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Financial privacy in peril, by R.Rahn from WSJ

[Forwarded with permission of the author.]

The Wall Street Journal
Tuesday, June 1, 1999

Financial Privacy in Peril
By Richard W. Rahn

What cause unites Christian conservatives, free-trade Democrats, small-
business people, the American Civil Liberties Union and tax reformers?
Financial freedom and privacy.

The cause is being advanced in a series of legislative battles against big-
government activists from both parties over the issues of encryption
restrictions, asset forfeiture and, of most immediate concern, requirements
that banks serve as agents of the state by monitoring the activities of
their customers. The cornerstone of this last activity is the Bank Secrecy
Act of 1970.

The BSA is, in fact, an antisecrecy act, because it requires bankers to spy
on their customers by monitoring accounts for "suspicious activities."
Bankers who fail to comply with this requirement are subject to
prosecution and fines. Since Congress enacted the BSA, the scope of the
law and of the bureaucracy to enforce it has steadily grown, a textbook
illustration of how failed government policies beget more failed policies
and ever more government.

The latest attempt to enlarge the reach of the BSA occurred in December,
when the Federal Deposit Insurance Corp. and the Treasury proposed
"Know Your Customer" regulations that would have required banks to
create customer profiles and report all activities that fell outside the
"normal" transactions according to that profile. Originally, the BSA
required only that banks monitor transactions above $10,000 -- which was
lowered to $5,000 when the higher number proved to be ineffective in
preventing money laundering and other financial crimes -- and to report
activities that the bankers themselves deemed suspicious. The proposed
new regulations would have required all transactions to be monitored, no
matter how small.

News of the Know Your Customer proposal circulated on the Internet and
in print; e-mail comments, which the FDIC had solicited, came pouring in.
The result: Some 254,000 people came out against the regulations, while
only 72 people favored them. The planned regulations were quickly
withdrawn, but the administration plans to issue new ones.

For years the BSA has had strong support in Congress. But now it seems
that's changing. Reps. Ron Paul (R., Texas) and Tom Campbell (R., Calif.)
have introduced legislation that would repeal the BSA and give people
the right to check and challenge government records. The legislation is
rapidly gaining cosponsors on both sides of the aisle.

Just as important, a growing number of law-enforcement organizations
have recognized that the BSA has not been effective. Between 1987 and
1996, banks filed more than 77 million Currency Transaction Reports with
the Treasury. This deluge of paperwork resulted in a mere 580
convictions. As Rep. Paul noted, "More than 99.999% of those [who] had
their privacy invaded were law-abiding citizens going about their own
personal financial business." The total private- and public-sector costs
have been tens of millions of dollars per conviction, many times what
Independent Counsel Kenneth Starr has spent per conviction in his
allegedly extravagant investigation.

Moreover, the new digital technologies now coming into widespread use
mean that no matter how assiduously the BSA and related provisions are
enforced, money laundering and other financial crimes will be even more
difficult to detect. Law-enforcement officials are nervously surveying a
host of devices that will make their jobs more difficult, particularly
easy-to-use, practically unbreakable encryption systems. These
technologies are coming together in ways that will allow people to move
money and financial assets instantaneously to almost any point on the
globe without the knowledge of any government.

Many in government wish to squelch these developments, either because
they fear the loss of their own roles as economic gatekeepers, or because
they genuinely believe that the new technologies will make life easier for
drug dealers, money launderers and other assorted criminals. To be sure,
these technologies do make a criminal's life easier -- as do the telephone
and automobile. Yet it is also true that the digital age has given law
enforcement many more tools to observe and detect criminal activity.
Law-enforcement officials must learn to adapt new technologies to their
purposes, rather than outlaw them in the futile hope that they will simply
go away.

As the digital revolution takes hold, laws that were written for another era
will become increasingly difficult to enforce. Americans can choose either
to jettison these laws and take advantage of new technologies and the
opportunities they create, or keep the laws and pay the price in economic
inefficiency, technological backwardness and government intrusiveness.
The immediate fate of the BSA will be a good indication of the direction
we eventually take.


Mr. Rahn is chairman of Novecon Financial, a senior fellow at the
Discovery Institute and author of "The End of Money and the Struggle
for Financial Privacy" (Discovery Institute Press, 1999).

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