Prisoners are persons whom most of us would rather not think about. Banished from everyday sight, they exist in a shadow world that only dimly enters our awareness. They are members of a "total institution" that controls their daily existence in a way that few of us can imagine. "[P]rison is a complex of physical arrangements and of measures, all wholly governmental, all wholly performed by agents of government, which determine the total existence of certain human beings (except perhaps in the realm of the spirit, and inevitably there as well) from sundown to sundown, sleeping, walking, speaking, silent, working, playing, viewing, eating, voiding, reading, alone, with others. . . ." It is thus easy to think of prisoners as members of a separate netherworld, driven by its own demands, ordered by its own customs, ruled by those whose claim to power rests on raw necessity. -- Justice William Brennan, dissenting in O’Lone v. Estate of Shabazz, 482 U.S. 342, 354-55 (1987).

Friday, April 4, 2008

Spitzer and Financial Privacy

I generally don't like to use my blog to comment on public issues unless I think my "rabbit hole" experience provides me a perspective that is not emphasized by mainstream commentators. That happens to be the case with the recent Eliot Spitzer scandal/tragedy. (It is a public scandal but personal tragedy.)

I was never a big Eliot Spitzer fan. He struck me as a bully who, as state Attorney General, used abusive methods to prosecute abusive practices on Wall Street (ends justify the means). Many viewed him as a hero for taking on Wall Street, but whatever merit there was in his cause, his "take-no-prisoners," heavy-handed application of the law and his office were offensive to me. The abuses of private businesses never scare me as much as the abuses of government officials, because private businesses ultimately do not threaten my liberty or livelihood. In addition, I can disassociate myself from private businesses; it is difficult to run from the government.

Like most, I agree that Spitzer's personal conduct was highly regrettable (in addition to being rather hypocritical, given the degree of self-righteousness on which he based his public image). He made the right decision by quickly resigning for disgracing the governorship.

However, having said all that, I find the Dept of Justice's conduct in this matter far more troubling than Spitzer's. Or, perhaps, I should say I find the laws that the DOJ are enforcing are more troubling, from the Bank Secrecy Act to the Money Laundering Control Act to the Patriot Act.

Newsweek briefly commented on the Unintended Consequences of the Patriot Act leading to Spitzer's downfall, while the NY Times describes some of the government's intrusiveness in this story, although it focuses more on the wiretaps and tailing. I want to focus more on the invasion of financial privacy that the government has authorized since 1970 and has increased with the Patriot Act.

I am not sure most people understand how Spitzer was actually caught because it was the reverse of what normally happens when you bust a prostitution ring. Normally, the ring is busted first and then the "johns" are discovered later. In this case, the "john" (i.e. Spitzer) was busted and then traced to the protitution ring. This was accomplished due to something called the misnamed Bank Secrecy Act of 1970, which was intended to fight money laundering by organized crime and, later, drug traffickers and terrorists, but has become the primary means through which the government spies on your financial life. Indeed the Bank Secrecy Act and it amendments requires your bank, under threat of significant civil and criminal penalties, to spy on its customers.

Initially, it did this by requiring banks to file Currency Transaction Reports (CTRs) for transactions over $10,o00 to the US Treasury, but it has extended to where banks are required to "know your customer" (KYC) to the point that they must install sophisticated software (in addition to training tellers and staff) to monitor customer transactions and report any "suspicious" activity to the government through Suspicious Activity Reports, which are filed with a bureau of the US Treasury call the Financial Crimes Enforcement Network. The following startling broad requirement will trigger a SAR:

"The transaction has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage, and the financial institution knows of no reasonable explanation for the transaction after examining the available facts, including background and possible purpose of the transaction"

That is how Spitzer got caught.

His bank identified transactions that were "suspicious" (Newsday does a good job of providing the details here). It appears that Spitzer, among other things, was attempting to structure his wire transfers in smaller amounts in order to avoid the $10,00 CTR reporting requirement. Just in case you were wondering, this is also a crime called "structuring." In other words, if you intentionally make sure your transactions are always below $10,000 because you don't like the idea of the government snooping around your financial life, then you have broken the law! Attempting to avoid a reporting requirement, even if there is no underlying criminal activity, is itself a federal crime.

