Sneak Attack.A stealth campaign by U.S. regulators to turn private bankers into policemen.
The return of Domingo Cavallo as Argentina's finance minister in March resulted primarily from a political backlash after years of economic stagnation and mounting fiscal problems. One factor that intensified the crisis, however, originated in Washington, specifically in the Senate of the United States. A report prepared by the Democratic staff of the Senate Permanent Subcommittee on Investigations ("PSI") made accusations that several Argentine financial institutions laundered money from drug dealing and bribery, creating serious political problems for President De la Rua. The report was a body blow to an already weak government, the mediocre successor to the regime led by the charismatic Carlos Menem. A scolding by a U.S. Senator from Michigan, Democrat Senator Carl Levin, added urgency to De la Rua's appeal to Cavallo, the architect of Argentina's currency peg and previous economic prosperity.
The fact that Argentina is a world leader in money laundering The process of taking the proceeds of criminal activity and making them appear legal.
Laundering allows criminals to transform illegally obtained gain into seemingly legitimate funds. is no surprise to TIE readers. Thanks to the dollar peg engineered by Cavallo, Argentina is one of those nations stable enough to attract anonymous offshore cash, but still corrupt enough not to be particularly bothered about who uses its banks. In 1996, TIE reported on "The G3 Money Launderers" (see The International Economy, May/June 1996) and the growth of venues like Argentina, Israel, and Russia in the invisible world of offshore money havens where legitimate capital flight and the proceeds of drug trafficking and other illegal activities blur, an opaque market built by Wall Street to serve the huge float in offshore dollars. Names like Merrill Lynch and Citibank pioneered modern private banking and offshore trusts, but to be fair, they are just following their clients. If you do a banking business in venues like the Cayman Islands, Mexico City, Nigeria, Colombia, Liberia or the Bahamas, odds are pretty good that many of your non-resident customers are, at best, tax evaders from countries with high levels of government spending and official regulation, like the EU.
1. Given over to dissipation; dissolute.
2. Recklessly wasteful; wildly extravagant.
A profligate person; a wastrel. governments from market discipline. Perhaps more importantly, it would undermine America's comparative advantage."
American cooperation with the OECD, which operates under the umbrella of the Financial Action Task Force ("FATF FATF Financial Action Task Force on Money Laundering
FATF Fuel Assembly Transfer Form (nuclear power) "), has extended to American bank regulators, who are eagerly imposing new guidelines on American banks in direct opposition to the wishes of the majority in Congress. Bankers and their lobbyists in Washington, speaking only off the record because of fear of reprisal reprisal, in international law, the forcible taking, in time of peace, by one country of the property or territory belonging to another country or to the citizens of the other country, to be held as a pledge or as redress in order to satisfy a claim. by zealous regulators, describe a stealth process where the U.S. Treasury U.S. Treasury
Created in 1798, the United States Department of the Treasury is the government (Cabinet) department responsible for issuing all Treasury bonds, notes and bills. Some of the government branches operating under the U.S. Treasury umbrella include the IRS, U.S. and Federal Reserve are building a system of surveillance, information gathering, and monitoring of law abiding citizens, and doing so without the consent of Congress or the knowledge of a distracted public. Indeed, despite the fact that the Congress declined to explicitly give the regulators further powers, bank regulators are using verbal "guidelines" regarding "enhanced due diligence Research; analysis; your homework. This term has caught on in all industries, because it sounds so "wired." Who would want to do analysis or research when they can do due diligence. See wired. " to turn your friendly commercial bank into a federal law enforcement agency Noun 1. law enforcement agency - an agency responsible for insuring obedience to the laws
FBI, Federal Bureau of Investigation - a federal law enforcement agency that is the principal investigative arm of the Department of Justice .
