Congress has renewed its efforts to combat
international money laundering in recent months. In the House of
Representatives, Representative Jim Leach (R-IA) has introduced
H.R. 3886, the International Counter-Money Laundering Act, which
has moved swiftly through the Banking Committee and is now
positioned to move to the House floor. In the Senate, John Kerry
(D-MA) has introduced an identical bill, S. 2972.
stated goal of both bills is to track down the funds that criminals
keep in financial institutions worldwide. Their real impact,
however, would be to restrict constitutional freedoms by
undermining the Fourth Amendment right to be free from government
criminal investigations without reasonable and specific evidence of
wrongdoing. They are also likely to impinge on consumers' financial
privacy. Moreover, their effect would be less to corral drug
kingpins than to make it easier for large nations to collect taxes
by forcing smaller nations to violate their citizens' financial
The legislation states that "certain kinds of transactions
involving offshore jurisdictions...make it difficult for law
enforcement officials and regulators to follow the trail of money
earned by criminals and organized criminal enterprises." It may be
difficult to follow these dealings, but it is certainly not
impossible; nevertheless, the bills would give federal law
enforcement agencies greater powers to scrutinize financial
transactions in foreign jurisdictions.
would also force U.S. financial institutions to profile consumers
for unusual activity, identify situations in which money laundering
may be taking place, and reveal "suspicious" activity to federal
law enforcement agencies. These provisions are similar to the "Know
Your Customer" rule proposed in 1998, which would have forced
domestic financial institutions to reveal individual account
information to law enforcement agencies. The rule was hotly
contested and ultimately was withdrawn in the spring of 1999. These
provisions of H.R. 3886/S. 2972 are simply an international "Know
Your Customer" rule.
legislation would waive liability in money-laundering cases for any
financial institution that agreed to disclose information and to
work with federal law enforcement and regulatory authorities. In
other words, American financial institutions would have to violate
their customers' financial privacy or assume liability for their
patrons' potentially illegal business. In effect, these bills would
force banks to spy on their customers. Furthermore, banks would
employ computer software to make customer "profiles," and then
could share this information with affiliates or sell it to third
parties in order to recover the cost of data collection.
Fighting Crime or Low Taxes?
H.R. 3886/S. 2972 would give the Secretary of the Treasury broad
new powers to require U.S. financial institutions to reveal data
about their customers. If the Secretary found that there were
"reasonable grounds" for believing that an American financial
institution's patrons were laundering money in a foreign
jurisdiction, he could require that institution to reveal customer
information. The Secretary would be able to consider whether the
alleged money laundering was taking place in a country
"characterized as a tax haven," and could then target low-tax
regimes regardless of whether they tolerated money laundering.
Secretary also could prohibit certain consumer financial
transactions, transactions with certain financial institutions, and
transactions with countries deemed by the Secretary to be in
non-compliance. Thus, due process of law would be subject to the
discretionary whims of the Secretary of the Treasury, who would be
able to force American financial institutions to comply with U.S.
law enforcement activities and tax objectives abroad.
provision raises serious search and seizure concerns. In a normal
criminal investigation, the federal government must have probable
cause to believe that a person has committed a crime in order to
search personal records. By lowering the bar for probable cause,
H.R. 3886/S. 2972 would enhance the potential for governmental
abuse since the government needs only "reasonable grounds" to
believe that some person at a foreign or domestic bank is doing
business in a foreign country that might harbor money launderers.
The government can then require the bank to provide access to every depositor's account information in
Taken a step further, the "reasonable
grounds" clause could justify wide-ranging federal investigations
of private companies and individuals. Under this legislation, for
example, since some criminals like expensive cars, federal law
enforcement agencies conceivably could require all car dealerships
that sell American or foreign-made automobiles to open their books
to determine whether any illegal activity was occurring.
H.R. 3886/S. 2972's international provisions would mandate U.S
support for the Organisation for Economic Co-operation and
Development's Financial Action Task Force (FATF) on Money
Laundering. The OECD is a group of unelected bureaucrats from 29
wealthy countries, including the United States, devoted to economic
and social policy. The FATF, ostensibly devoted to combating money
laundering, is actually a means through which member nations with
high tax burdens (such as France) can pursue taxpayers and
businesses that protect their assets overseas in so-called tax
3886/S. 2972 would compel the United States to "actively and
publicly support the objectives of the FATF." They would urge the
United States to sanction tax-friendly nations if they do not
cooperate with the OECD, thereby compromising their sovereignty.
The OECD has called for the elimination of "preferential tax
regimes," and this legislation would bind the United States to the
OECD's collective will. It would also severely curtail financial
privacy by forcing U.S. financial institutions to play an
instrumental role in identifying "preferential tax regimes."
justification for these assaults on financial privacy and national
sovereignty is that the legislation presumably will prevent money
laundering. In reality, however, these provisions of H.R. 3886/S.
2972 would achieve one of the OECD's long-standing goals by driving
assets out of tax-friendly nations so that the world's high-tax
nations can prop up their welfare states.
Scott C. Rayderis formerly Senior
Technology Policy Analyst in the Thomas A. Roe Institute for
Economic Policy Studies at The Heritage Foundation.