Anti-Money Laundering Enforcement: What Happened To Due Process Of Law?

December 18, 2024/ Francis Menton @ Manhattan Contrarian

After two Manhattan Contrarian posts in the last month on the subject of anti-money laundering (AML) regulation (here from November 24 and here from December 9), the topic is suddenly in the news. On November 26, Marc Andreessen appeared on the Joe Rogan podcast, with an extensive discussion of the debanking of the crypto industry, and that appearance got some notice. The Wall Street Journal ran two op-eds on the subject of AML on Monday (December 16): “Debanking and the Return of Operation Choke Point” by Allysia Finley, and “Businesses Get a Reprieve from a Draconian Law” by Caleb Kruckenberg and Andrew Grossman. Both are worth your time if you can get behind the paywall.

It’s about time that some attention is paid to this issue. AML enforcement ranks right up there among the most egregious systematic violations by the government of the people’s civil rights. As with the First Amendment violations of the Censorship Industrial Complex revealed by the Twitter Files, the AML regime shows how quickly and how completely seemingly well-intentioned government regulators can veer completely off the rails into clearly illegal and oppressive conduct without anyone involved appearing even to realize it. In their minds, they are just innocently trying to rein in the bad guys. Thousands upon thousands of people work in the AML enforcement game for government and for banks and financial institutions, and none of them seem to see anything amiss. Or if they do, they are keeping quiet, maybe out of career ambition, or fear of retribution.

The huge problem with AML enforcement is that the enforcers have completely lost track of the people’s right to due process of law. That’s the right guaranteed by the Fifth Amendment (“No person shall be . . . deprived of life, liberty, or property without due process of law.”) with respect to the federal government (and, in the same words, by the Fourteenth Amendment as to the states). We are all familiar with what the requirement of “due process” means. If the government wants to take away a person’s life, liberty or property, it first must issue a charge and notify the accused; then there must be a trial or hearing before a neutral party (judge or jury) where the accused gets to present a defense; then it is up to the neutral party (judge or jury), not the prosecutor, to make a finding of wrongdoing after hearing; and then the punishment, if any, must be issued by the neutral party (judge).

With that in mind, let’s take another look at the Consent Order agreed to by TD Bank with the Treasury Department’s FinCEN and the OCC (undated, but apparently from approximately October 10). Here is a quote from page 13-14 of that document that I included in my December 9 post:

Demarketing Backlogs. . . . TD Bank did not have a process to apply restrictions or appropriate mitigating controls to customers that are the subject of SAR filings. Instead, the Bank left demarketing adjudication to an investigator after a certain number of SAR filings. As the Bank’s AIU began working through its large queue of potentially suspicious transactions, inevitably a portion would be found to be suspicious, and some of the related customers would be subject to the Bank’s demarketing processes. TD Bank’s lack of staffing and backlogs allowed these customers—which the Bank deemed to pose an unacceptable money laundering risk—to continue transacting without appropriate controls consistent with the Bank’s own AML program.

Let that sink in. The regulators are imposing a large penalty on a bank for failure to “demarket” customers quickly enough to satisfy the regulators. The bank had made a “queue” of customers subject to multiple SAR (suspicious activity report) filings, and then left it up to an internal bank “investigator” to “adjudicate” whether each customer would have his accounts closed. Because this process took some time, and because some of the people in the queue would inevitably prove to be “suspicious,” the regulators deem that the bank has allowed an “unacceptable money laundering risk.” Thus they impose a $3 billion penalty on the bank.

Wait a minute. Customers are being deprived of a serious piece of liberty — the ability to have bank accounts — at the demand of the government. In today’s increasingly cashless and card-dependent society, losing bank accounts can mean placing severe limitations on many life activities, from running a business to traveling to just paying ordinary expenses. And yet these customers have not been charged with anything, have not had a hearing before a neutral, and have had no ability to defend themselves. The so-called “adjudication” is not by a neutral party, but rather takes place somewhere inside a bank, without the customer even knowing about it until it is decided. There is no right to appeal to any judge or to the court system. And the punishment — debanking — is what the regulators demand, not what any judge or even hearing officer has imposed. Government imposes the punishment of loss of liberty on the errant customers, completely without due process, through the device of threatening sanctions of billions of dollars on the institutions that decline to do its bidding.