On December 7, 1998, the Federal Reserve Board in Washington, along with the Federal Deposit Insurance Corporation Federal Deposit Insurance Corporation (FDIC), an independent U.S. federal executive agency designed to promote public confidence in banks and to provide insurance coverage for bank deposits up to $100,000. , the Office of the Comptroller of the Currency The Office of the Comptroller of the Currency (or OCC) was established by the National Currency Act of 1863 and serves to charter, regulate, and supervise all national banks and the federal branches and agencies of foreign banks in the United States. , and the Office of Thrift Supervision The Office of Thrift Supervision (OTS) was established as a bureau of the Treasury Department in August 1989 as part of a major Reorganization Plan of the thrift regulatory structure mandated by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) (12 U.S.C.A. , asked for public comment on proposed "Know Your Customer" ("KYC KYC Know Your Customer
KYC Know Your Client ") regulations. The interagency proposals precisely followed the FATF's agenda and were ostensibly designed to fight money laundering and other financial crimes, seemingly reasonable goals. Instead the Fed and other regulators found themselves buried in an avalanche of negative public comments, in part orchestrated by several libertarian groups in Washington led by the Center for Freedom & Prosperity (http://www.freedomandprosperity.org). Texas Representative Ron Paul, a nominal Republican who is among a handful of members who actually questions government intrusions into individual privacy, led the counter attack on Capitol Hill.
Criticizing the proposed rule, House Judiciary Commercial and Administrative Law administrative law, law governing the powers and processes of administrative agencies. The term is sometimes used also of law (i.e., rules, regulations) developed by agencies in the course of their operation. Subcommittee Chairman George W. Gekas (R-Penn.) said the Federal Reserve, the nation's primary bank regulator, was effectively trying to impose through regulatory fiat the Money Laundering Deterrence Act of 1998, which called for the issuance of draconian KYC regulations. Gegas complained that regulators were trying to outstrip out·strip
tr.v. out·stripped, out·strip·ping, out·strips
1. To leave behind; outrun.
2. To exceed or surpass: "Material development outstripped human development" their legal authority and usurp u·surp
v. u·surped, u·surp·ing, u·surps
1. To seize and hold (the power or rights of another, for example) by force and without legal authority. See Synonyms at appropriate.
2. the role of Congress. The legislation passed the House in October 1998, but died in the Senate, in large part because Banking Committee Chairman Phil Gramm flatly opposed the measure. "We didn't even have to see Gramm," recalled one bank lobbyist. "KYC is dead on the Hill so long as Gramm is Chairman."
But unbeknownst to KYC opponents, regulators are unilaterally seeking to make banks and other financial institutions act more aggressively to ascertain the origins of a client's wealth and business relationships, effectively turning your banker or stockbroker into a full-time policeman. "These new rules are coming from Washington and reflect a lack of understanding of the banking business," grouses the representative of half a dozen money center and regional banks. "The Fed people think you can ask customers for excessive amounts of information and not kill our business, but they are badly mistaken."
While the legislation failed and the proposed regulations were subsequently defeated, federal regulators began almost immediately to impose European-style standards on U.S. commercial banks. Under the rubric RUBRIC, civil law. The title or inscription of any law or statute, because the copyists formerly drew and painted the title of laws and statutes rubro colore, in red letters. Ayl. Pand. B. 1, t. 8; Diet. do Juris. h.t. of "enhanced due diligence," bank examiners from the Fed and other agencies are compelling U.S. banks to greatly enhance scrutiny of customer activities.
Lobbyists for several bankers tell TIE off-the-record that Federal Reserve examiners operating from the Miami branch of the Atlanta Federal Reserve Bank are meeting privately with bankers to force adoption of new diligence procedures that effectively discriminate against new customers based on race and national origin, a type of illegal screening in fact used by many U.S. police organizations in anti-drug operations. "The Fed personnel don't put this in writing, but we have been told to target Nigerians and Latin grocers," complains one banker's lawyer. "To do so is a violation of federal anti-discrimination laws."
The Miami-based effort is reportedly directed by Federal Reserve Board Governor Laurence H. Meyer, a brilliant economist with a monetarist Monetarist
An economist who holds the strong belief that the economy's performance is determined almost entirely by changes in the money supply.
Milton Friedman was a well-known monetarist. bent but who, like all current Fed governors, has no experience managing banks. Indeed, Fed Chairman Paul Volcker (1979-87) was one of the last governors with operating experience as a banker. At a meeting in January, when one southern banker challenged Fed examiners about the legality of the new "enhanced due diligence" standards and the striking similarity to the failed KYC legislation, a senior Fed official reportedly responded that that the new guidelines "are Know Your Customer." However Richard Small, Assistant Director of the Fed's Division of Banking Supervision and Regulation, flatly denies the existence of a special group of examiners in Miami operating under Washington's direct control.
