The Most Insidious Area Of Government Regulation

OK that title sets me a high bar of insidiousness, but I have a very strong nominee: the regulation -- and criminalization -- of so-called "money laundering."  In an article back in December 2012 where I described government money-laundering regulation as "the next big shakedown," I had this to say:

We have allowed the government to deputize the banks to spy on us all 24/7 behind our backs to enable an exercise in total futility.

Few non-specialists pay much attention to money laundering regulation because it takes place behind your back and they don't tell you they are doing it.  Hey, that's what makes it insidious!  Those who give it a small amount of thought tend to think, if you want to get the crooks, it probably makes sense to "follow the money."  Why wouldn't that work?

Like many areas of insidious government regulation, the money laundering thing does not have a long history, and basically began with the badly mis-named Bank Secrecy Act of 1970.  By the time USA PATRIOT Act passed in 2001 the banks (and other financial entities broadly defined -- they even tried to make this apply to lawyers, but the D.C. Circuit shot that down) had become involuntary law enforcement deputies, required to report to the authorities any "suspicious" acts of their customers, whatever that may mean.

So surely, if this gigantic invasion of our privacy and autonomy worked at all, crime involving money should more or less be stamped out by now?  The reality could not be farther from that.  Charles Kenny has an article at Bloomberg News on February 23, titled "Why the World Is So Bad at Tracking Dirty Money."  Some statistics please:

Michael Levi of Cardiff University and Peter Reuter of the University of Maryland have studied the global anti-money-laundering system (PDF) and conclude that it has helped facilitate some criminal investigations and prosecutions. But at best, it snares just a fraction of 1 percent of criminal income flows. A lower-end estimate for global laundering transactions is 2 percent of global gross domestic product—or about $1.5 trillion. Global money laundering convictions involve at the most hundreds of millions. In the U.S., a generous estimate of seizures would amount to a mere 0.2 percent of all laundered funds.

The Levi/Reuter study cited there is from 2006, but Kenny also cites updated research to the same effect.  And how about the particular effectiveness of money-laundering regulation in the war against terrorism?

A system that misses all but a fraction of a percent of criminal financial flows is almost guaranteed to miss terrorism finance in particular, which involves very small sums: The Madrid and London terror bombings cost no more than $10,000 to finance; the Sept. 11 attacks, less than $500,000.

And exactly how many anti-terrorism prosecutions have come from anti-money laundering regulation?   Kenny's answer:  "None."  OK, I can't vouch for the thoroughness of his research, but I've also done some looking around, and I also cannot find a single one.  For this we have deputized the banks to spy on everyone behind their backs all the time?  And the cost:

Though the regulations have limited impact on criminal activities, they still cost money. Tracking illicit money flows requires a considerable bureaucracy. Enforcing the regulations cost an estimated $7 billion in the U.S., and probably far more.

I would call that cost estimate ridiculously low -- it could easily be 10 times that by the time you add in the compliance costs of all the institutions.  But it's real money no matter how you count it.

Meanwhile, what happens to all the money generated in the drug trade, or illegal gambling, or any of the other illegal businesses?  My answer is, essentially all of it ends up in the banking system at one point or another.  I don't see how the banks have any ability to stop that, particularly given the near complete automation of the process of depositing money in banks and the elimination of personal interaction between bank employees and customers after the account opening process.  So the banks are just sitting ducks for periodic prosecutions.  An example of a fairly recent capitulation by a bank was a settlement by HSBC for $1.9 billion in 2013.

Given that any bank can be prosecuted for poor money laundering compliance at any time, you may be thinking that the Feds have been fairly discreet about this one lately, and there's something to that.  But remember, our federal/state system is plagued by dozens of overlapping prosecutors and regulators, each looking to get his name in the papers.  And thus here in New York we have a head banking regulator named Benjamin Lawsky, about as desperately ambitious a buffoon to come along since Eliot Spitzer, making a speech yesterday at Columbia University.  The Wall Street Journal reports on the speech in today's edition:

In his speech, Lawsky also touched on new rules he is considering to better protect against money laundering, including random audits for DFS licensed banks to assess how well they flag suspicious transactions.  Lawsky said he might also start requiring bank executives to certify that their money transaction monitoring is up to snuff to better protect against terrorism and other crimes.  "Money is the oxygen feeding the fire that is terrorism," Lawsky said. "Without moving massive amounts of money around the globe, international terrorism cannot thrive."

Is it possible that Lawsky is so ill-informed that he believes that more anti-money-laundering regulation can actually have some effect on the war on terrorism?  Probably, he just doesn't care about that one way or the other.  What he does know is that it's impossible for banks to tell "dirty" from "clean" money, and thus to keep "dirty" money out.  So if he can force bank executives to "certify" that they keep out "dirty" money, he can then have a lay-down prosecution any time he feels like it where he gets to have some big name executive hauled off in handcuffs and his own picture on page A1.  This is not a pretty game.

Don't know if you caught yesterday's Supreme Court opinion where the Court reversed the conviction of a fisherman under Section 1519 of the 2002 Sarbanes-Oxley financial regulation law, supposedly because he was someone who "knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object."  The "tangible objects" in question were a small number of allegedly undersized fish.  The majority found it out-of-line to use this financial-regulatory act to prosecute a fishing violation (to obtain hugely enhanced penalties).  Justice Kagan wrote the dissent -- in other words, she would have affirmed the conviction on the grounds that the words of the statute mean what they say, no matter how bizarrely applied.  But then she had this to say:

"[Section 1519 is a] bad law -- too broad and undifferentiated, with too-high maximum penalties, which give prosecutors too much leverage and sentencers too much discretion.  And I'd go further: In those ways, Section 1519 is unfortunately not an outlier, but an emblem of a deeper pathology in the federal criminal code."

I'd only add that it's not just a problem at the federal level, but with many states as well, with New York of course in the lead.