How is this remotely OK? More important, how can anybody participating in the process think it is OK? Of the thousands of lawyers, in and out of the government, involved in this process, all of them went to law school. Did every one of them miss the part about the Constitution?

I have some sympathy for the banks here. Clearly, TD here thought that the potential cost of its trying to challenge the AML regime on behalf of its customers was just too high. If it had lost, the regulators may have imposed penalties that could be a multiple of the $3 billion that it paid, not to mention business restrictions, which could even have included complete exclusion from the United States.

But the arrogance and hubris of the regulators is completely unfathomable.

If you are curious, as far as I can find, there is nothing in the relevant statutes that confers upon the regulators any explicit ability to demand that banks “debank” suspicious customers, and to impose multi-billion dollar fines to banks that refuse. Here is the text of the USA PATRIOT Act if you want to look for yourself. The closest I can find is Section 314, which requires banks and financial institutions to “cooperate” with the regulators in efforts to deter money laundering. In a non-lawless world, that would mean that the banks provide information to regulators and prosecutors, and the regulators and prosecutors use that information to charge and prosecute alleged wrongdoers in the courts as they see fit.

I certainly hope that the new administration is going to pay some attention to this situation.

Anti-Money Laundering Enforcement And De-Banking

December 09, 2024/ Francis Menton @ Manhattan Contrarian

 In a government full of nasty, obnoxious and extra-legal regulatory initiatives to harass the people, the effort to regulate “money laundering” out of existence has to rank at the top. The basic idea is for the government to require all banks to become involuntary deputies of law enforcement to spy on their customers behind their backs, so that the bureaucrats can gain access to detailed information on what every single person is doing all the time. And thus will all criminality be stomped out! In the real world, what anti-money laundering (AML) regulation means is that the government gains vast information on the innocent citizenry. This information in almost all cases has nothing to do with criminality and instead finds its principal use in hobbling and harassing the political opponents of the régime. Meanwhile, the real crooks have plenty of ways (cash, Bitcoin, ten other forms of crypto, gold, MoneyGram, etc., etc.) to continue business as usual.

I had two big posts on this subject back in the early days of this blog, one in June 2015 (“The Joke Of Criminalizing Money Laundering”), and another in April 2016 (“The Joke Of Criminalizing Money Laundering — Part II”). The first of those pieces reported on a series of massive fines exacted by the regulators against big banks that had failed to detect money launderers in their midst. 

The second cited a Wall Street Journal article reporting that the effect of stepped-up AML enforcement had merely been to drive the “organizations considered suspicious or high-risk” to use non-bank means of money transfer. What a shock. 

Fast forward to this year, and we have the events I just covered in my November 24 post (33 million small to tiny corporate entities suddenly required to register with the IRS); plus the additional events covered in my most recent post (December 7), where federal AML regulators have been systematically forcing the de-banking of crypto moguls, not to mention of Melania and Barron Trump and other such suspicious entities. Nothing political here! Meanwhile, nobody has noticed any effect of AML regulation on reducing, for example, drug dealing.

For a deeper look at what AML regulators have recently been up to, consider the just-ended investigation and prosecution of a bank called TD Bank. TD (Toronto Dominion) is a very large bank originally from Canada, that in recent years has put on a big growth spurt in the U.S., and has become the 10th largest bank in this country. 

It appears that federal regulators have been investigating TD Bank over money laundering compliance for many years. Both FinCEN (part of the Treasury Department) and the Justice Department have been involved. The investigation ended in TD agreeing to a Consent Order with FinCEN and a guilty plea with Justice. Here is a copy of the FinCEN Consent Order (undated), and here is the Justice Department press release (October 10, 2024) announcing the guilty plea.

