The Privacy Papers
First Quarter 2002
The New Money Laundering Law
Bert Ely, president of Ely & Company, a consulting company for financial institutions, contends that the new anti-money laundering provisions of the USA Patriot Act will do nothing to stop the financing of international terrorism. If such measures worked, the Suspicious Activity Reports (SARS) that are required to be filed under the Bank Secrecy Act even before September 11th would have snagged convicted CIA spy Aldrich Ames and convicted FBI spy Robert Hanssen. Rather, the new regulations provide evildoers with a roadmap of how to avoid detection. The real rationale behind the new anti-money laundering provisions is to have the United States fall into line with the campaign being waged by the Organization for Economic Cooperation and Development and the Financial Action Task Force (FATF) against countries that serve as tax havens. That campaign is counterproductive from a free market standpoint in that tax havens allow capital to leave countries that impose corruption and unfair regulatory and tax burdens upon their citizens. Chasing money trails is a misguided tactic that fails to stop crime before it starts; the better way is to work harder at penetrating the actual terrorist networks.
by Bert Ely
The anti-money laundering provisions in the just-enacted USA PATRIOT Act of 2001 will not stop international terrorists from carrying out evil deeds in the United States. The premise underlying this legislation, which greatly expands the already intrusive Bank Secrecy Act (BSA) as well as other controls over money flows, is both false and extremely dangerous. The premise behind the new law: grant federal authorities more intrusive access to customer records at banks, securities firms, and other financial services providers to enable the authorities to identify future terrorists and to cut off their funds before they strike. Presumably, the Bank Secrecy Act, as it previously read, did not give the authorities sufficient access to financial records, which is why the federal government was unable to detect the al-Qaeda terrorists before they struck on September 11, 2001.
The premise of this legislation is false, on two grounds. First, the authorities have consistently failed to use the BSA effectively to detect criminal behavior before the fact. Suspicious Activity Reports (SARs) failed to trigger an investigation into Aldrich Ames, the convicted Central Intelligence Agency (CIA) spy and were never even filed in the case of Robert Hansen, the convicted Federal Bureau of Investigation (FBI) spy. Despite these failures, Congress has made U.S. bankers, stockbrokers, and other financial professionals an integral element of a pervasive domestic financial spying apparatus. In effect, bankers have been drafted as spies and snitches.
Second, even with this additional police power, the authorities will still not be able to identify terrorists before they strike nor shut off their funding. In fact, the new law and the flood of regulations that will flow from it will provide future terrorists with a highly detailed road map of what not to do in order to avoid detection. Immediately one can conceive of six devices that future terrorists could use to escape detection while obtaining ample dollars within the United States to conduct their evil activities.
This premise underlying the new law also is extremely dangerous, for it could give Americans a false sense of security, that evildoers will be identified and caught before they strike, by screening the financial records of all Americans. Worse, this premise detracts attention from the extremely serious intelligence failures before September 11 on the part of numerous federal agencies. It has become increasingly clear in the weeks since the terrorist attacks on the World Trade Center and the Pentagon that these agencies failed completely in detecting the terrorist cells within the United States which spewed forth the 19 hijackers.
As the federal agency principally responsible for domestic intelligence, the FBI is most to blame for this devastating intelligence failure. The Immigration and Naturalization Service (INS) too easily granted visas to the 19 hijackers and failed to deport the three terrorists who overstayed their visas. The Financial Crimes Enforcement Network (FinCEN), the Internal Revenue Service (IRS), and possibly the Bureau of Alcohol, Tobacco, and Firearms (ATF), the Drug Enforcement Agency (DEA), and the Secret Service share some blame in this intelligence debacle. The CIA, the federal agency principally responsible for intelligence gathering outside the United States, must share in the blame for this failure, too, along with the National Security Agency (NSA) and the Defense Intelligence Agency (DIA). Additionally, the Federal Aviation Administration (FAA) has long failed to police airport baggage screeners properly. These screeners failed to detect the box cutters and other weapons the hijackers were carrying when they boarded the ill-fated flights on September 11.