A letter opposing KYC legislation sent to members of Congress by the Texas Bankers Association stated: "Texas banks already labor under very costly burdens in the production of currency transaction reports (CTRs) and suspicious activity reports (SARs). Last year the U.S. banking industry prepared 12.5 million CTRs for the Treasury Department. Over one million came from Texas. Although these reports take up a great deal of bank employee time, they result in very few prosecutions. H.R. 3886 would allow the Treasury Department to target any area of the country and add an additional layer of reporting requirements. The bill would also require banks to verify the true beneficiaries of their loan and deposit accounts. This will be perceived by bank customers as an invasion of their privacy."
Despite opposition from Senate Banking Committee Chairman Phil Gramm (R-Tex.) and most Republicans in both houses of Congress, the Treasury, Fed, and FDIC FDIC
See: Federal Deposit Insurance Corporation
See Federal Deposit Insurance Corporation (FDIC). are apparently imposing KYC de facto [Latin, In fact.] In fact, in deed, actually.
This phrase is used to characterize an officer, a government, a past action, or a state of affairs that must be accepted for all practical purposes, but is illegal or illegitimate. "guidance" on banks and other financial institutions. As the Federal Reserve said in its March 19, 1999 notice withdrawing the KYC rule: "Notwithstanding this withdrawal recommendation, Federal Reserve staff will continue to participate in the government's programs designed to attack the laundering of proceeds of illegal activities through the nation's financial institutions, and to assist banking organizations meet their current obligations under existing federal anti-money laundering statutes and regulations, including the Bank Secrecy Act The Bank Secrecy Act of 1970 (or BSA, or otherwise known as the Currency and Foreign Transactions Reporting Act) requires U.S.A. financial institutions to assist U.S. government agencies to detect and prevent money laundering. ."
This aggressive behavior by U.S. regulators stems from several issues, including tax evasion The process whereby a person, through commission of Fraud, unlawfully pays less tax than the law mandates.
Tax evasion is a criminal offense under federal and state statutes. A person who is convicted is subject to a prison sentence, a fine, or both. , anti-narcotics activities, and national security concerns. The OECD countries, led by such positivist police states as France and the UK, are frequently blamed for the rise of KYC by pushing their policy against "tax competition" at the expense of the low or no tax states, especially offshore money havens but also including the United States. Washington's efforts to stem narcotics activities are another reason for the big push behind KYC, as illustrated by the report issued on Argentina earlier this year. A November 9, 1999 report, "Private Banking and Money Laundering: A Case Study of Opportunities and Vulnerabilities," also prepared by the Democratic staff of the Senate PSI, detailed how Raul Salinas Salinas, city, United States
Salinas (səlē`nəs), city (1990 pop. 108,777), seat of Monterey co., W Calif.; inc. 1874. It is the shipping and processing center of a fertile valley famous for its grain and lettuce. employed Citibank's private banking department to launder Launder
To move illegally acquired cash through financial systems so that it appears to be legally acquired. over $240 million into Swiss accounts. The Fed and other regulators were badly embarrassed by these scandals, but significantly, the United States never prosecuted Raul Salinas or the officials of Citibank who the PSI identified as being actively involved in the Salinas money laundering activities.
The third pressing concern is the link between international terrorism and money laundering. For example, U.S. officials say the 1991 collapse of the Bank of Credit and Commerce International The Bank of Credit and Commerce International (BCCI) was a major international bank founded in Pakistan in 1972. At its peak, it operated in 78 countries, had over 400 branches, and claimed assets of $25 billion. placed a great financial strain on Saudi millionaire Osama bin Laden's terrorist network, depriving it of its main source of funding. Under the rubric of fighting terrorism and other evils, the U.S. government is now engaged in a range of domestic surveillance activities from monitoring email to watching for "suspicious" financial activities. Agencies such as the Financial Crimes Enforcement Network Noun 1. Financial Crimes Enforcement Network - a law enforcement agency of the Treasury Department responsible for establishing and implementing policies to detect money laundering
FinCEN (FINCEN Noun 1. FinCEN - a law enforcement agency of the Treasury Department responsible for establishing and implementing policies to detect money laundering
Financial Crimes Enforcement Network ) act as aggregators of information from dozens of law enforcement agencies A law enforcement agency (LEA) is a term used to describe any agency which enforces the law. This may be a local or state police, federal agencies such as the Federal Bureau of Investigation (FBI) or the Drug Enforcement Administration (DEA). , creating a pool of information which, in the wrong hands, could be used as a mechanism of control of the type predicted by George Orwell in his book, 1984.