The guilty plea announcement alludes to a payment of $1.8 billion by TD to resolve the charges. However, according to the ABA Banking Journal, yet other regulators (Comptroller of the Currency, Federal Reserve) piled on to get in on some of the loot, and the total paid to all agencies by the bank came of over $3 billion.

So what exactly is TD supposed to have done wrong? The gist of FinCEN’s allegations is that TD failed to devote enough “resources” to spying on the customers. From page 7 of the Consent Order:

The Bank did not invest sufficient time, money, or managerial resources in the creation and maintenance of TD Bank’s AML program, nor did the Bank take sufficient steps to ensure TD Bank’s ongoing compliance with the BSA. As described more fully below, TD Bank failed to devote sufficient resources to BSA compliance, and refused to invest in improvements to address such gaps when they were deemed too costly, thus allowing illicit activity to flow through the Bank. TD Bank vastly underinvested in its AML compliance efforts, with TD Bank knowingly spending an order of magnitude less than its peers.

So what amount of resources is the correct amount to spend spying on the customers? From page 8-9 of the Consent Order:

TD Bank was required to designate an individual to be responsible for coordinating and monitoring the Bank’s day-to-day compliance with the BSA—a “BSA Officer.” Longstanding regulatory guidance has made clear that . . . the mere act of appointing an individual to the role of BSA Officer is insufficient to assure and monitor the bank’s compliance with the BSA. . . . To have an effective AML program, a bank’s board of directors must ensure that the designated BSA Officer has appropriate authority, independence, and access to resources to administer an adequate BSA compliance program.

Ah, so there is nothing in the statute, or even in regulations, the tells you how much you are supposed to spend. You have only the famous “longstanding regulatory guidance” — and even that only has the vague demand that the amount spent must be “sufficient” to have an “adequate BSA compliance program.” The regulators reserve to themselves the complete ability to second-guess whatever you do and then hit you up for a multi-billion dollar payment to their slush fund.

You might wonder how much it costs a bank to spy on customers sufficiently to keep these regulators at bay. This November 2024 piece from the Financial Crimes Academy reports that “large banks reportedly spend up to $1 billion per year to maintain regulatory compliance standards.” The Consent Order, page 3, states that the 2023 earnings of TD’s U.S. affiliate were approximately $2.3 billion.

Go over to the Justice Department announcement to get an idea of the scope of what TD was supposed to be looking for. The release says that between January 2018 and April 2024 TD had some $18.3 trillion of “unmonitored” transaction activity. Of this, from 2019 to 2023 some $670 million was transferred by what they call three “money laundering networks.” They don’t say what a “money laundering network” is, or how one would know what these three were or what they were up to. Recognize that the government’s position is that any use of illegally obtained money is “money laundering.” So if a drug dealer pays his cable TV bill, that’s “money laundering.” Could the term “money laundering network” as used here mean nothing more than a crypto exchange? That is likely. But even if you assume that all of the $670 million is something that anyone would immediately recognize to be a crime, it’s still $670 million divided by $18.3 trillion, or 0.0036% of the transactions processed.

Read on in the Consent Order to page 13, and you will find out what the regulators ultimately want this bank to do. It’s all about “de-marketing,” which is the term used here for de-banking. The regulators demand that TD act more quickly to “de-market” disfavored customers:

TD Bank did not have a process to apply restrictions or appropriate mitigating controls to customers that are the subject of SAR filings. Instead, the Bank left demarketing adjudication to an investigator after a certain number of SAR filings. As the Bank’s AIU began working through its large queue of potentially suspicious transactions, inevitably a portion would be found to be suspicious, and some of the related customers would be subject to the Bank’s demarketing processes. TD Bank’s lack of staffing and backlogs allowed these customers—which the Bank deemed to pose an unacceptable money laundering risk—to continue transacting without appropriate controls consistent with the Bank’s own AML program.

On December 5 the Wall Street Journal reported that TD Bank had called a halt to its ambitious growth plans in the U.S.:

The Canadian bank said Thursday that part of the challenges to its finances would be the spending needed to strengthen its risk and controls following a settlement with regulators and prosecutors that involved money laundering . . . .