In effect, Congress mistakenly bought the assumption that technology, in the form of running an electronic dragnet across all financial records, is a sufficient substitute for the hard, dangerous work of gathering human intelligence by using human agents to penetrate terrorist cells. Earlier terrorist acts, notably the World Trade Center bombing in 1993, have repeatedly demonstrated that technology is no substitute for human intelligence. The BSA dragnet is neither designed nor intended to detect evildoers before they strike. Instead, it serves only to provide information, after-the-fact, that otherwise can lawfully be obtained through subpoenas and search warrants that do not invade the financial privacy of innocent individuals and businesses.
Many Americans believe that in times of war, it is necessary to sacrifice personal liberties to gain physical security. That is a false trade-off, for individual liberty need not be sacrificed if the government agencies charged with protecting America from foreign attacks do a more effective job than they did prior to September 11.
The false premise of financial monitoring
The BSA, first enacted in 1970, spawned two types of reports that banks must file with the government—Currency Transaction Reports (CTRs) and in 1992 Suspicious Activity Reports (SARs). Non-financial businesses also are required to file CTRs with the IRS. Subject to a long list of exemptions, CTRs must be filed with the IRS for any receipt of currency over $10,000. Banks must file SARs for any transaction that seems out of the ordinary for a particular bank customer, possibly indicating criminal activity.
In effect, the BSA is intended to prevent the laundering of dirty money, such as the proceeds of drug sales, into clean money. Terrorists, however, do the reverse; they use clean money for criminal purposes, which is a fundamental reason why the BSA has been, and will continue to be, ineffective in detecting terrorists' financial transactions. Additionally, the BSA was intended to detect large money flows, such as drug dealers moving millions of dollars out of the United States, while foreign-based terrorist groups need to move relatively small amounts into the United States. The FBI has estimated that the September 11th hijackers spent just $500,000 over more than a year carrying out their diabolical acts. Payments moving through the U.S. financial system average $1.7 trillion per business day.
The BSA's premise is that screening CTRs and SARs will enable federal agents to detect criminal activity and then swoop in to arrest the bad guys before they commit another crime. In practice, that has not been the case. Rarely have CTRs and SARs signaled that a crime has been committed. This is understandable since even highly sophisticated computer screening will generate numerous false positives without identifying patterns suggesting criminal activity. That is, the screening will flag too many perfectly lawful transactions, which take time and cost money to investigate, while missing criminal transactions. Hence, CTRs and SARs are used almost entirely to support the prosecution of criminals who have been caught by other means. That usage is tolerable when the criminals already have been apprehended, but useless when the criminals are kamikazes, as was the case on September 11.
This shortcoming of the SARs is starkly illustrated by the case of Mohammed Atta, the alleged ringleader of the September 11th hijackers. Sometime in 2000, Mr. Atta received several wire transfers from the United Arab Emirates totaling $100,000. According to the Wall Street Journal article reporting on this incident:
The bank that handled Mr. Atta's $100,000 transaction was sufficiently suspicious that some crime was involved that it alerted authorities last year . . . But the first time [FinCEN], which is the chief reviewer of [SARs], became aware of the document in its own file was after Mr. Atta is believed to have flown a plane into the side of the World Trade Center. . . James Sloan, director of FinCEN, declined comment on the report filed about Mr. Atta, citing legal constraints.
While the terrorists displayed diabolical brilliance in planning and executing their September 11th attacks, they left scores of financial fingerprints and footprints, notably the SARs filed on the cash transfers to Mr. Atta, that have helped the authorities greatly in reconstructing the terrorists' movements and activities before September 11. However, it is quite likely that future terrorist groups will conduct a post mortem on the September 11th attacks and determine that next time they should cover their tracks so that they and their allies cannot be identified so easily after-the-fact.
As noted above, the author easily concocted six ways to obtain sufficient dollars in the United States; surely, future terrorists can conceive of other ways to escape detection by an expanded BSA. Terrorists will find it especially easy to escape detection if the source of their funds lies outside the United States, for it is much harder for U.S. authorities to detect an illicit financial transaction if one leg of the transaction lies outside the United States and no money actually crosses the U.S. border.