It may well be that Spitzer knew about the Currency Transaction Reports that banks are required to file (for transactions over $10,000) but was unaware of Suspicious Activity Reports. The irony is that had he simply wired the $10,000+ instead of breaking it down, the CTR that would have been filed would likely have raised no suspicions with the US Treasury. This is because 15 million CTRs are filed every year, wherease only about 1 million SARs are filed. CTRs are automatic but SARs require judgment on the part of the bank so SARs automatically draw more suspicion than CTRs. (See this article for more details.)

In any case, his bank filed a SAR and because he was also a PEP ("politically exposed person"... seriously, banks must rank the suspiciousness of each customer!), it drew the attention of a treasury agent, who thought these transaction might be tied to political corruption (payoffs, blackmail, etc). There was no suspicion that Spitzer was patronizing a prostitution ring at the time, but that is where the investigation led.

So how do you find out if your bank has filed a CTR or SAR on you?

YOU CAN'T!! It is illegal for your bank to tell you!

I don't know about you, but the realization that MY BANK is required to SECRETLY spy on me for MY GOVERNMENT does not sit well with me.

I thought "How can the Bank Secrecy Act possibly be constitutional? How can the government compel my bank to turn over my financial records without my knowledge and without a search warrant?" Well, it turns out that I was not the first to think that. In 1976, the Supreme Court ruled that it is NOT unconstitutional although Justice Douglas wrote, in dissent:
"It is, I submit, sheer nonsense to agree with the Secretary that all bank records of every citizen ‘have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings.’ That is unadulterated nonsense unless we are to assume that every citizen is a crook, an assumption I cannot make," Justice Douglas concluded. He added, "A mandatory recording of all telephone conversations would be better than the recording of checks under the Bank Secrecy Act, if Big Brother is to have his way." [AMEN!]

Apparently, when you turn over your information to a 3rd party, you FORFEIT your 4th amendment rights over that information, including your banking records.

This decision was so startling that Congress passed the Right to Financial Privacy Act two years later, but specifically exempted the Bank Secrecy Act requirements, a rather large loophole it seems to me.

Now, if you are like me, and believe that every person has a fundamental right to keep his financial affairs beyond the reach of the government -- indeed, I would prefer the government install a camera in my bedroom than spy on my finances, but perhaps that is because my sex life is a lot less interesting that my financial life :) --then you might think it time to move your bank accounts off-shore.

I considered that but guess what.... if you have money in a foreign bank you are REQUIRED to note that on Schedule B of your tax return. If the amount of money is more than $10,000, you are required to file Form 90-22.1 Report of Foreign Bank and Financial Accounts (FBAR) with the US Treasury by June 30 detailing each account and its balance. The reason you file this form with the US Treasury instead of the IRS is so that it will not be governed by IRS privacy laws and any law enforcement person in the country can look up your foreign finances! Before 2004, there were no significant penalties for failing to submit the FBAR but now you can be required to forfeit the entire amount of your foreign deposits (and maybe go to jail) for willful violation of the reporting requirement even if you have not otherwise broken any laws!

There is no place to hide apparently. The government has asserted an unconditional right to know whatever it wants to know about your finances and any attempt to assert your right to financial privacy (a right that the government does not recognize) will result in significant civil and criminal penalties, even if you have not otherwise done anything illegal.

So you tell me, which is more disturbing: Spitzer and his hookers or Big Brother (along with his banking spies) and your money.

Who is to blame? Ultimately you and I because we elect the bozos who pass the laws that prosecutors then abuse. I simply find it difficult to believe that the average citizen would accept the current laws if they really understood them.

Congress should either abolish the Bank Secrecy Act (and its offspring, the Money Laundering Control Act and the Patriot Act) or significantly modify them to limit prosecutorial abuses and ensure individual financial privacy.


I hope to write soon on the related subject of Money Laundering and how prosecutors abuse those statutes as leverage in plea bargaining and to increase sentences for relatively minor offenses. Indeed, Spitzer also faces possible money laundering charges since it could be argued that depositing funds in a shell account (QAT Consulting) was an attempt to hide the proceeds of a criminal enterprise.


Below is a list of links for your further reading pleasure on this subject:

1 comment:

Anonymous said...

This is a super article, it shows you how much abuse goes on, also amazing how offshore banking is a hazard. Big brother wants you to always be broke and in debt, keep circulating the greenback, once that circulation stops we will revisit the great depression.