A RECKONING LOOMS FOR AMERICA'S 50-YEAR FINANCIAL SURVEILLANCE SYSTEM.

• Author: Casey, Michael J.

For all the upheaval of 2020, it's perhaps not surprising that the 50-year anniversary of a major piece of financial legislation came and went with little fanfare. But the 1970 U.S. Bank Secrecy Act (BSA) deserves much scrutiny. (1) In mandating that financial institutions maintain customer identity records and report illicit activity to government agencies, the BSA was a landmark statute by any measure. It paved the way to an ever-expanding system of international surveillance that's a cornerstone of U.S. economic power.

There have long been questions about whether this system, aimed at domestic and international money launderers, tax evaders, and other criminal financiers, provides a net benefit to global well-being. Its critics argue, for example, that the draconian rules excessively burden the poor, leaving billions excluded from vital financial services (de Koker 2006; Isem and de Koker 2009). Even so, in the years since the BSA's founding, the regime created in its wake has only become more pervasive.

Now, for the first time, a real alternative is emerging, courtesy of digital currency technology. This is empowering people, businesses, and, most importantly, foreign governments to bypass intervention in their financial affairs. The situation poses a real threat to U.S. international power and creates avenues for other states, such as China, to boost their foreign influence. There is an urgent need to reassess U.S. regulatory priorities. Though rarely discussed, it is arguably the biggest of the many challenges facing President Joseph Biden.

A Leviathan Grows

Signed into law by President Richard Nixon and amended and expanded over time as concerns grew, first about international drug trafficking and, later, over terrorism, the BSA requires financial institutions to monitor and keep records of their clients' transactions, identities, and personal information. It obliges them to report total daily purchases of negotiable instruments exceeding $10,000 and to file suspicious activity reports (SARs) when transactions suggest potential money laundering, tax evasion, or other criminal activities. In the wake of the September 11 attacks of 2001, the BSA was amended under the USA PATRIOT Act. Since then, it has required the entities covered by the act to employ a pervasive identifying system known as "know your customer" (KYC) and to create formal anti-money-laundering (AML) programs with clear policies, procedures, and controls to put compliance officers in place, to hold ongoing employee training, and to conduct independent audits of the program. Those amendments also greatly expanded the act's definition of "financial institution" to include nonbank entities such as securities broker-dealers, casinos, money-service businesses, and insurance companies.

The BSA's founding fostered a variety of related agencies at home and abroad that together formed an increasingly complex, pervasive financial surveillance network. The Financial Crimes Enforcement Network (FinCEN), founded in 1990, receives the customer reports that banks generate and turns them into actionable intelligence against money laundering and other illicit financial activity. Upon its founding, FinCEN joined the Financial Action Task Force (FATF), a multilateral body created by the Group of Seven nations the previous year amid growing concerns about the international drug trade. Five years later, FinCEN became a founding member of the international Egmont group of Financial Intelligent Units (FIUs), which in compliance with the FATF's guidelines, has enforced an interlinking, cooperative, KYC-based international system of record-keeping and monitoring.

Over time, FinCEN rule updates and "guidance" have expanded the umbrella of AML-KYC principles. Since 1999, the agency has explicitly required operations deemed as money-service businesses (MSBs) to register with it (Treasury 1999: 4). In 2013, the increasing popularity of bitcoin and other cryptocurrencies led FinCEN to expand its definition of those MSBs to include businesses involved in exchanging what the agency called "virtual currencies" (Treasury 2013). Since then, it has tweaked and adjusted its rules to expand its oversight of the sector. And in consultation with its fellow FATF members, many of these rules have essentially been internationalized as other FIUs follow FinCEN's lead.

While the FATF and the Egmont group are set up as equal-weight deliberative bodies, this international alphabet soup of agencies and monitoring programs has evolved to become an indirect, but effective mechanism for the United States to exercise significant influence over foreign businesses and governments. For example, this authority to monitor and curtail financial flows affords Washington broad sanctioning power under the Office of Foreign Assets Control--which, along with FinCEN now falls under the U.S. Treasury's Office of Terrorism and Financial Intelligence--and it forces foreign companies to comply with other U.S. laws such as the anti-Cuba Helms-Burton Act. This unique power derives from the dollar's status as the world's reserve currency, which leaves non-U.S. banks wishing to conduct cross-border transactions no choice but to create correspondent banking relationships with U.S. banks--typically Wall Street-based money-center institutions. As institutional "customers," those foreign banks must comply with those U.S. banks' KYC requirements, which in turn means they too must make similar demands of the smaller domestic banks they deal with, dictating how they monitor their customers.

In this article, I will discuss whether this hierarchical system of KYC and KYCC (know your customer's customer) has delivered a net benefit in terms of criminals caught and lives saved and whether or not U.S. and international peacekeeping interests have ultimately been served by tracking terrorists' and other violent actors' funds. But even if we assume a positive effect, let's describe it for what it is: an all-pervasive, globe-spanning surveillance system. This is important when addressing legitimate concerns over China's invasion of privacy as it rolls out a centrally controlled digital currency that has the potential, privacy advocates warn, to become a "panopticon." I say this not to grant Beijing's supporters a chance for "whataboutism," but to point out that with America's enemies and competitors actively building technologies that get around Washington's financial gatekeeping powers, its own moral standing can be challenged.

But Is It All Worth It?

So, after 50 years of the BSA, let's try to measure its effectiveness. Little is known about how much money laundering and illicit financial activity goes uncaught. After all, it's an immeasurable counterfactual. A 2011 UN Office on Drugs and Crime study estimated that in 2009, criminals laundered $1.6 trillion, or 2.7 percent of world GDP (UNODC 2011). (Tellingly, no international accounting of the problem has occurred in the decade since.) More recently, a trove of leaked FinCEN documents revealed that banks had flagged around $2 trillion worth of suspicious transactions to authorities between 1999 and 2017, and in many cases, they continued to do business with those entities (Leopold 2020). Many of those transactions were likely legitimate, and even for those recognized as illicit, there are often legitimate...