With regulators demanding that they spend up to half of earnings on completely useless spying on customers, can you blame them for pulling back?

Elon and Vivek, here is a great place to start!

UPDATE, December 10: On the subject of how AML regulation transforms into harassment of political opponents, let me throw in this link to the Report just out December 6 from the House Special Subcommittee on the Weaponization of the Federal Government, title:

 “FINANCIAL SURVEILLANCE IN THE UNITED STATES: HOW THE FEDERAL GOVERNMENT WEAPONIZED THE BANK SECRECY ACT TO SPY ON AMERICANS.” 

An excerpt or three:

The FBI has manipulated the Suspicious Activity Report (SAR) filing process to treat financial institutions as de facto arms of law enforcement, issuing “requests,” without legal process, that amount to demands for information related to certain persons or activities it considers “suspicious.” 8 With narrow exception, federal law does not permit law enforcement to inquire into financial institutions’ customer information without some form of legal process.9 The FBI circumvents this process by tipping off financial institutions to “suspicious” individuals and encouraging these institutions to file a SAR—which does not require any legal process—and thereby provide federal law enforcement with access to confidential and highly sensitive information.10 In doing so, the FBI gets around the requirements of the Bank Secrecy Act (BSA), which, per the Treasury Department, specifies that “it is . . . a bank’s responsibility” to “file a SAR whenever it identifies ‘a suspicious transaction relevant to a possible violation of law or regulation’” . . .

In the days and weeks after January 6, 2021, the FBI coordinated with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) to encourage financial institutions across the country to scour their data and file SARs on hundreds of Americans, if not more, without any clear criminal nexus. . . .

Financial institutions and FinCEN are expanding their capacity to surveil Americans through new, confidential projects and emerging technologies. Officially, the Bank Secrecy Act Advisory Group (BSAAG) serves as an advisory body to the Treasury Department on issues related to the BSA.22 However, in practice, documents obtained by the Committee and Select Subcommittee indicate that it is also a tool for federal law enforcement and financial institutions to monitor the private, financial data of American citizens.

Bold is in the original. Use cash.

Restraining Government in America and Around the World Dictators Hate Financial Privacy

July 12, 2024 by Dan Mitchell @ International Liberty

Earlier this year, I began a column about anti-money laundering laws with four observations.

• 

  As a libertarian, I don’t like that the government forces banks to spy on customers.
• As an economist, I don’t like that these laws don’t come close to passing a cost-benefit test.
• As a citizen, I don’t like that AML policies divert law enforcement from fighting crime.
• As a humanitarian, I don’t like the way poor people are disproportionately hurt.

I now want to confess that I committed a sin of omission. I should have included a fifth point.

• As a believer in democracy, I don’t like how AML laws can be used as tools of oppression.

But I’m not going to cite a libertarian-leaning source to justify this additional observation.

Instead, let’s look at some excerpts from a recent article in the Economist.

…charities that support small-scale farmers and help people after natural disasters have…had their top brass charged and accounts frozen for allegedly breaching the Philippines’s Anti-Terrorism Act, a draconian law passed in 2020. Their ordeal is an example of how governments are weaponising rules intended to stop dirty-money flows, both at home and abroad. …international directives create opportunities for large-scale abuse.

And evidence suggests that strongmen are becoming increasingly creative in how they wield tools of financial suppression. At fault is a body called the Financial Action Task Force (FATF). …The worst offenders are autocratic regimes keen to maintain a pretence of democratic rule… But even democracies are sometimes tempted. In 2022 Canada broadened its anti-money-laundering laws to stop funding for a protest by lorry drivers… Some strongmen start by collecting information. The FATF requires governments to establish “Financial Intelligence Units” with the power to obtain data…

Abusers might then starve victims of funds so they cannot continue to work. …banks, wary of being punished, are often ultra-cautious in how they handle frozen assets… the FATF can be used to make politically motivated arrests…and…allows repressive regimes to lock up people for months or years on baseless charges. …

FATF standards require states to provide legal assistance, cross-border asset freezes and extraditions. Belarus and Kazakhstan have used this to make Western democracies provide financial intelligence on exiled dissidents.