The problem of false positives, which will become more serious under a more intrusive BSA, was illustrated by the asset freezes the government imposed immediately after the September 11th attacks. Numerous innocents with names identical or even similar to the names, or possible names, of the 19 hijackers, were caught in the asset freeze. Not only are such incidents embarrassing for those whose assets are mistakenly frozen, but they also can be quite damaging financially as well as an affront to the Constitution. (Memo to future terrorists: use common names.)
The experience of Mohammad N. Ahmad, an American citizen originally from Pakistan, amply illustrates this problem. Mr. Ahmad is a manager in the global telecommunications division of Lockheed Martin Corp. in Gaithersburg, Maryland. On September 25, he tried to access the balance in an account he had at Citibank, only to discover that it was blank. When he asked why this was so, the bank "told him they had to freeze his assets. His name, as common in Arabic as John Smith in English, triggered the freeze." It turns out that a name on a list of organizations and individuals whose assets the government asked be frozen was Mustafa Muhammad Ahmad, not the same as Mohammad N. Ahmad. "Mr. Ahmad said he had to appeal to Citibank for several days before he was told why his account was frozen. Then, he said, he was required to prove that he was not on the government's asset-freeze list by submitting documentation to show that his name was different."
An expanded BSA's assault on personal financial privacy is a much more fundamental criticism of this misguided legislation than its ineffectiveness in snaring future terrorists. The essence of personal freedom and liberty in a democratic society is privacy in one's personal affairs and minimum intrusions by the government into those affairs. Financial records have become an increasingly important element of personal affairs and therefore of individual privacy. As the enforcer of society's criminal laws and defender of the nation's borders, government needs access to the appropriate records when it has reasonable cause to believe that those laws have been or are about to be violated or when our borders have been threatened. But these police powers must be Constitutionally restrained, which is why the Fourth Amendment reads as its does:
The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the person or things to be seized.
Arguably, the BSA as now written, and specifically the provisions mandating banks to file SARs, violates the Fourth Amendment as no warrant has been obtained requiring the bank to supply information about a customer. The expansion of the SAR requirement to non-bank financial firms further breaches this basic Constitutional protection, as do the expanded asset forfeiture provisions in this legislation.
Apart from its Constitutional offensiveness, expanded financial monitoring deputizes bankers, broker/dealers, commodity dealers, and other financial intermediaries as spies upon their fellow Americans and others lawfully conducting business in America. Banks have long been looked upon as trusted third-party repositories of their customers' financial information. Popular support for the privacy provisions of the Gramm-Leach-Bliley Act reinforces that perception, yet individuals and businesses lost that privacy from government snooping under the BSA, which has been made much worse by the money-laundering provisions of the USA PATRIOT ACT.
A hidden agenda underlying the new law is to join the United States with other members of the Organization of Economic Cooperation and Development (OECD) and the Financial Action Task Force (FATF) in cracking down on countries that serve as tax havens. Many individuals and corporations use tax havens to legally avoid confiscatory taxation and to reduce the tax paid in countries with high tax rates. Hence, tax havens have become a threat to high-tax regimes in the industrialized world, which is why the OECD and FATF are trying to eliminate them—they can't stand the competition.
Given the Republican belief in lower tax rates, it is difficult to understand how the Bush Administration and congressional Republicans could have supported provisions in the new legislation that impair tax havens. Tax havens also facilitate capital flight from corrupt regimes and countries with heavy state interference in business and commerce. Capital flight has been one of the most effective devices over the years in undermining corrupt and non-market oriented economies. That undermining serves the long-term interests of the United States and should not be deterred by an expanded BSA.
To a great extent, expanding the scope of the BSA has nothing to do with fighting terrorism, for many of its specific provisions had previously been considered by Congress, and rejected, because they went too far. Those who advocated the new legislation shamelessly took advantage of an enormous tragedy to advance an agenda that could not be enacted in peacetime. For that reason alone, Congress should have rejected this legislation and instead considered the merits of the BSA, in its entirety, in the deliberative manner our Founding Fathers intended when they drafted our great Constitution. Unfortunately, expediency trumped deliberativeness.
