’t have a right to your 4th Amendment protections for the records that the banks kept on you, even if they were different mandated by the government. And these were done by two exceptions to the Common Law expectations. Graham-Leach-Bliley may have closed some of those by which law enforcement has been able to do this. And loopholes it will be interesting to see if this statute has given individuals standing to challenge the constitutionality of the money-laundering laws against their 4th Amendment protections which the Supreme Court rules they had not had previously. So, we look forward to some interesting developments and unintended consequences of the law as we proceed.
MR. LUCAS: Well, of course, 4th Amendment protections don’t apply to customers at foreign banks, so that is an entirely different issue, the international side of this. And hopefully we will hear a little bit about that from our next speaker. But, first, I have just been handed this, to demonstrate that these issues are very much alive.
Someone at the ACLU, I guess they were aware of this forum, called and asked if we would announce that right now a piece of legislation just passed the Senate, S.2314, and it is possibly moving in the House. According to this anonymous source at the ACLU, the legislation would allow the government to use an administrative subpoena, no judge, no probable cause required, against fugitives — which could be broadly defined — to get personal records, including bank and phone records. And it includes a delayed notice provisions, which allows the government months before informing the fugitive of the search. So, these issues are very much alive and moving in Congress as we speak.
MR. JANSEN: Yes. I found it odd that the two of us are both trying to uphold the rule of law, but we come to very opposite conclusions of money-laundering.
You talked about chaos versus order and that order coming with rules. Sitting in the Hayek Auditorium, I think it is important to point out the idea of spontaneous order out of chaos and how the rules that are being promoted here actually undermine the rule of law, where you have civil asset forfeiture.
The case that you gave on the helicopter — they the property of a company. This is what it boils down to. took the property of a company without actually convicting of a crime. The owner of the helicopter lost his property without ever being charged with a crime, as far as I know. this is the example that you are citing to uphold the rule law.
MR. TUCKER: I would argue that the Bell Company willfully blind.
MR. JANSEN: But what I am arguing is that there rule of law and we have a set of processes. And they can go to a court and they can, if they have probable cause, they can follow is a the rule of law and do what you want to do. And I agree with that.
We think that banks should assist law enforcement, the financial industry, just like every other industry, but no more. That means if law enforcement has probable cause, they can get a warrant, and banks should comply, just the same as every other industry. There should be no special carve-outs undermining that public confidence.
Law enforcement now is — well, on the global scene you have a small cartel of rich welfare states setting the rules and trying to impose it by naming and shaming other countries who had no voice in setting those laws. In the words of Premier Owen Arthur of Barbados, “Institutions of the developed world that have no authority under any treaty, convention, agreement or legal instrument known in international law are simply attempting to bend the course of developing countries to their will by the use of crude threats and stigmas.”
In my mind, this is not furthering the rule of law. This is undermining it. These countries that had no voice in setting these rules are being forced to adopt policies such as “Know Your Customer,” which is the cornerstone of the OECD policy, that has been rejected overwhelmingly by the American people here.
In addition to the States rights issues involved of whether it should be criminalized or not, we believe very clearly that this is not a Federal issue. And in fact, before the Bank Secrecy Act, many States had laws that were more tailored to their specific locations.
What may make sense legally for a money center bank in New York probably doesn’t make a lot of sense to the rural community banks in our district. Yet, they are forced to follow the same laws. Not only that, the laws are enforced disproportionately more severely against the rural community banks than they are the larger institutions. And this is what we find in practice.
Real quickly, and this is a question to you, or two questions: One, there is a debate whether money-laundering laws started either in Russia or Nazi Germany. I am wondering if you can enlighten us on that and which one you see as a better model.
The second question, then, is that if we want to use banks as informants for the government against their customers, and there is now a push by law enforcement to use accountants and lawyers as informants against their customers for the government, how long will it be before we start using priests, as well?
MR. TUCKER: You forgot the question about when did I stop beating my wife.