The bottom line is that it is a very dangerous idea to give politicians carte blanche access to everyone’s financial data.

That’s true when dealing with dictatorships like Russia. And it’s even dangerous, as the Economist noted, in (supposedly) civilized societies such as Canada.

By the way, anti-money laundering laws are just part of the problem. In this video from 15 years ago, I explained why financial privacy laws in tax havens should have been defended rather than attacked.

Pay close attention about 4:40 and you’ll notice that even some left-wing sources admitted that governments would misuse financial data.

Subsequent events (including in the United States) confirm that my fears were fully warranted.

P.S. On a related note, you can read my seven-part series about the “War on Cash” by clicking here, here, here, here, here, here, and here.

AML = High Costs and Trivial (if any) Benefits

 May 19, 2024 by Dan Mitchell @ International Liberty

I’ve repeatedly complained about the absurdity of anti-money laundering laws and regulations.

• As a libertarian, I don’t like that the government forces banks to spy on customers.
• As an economist, I don’t like that these laws don’t come close to passing a cost-benefit test.
• As a citizen, I don’t like that AML policies divert law enforcement from fighting crime.
• As a humanitarian, I don’t like the way poor people are disproportionately hurt.

Today, let’s cross the Atlantic Ocean to examine some new evidence about why anti-money laundering laws and regulations are misguided.

Looking at the United Kingdom, this chart shows that AML policies impose nearly £35 billion of costs on the economy, which is twice as much as the total budget for policing in the country!

I created the chart, but the numbers come from a new study published by the London-based Institute of Economic Affairs.

The author, Jamie Whyte, compares costs and benefits. The results are not pretty.

…debanking is a problem in the UK. In 2021/22, UK banks closed 343,000 accounts, up from 45,000 in 2017 when the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017) was passed into law. …Customers whose accounts are not closed also pay a material price, because complying with the government’s anti-money laundering (AML) regulations costs UK banks £34 billion a year, which is double the £17 billion spent on policing all other crimes in the UK… This cost must ultimately be passed on to customers through higher account fees, higher rates of interest on loans, and/or lower interest rates on deposits. …Given the lack of evidence that banks’ post-2017 AML obligations have done anything to reduce crime compared with pre-2017 trends, you might hope that the UK government, and all others, would simply eliminate them. …there is no evidence that the well-known and large costs of AML regulations are offset by their benefits.

Yes, you read correctly. There is no evidence that AML laws and regulations have had any positive effect.

The War on Drugs has been the main excuse for AML policies. Here’s some of what is in the study.

Between 1990 (when the FATF AML regulations began to come into force) and 2021, the number of illegal drug users around the world increased by 60% and the number of deaths attributed to drug use more than doubled. According to a 2023 report by the UK’s National Crime Agency: ‘From January 2022 to December 2022, cocaine prices have dropped by about 30% and heroin prices have fallen by about 33%.

Looks like one half of the Baptists and Bootleggers coalition is doing well.

Here are some of Whyte’s concluding thoughts.

The AML obligations imposed on banks have massive costs and no apparent benefit in reducing crime. The rational response is to abolish them or, at least, to scale them back… This is probably expecting too much of contemporary politicians, who find it difficult to stop regulating and who find it difficult to admit to profound policy errors.

Sadly, American politicians are just as feckless as British politicians. So the bad policies in the United States also seem invulnerable to common-sense changes.

To make a bad situation even worse, policy is like to become more nonsensical thanks to the War on Cash.

P.S. Since the statute of limitations presumably has passed, I can admit that I engaged in money laundering while in London about 10 years ago.

P.P.S. You may not think AML policy lends itself to humor, but here’s an amusing anecdote involving a former President. There’s also a very clever Instagram video from Australia.