The dangerous illusion of financial monitoring
The latest chapter in the war on international terrorism must be fought on two fronts—outside the United States, where the terrorists are headquartered, and inside the country, where terrorists have struck and could strike again. The U.S. military and the CIA, NSA, DIA, and the National Reconnaissance Office, which operates many of America's spy satellites, are fighting this war outside the United States, with initial success in Afghanistan. Domestically, the war has to be fought in a very different manner, in part to respect the Constitutional protections from which Americans have long enjoyed and prospered.
One unchallenged fact of the war on terrorism post-September 11 is that the enemy consists overwhelmingly of radical Muslims. To defeat al-Qaeda inside the United States, the domestic terrorist fighters must find the Muslim terrorist cells, penetrate them, and then destroy them. Fishing through financial records will not flag those cells, particularly if future terrorists become more effective in covering their financial tracks, as undoubtedly they will. Instead, the search for the terrorists' cells must start where they incubate—in the minority of Muslim mosques, cultural centers, and similar gathering spots where hatred of America is fomented. It is unlikely that these cells will be found in a Catholic Church, Jewish synagogue or Episcopal church or at the local country club or Rotary meeting.
For obvious reasons, redheaded Irish-Americans, blond, blue-eyed Scandinavian-Americans, and good ol' boys with a thick Southern drawl cannot be sent to identify and penetrate these cells. Instead, loyal Arab-Americans and non-Arab American Muslims must be recruited for this task, just as Japanese-Americans helped to win World War II. These new gatherers of intelligence must speak the appropriate languages and the culture of the mosque or the cultural center must be their culture. Some must take on the task of becoming double agents and even going abroad for training so that they can penetrate the terrorist camps and headquarters in Afghanistan, Iraq, and elsewhere. Penetrating terrorist cells has the added benefit of sowing mistrust among the cell members, greatly impairing their effectiveness. There has been no indication that the FBI succeeded in penetrating the hijackers' cells.
One by-product of successful penetrations is gathering information about terrorist financial flows—where funds are coming from, how they are being moved, who is spending them, and for what purpose. Feeding that information back to federal agents would provide the basis for highly targeted, and productive, subpoenas for financial records and requests for search warrants and wiretaps. These actions would not violate the Constitutional protections that have made America the beacon of liberty for the rest of the world.
The failure of the domestic intelligence agencies to prevent the September 11th terrorist attacks may partially reflect this shortcoming—the crime-fighting orientation of these agencies, notably at the FBI. These agencies have focused their energies primarily on catching criminals after-the-fact, in the classic mode of playing cops-and-robbers. Intelligence gathering has been of secondary importance, and often has been ineffective, in the case of the drug wars.
Hence, winning the international war on terrorism within the United States may require a fundamental restructuring of the federal police agencies into just two organizations—a terrorist-fighting agency that focuses on gathering intelligence on domestic terrorists and acting to prevent terrorist attacks and a second agency devoted to traditional crime detection and after-the-fact apprehension.
This restructuring would require splitting up the FBI. The FBI's counter-terrorism and national security divisions and those INS personnel monitoring visitors to the United States would form the nucleus of a domestic terrorist-fighting agency. The FBI's traditional crime-fighting activities should then be consolidated with the DEA, ATF, and other federal police agencies into one agency. At the same time, Congress should shift as much crime-fighting as possible back to the states and localities by repealing federal criminal statutes that duplicate state criminal statutes that are more than adequate to deal with run-of-the mill crime.
The latest chapter in the war on international terrorism will not be won by a bunch of mid-level bureaucrats sitting in front of computer terminals scanning CTRs and SARs and otherwise probing into the financial affairs of almost 300 million Americans who clearly have no terrorist involvement. Instead, it will be won to a great extent by American Muslims who ferret out and penetrate radical Muslim terrorist cells operating within the United States. Achieving victory does not mandate an assault on the U. S. Constitution, as the new legislation does. Instead, it requires an intelligent, Constitutional attack on the sources of international terrorism within the United States.
Congress should have told the Executive Branch to make better use of the ample tools it already possessed and to fight this war with greater intelligence and insight instead of enacting draconian new money-laundering laws. Now that the USA PATRIOT Act is law, Congress should exercise the provision in the Act which would repeal the money-laundering portion of the Act after September 30, 2004, by enacting a joint congressional resolution to that effect.