Time to bring back financial privacy

The arrest of former U.S. House Speaker Dennis Hastert on charges of violating the Bank Secrecy Act and lying to the FBI about it is the latest example of how financial privacy is an oxymoron. Simply put, since it originally passed the Bank Secrecy Act in 1970, Congress has gone too far in opening up your members’ accounts to the investigative eyes of the government. Recently Congress scaled back the power of the government to engage in the bulk collection of phone metadata, concluding that the threat to our civil liberties outweighed the security benefits of warehousing this information. I hope that similar changes will one day be made to bank regulations in general, and the BSA in particular. Congress and regulators have gone too far in authorizing fishing expeditions into the financial dealings of Americans.

The former speaker is charged with purposefully structuring cash transactions to avoid the $10,000 Currency Transaction Reporting requirement. There is no suggestion that the cash was dirty money derived from criminal activity. Instead it is alleged that he wanted to hide payments being made to cover up allegations of sexual misconduct with a high school student. Why this bothers me was summed up nicely by this quote by Barry Pollak, a white-collar criminal defense lawyer at the law firm Miller & Chevalier, in the National Law Journal:

“In most cases, the government alleges that the reason the defendant engaged in structuring was to hide criminal conduct. What is extraordinary in this case is that the premise may be that what Speaker Hastert was trying to hide was that he was the victim of extortion.”

According to the article, structuring charges are on the rise.

Prosecutors and regulators have seized so much authority to examine account activity in the name of ferreting out potentially criminal conduct that it is increasingly common for financial institutions to face greater scrutiny than the criminals whose misconduct they are allegedly facilitating. For example, New York pressured banks and credit unions not to facilitate lawful ACH transactions to third party financial institutions providing pay day loans in localities where such loans are legal. And the Justice Department’s “Operation Chokepoint” is based on—in the words of the Department’s blog—“a recognition that choking off access to consumers’ bank accounts could stop numerous fraud schemes at one time and protect more people from being victimized.” Considering that an estimated 90 percent of the currency in U.S. cities contains traces of cocaine, this is a mandate without limit.

The scope of these account oversight powers is all the more daunting when one considers that only a handful of the largest banks have the deep pockets and hundreds of millions of dollars necessary to contest regulatory and criminal investigations. As a result, regulators act as judge and jury while the largest BSA transgressors carry on with impunity. The Financial Crimes Enforcement Network thought it was appropriate to issue a report scrutinizing the activity of credit unions, apparently without even giving NCUA board Chairman Debbie Matz a heads-up. Now that this secret report has been front page news, these credit unions are essentially guilty until proven innocent. In contrast, if a similar report was produced about the nation’s largest banks, 50 lobbyists and lawyers would have commented on its earliest drafts.

Despite their enormous power, regulators face few constraints investigating financial activities. For example, the Consumer Financial Protection Bureau may request information otherwise subject to the attorney-client privilege and attorney work product protection. When the Bureau wanted to know the order in which financial institutions honor checks, it simply demanded the information from their payment processors..

There is a time and a place for Suspicious Activity Reports, regulatory fines and criminal investigations, but the original intent of the BSA and its regulations has been torn from its moorings. When the enforcement of regulations becomes uncoupled from the criminal activity they were designed to deter, something is seriously wrong. Eliot Spitzer’s arrogance made him a convenient target of ridicule, but does the government need a SAR to investigate if someone paid for a prostitute?

Of course consumers want to be protected against terrorists, but they also want to live their lives free of prying eyes. How many consumers really know that their financial institution is essentially required to spy on them?

The country would be a better place if:

• The scope of the BSA and its regulations were limited to specific crimes, such as facilitating terrorist financing. Once it was determined that a SAR was not related to any of these specified crimes, it would be destroyed and any evidence gathered as a result of the SAR investigation would not be admissible in a criminal prosecution.
• Members were told when they have been subject to a SAR. This would put them and other members on notice that their bank privacy has limits and would foster an honest debate about how much financial privacy Americans expect versus how much they actually have.
• Prosecutors had to prove that structuring was done to facilitate criminal activity. Structuring itself shouldn’t be a crime unless it is being done to cover-up criminal activity.
• Attorney client privileges for credit unions and banks were extended to regulatory inquiries. All businesses need a zone of privacy in which they can assess their practices.

Would these changes make it more difficult to investigate certain crimes? Yes. But prosecutors could still subpoena individual accounts whenever they have evidence of wrongdoing.

Would these changes make us less safe? No, because they would allow regulators and law enforcement officials to concentrate on the type of large scale crimes that truly need systemic investigations.

Would they reduce the regulatory burden? Maybe.

Would they make us a freer country? Absolutely.