Senator Levin, the ranking Democrat on the PSI, has been the driving force behind congressional interest in money laundering and legislative proposals to increase government surveillance of U.S. banks. His enthusiasm for added government surveillance of the financial marketplace is not shared by Senate Republicans, however.
"Given the intricate nature of the schemes criminals use to launder money, there are obviously practical limitations upon the intensity of scrutiny that U.S. banks can give to the customers of their correspondent banking clients, or to any particular link in a chain of `nested' correspondent accounts," said Senator Susan Collins, the ranking Republican on the PSI. "A requirement that U.S. banks thoroughly investigate the business dealings of each and every customer of a correspondent banking client--their customer's customers--might well prove burdensome and impractical, doing more harm to the financial industry than good in preventing money laundering."
The managing partner of a large hedge fund hedge fund, in finance, a highly speculative, largely unregulated investment device. Originating in the 1950s, the funds "hedge" by offsetting "short" positions (borrowing a security and then selling it at a higher price before repaying the lender) against "long" in New York New York, state, United States
New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of that specializes in trade finance arbitrage says that the reporting and due-diligence requirements being imposed on banks, especially foreign banks, have greatly increased the lead-time necessary for transactions. "It now takes weeks for us to get new counter-party approvals from some banks. This means that the time between when we identify an opportunity to the close of the transaction has been increased ten-fold and frequently results in the transaction being missed."
One senior Democratic staffer tells TIE that federal bank regulators are doing more harm than good, and are effectively attacking the over-the-counter markets in bearer securities, commodities, and other private assets. "What the regulators are doing is gradually bringing an end to negotiability of private financial assets Financial assets
Claims on real assets. . In technology parlance, if you don't have a static address on the global financial network, you will not be allowed to do business in the United States or with a U.S. financial institution." A Senate aide says that, as yet, no bankers have directly approached Senator Gramm or the other relevant members of Congress to discuss the stealth process to impose KYC rules on banks without Congressional authority or legally mandated public comment.
So far, the only Congressional reaction against KYC is visible in the battle being fought regarding the OECD's policy of attacking the bank secrecy laws of any nation that has lower taxes than the authoritarian states of Europe. Three additional influential U.S. lawmakers, including Senator Wayne Allard (R-Colo.), who serves on the Budget Committee and the Banking Committee, have asked Secretary O'Neill to reject the OECD's so-called "harmful tax competition" project.
Jack Kemp, former Republican Vice Presidential candidate and a leading tax reform advocate, likewise has asked Secretary O'Neill to put U.S. taxpayers first and dump the OECD's misguided tax competition project. Kemp notes: "Our tax rates and the overall tax burden may be high, but they are significantly lower than tax rates and tax burdens of other industrialized in·dus·tri·al·ize
v. in·dus·tri·al·ized, in·dus·tri·al·iz·ing, in·dus·tri·al·iz·es
1. To develop industry in (a country or society, for example).
2. nations. Combined with our favorable tax treatment of foreign investors, the OECD has deemed the United States a menacing `tax haven Tax Haven
A country that offers individuals and businesses little or no tax liability.
There are several countries in the Caribbean that are considered tax havens. ,' which is not only inaccurate but insulting."
All of this is fine, but members of Congress may need to directly deliver the same message to Federal Reserve Chairman Alan Greenspan Alan Greenspan
Dr. Greenspan is Chairman of the Board of Governors of the Federal Reserve System. Dr. Greenspan also serves as Chairman of the Federal Open Market Committee (FOMC), the Fed's principal monetary policymaking body. and his colleagues on the Federal Reserve Board.