As the US enacts new laws (AML Act 2020 passed as an amendment to the National Defense Authorization Act for 2021 and after beating a Presidential Veto) to impose record keeping and reporting requirements on so called shell companies incorporated in the US, many have hailed this as one of the most important AML developments for years and long overdue.
For others it still doesn’t go far enough, for example many companies are excluded, the reporting will not be public, and reporting institutions are only entitled to access this information with consent.
According to reports, compromises were made, to among others, the US Chamber of Commerce, that then dropped their long held objections after privacy concerns were met.
This is not the first time that complaints about the extension of AML laws and the effect on privacy rights have been a big part of the AML debate, indeed it is likely to become ever more THE debate.
This may feel new but it is not. Looking back 50 years to the landmark record keeping and reporting requirements that became the US Bank Secrecy Act 1970, faced serious challenges at the time on privacy grounds, despite being an incredibly thin piece of legislation, with limited purposes, by today standards.
The Bank Secrecy Act 1970
The 1970 Act can be considered the first money laundering law enacted anywhere in the world. It was originally called the “Currency and Foreign Transactions Reporting Act” which required US Banks to keep records and report transactions.
The Act followed extensive and detailed hearings including in the US Congress concerning the widespread use by US persons of foreign bank accounts in so called Bank Secrecy jurisdictions to conceal criminal behaviour and the failure by domestic US banks to keep adequate records in order to link these activities.
The overriding purpose of the Act was to make available greater evidence of financial transactions in order to deter the use of these channels for illicit purposes, by enabling the US Government to obtain financial information having “a high degree of usefulness” in criminal tax or regulatory investigations or proceedings.
At the time Congressman Patman, who led on the Bill in the House stated that, “This is really a Bill which, if enacted into law, will be the longest step in the direction of stopping crime than any other we have had before this congress in a long time.” A similar view has been articulated by many about the 2020 AML Act.
The California Bankers Association v Schulz 1973 – US Supreme Court
The provisions of the Bank Secrecy Act was challenged up to the US Supreme Court which heard the case as The California Bankers Association v Schulz. Bankers, Civil Rights Campaigners and some customers complained that the new law imposed unreasonable and onerous new obligations which included micro fishing and retaining information and by reporting these to the government, the regulations effectively made the Banks the agents of the Government in the surveillance of its citizens and in doing so contravened 1st (Free Speech) 4th (Search) and 5th (Incrimination) Amendment rights.
The Chief Justice in his majority judgement (which found in favour of the Government by a 6-3 decision), did make the point that the Act didn’t violate in particular the 4th Amendment Rights of either the Bank or customer as the mere maintenance by the bank of records and the reporting as requested were reasonable, recognising there was no “unqualified right to conduct their affairs in secret” according to case law – [US v Morton Salt Co 338 US 632,338 US 652 Pp416 US 63-67].
The court was though influenced by the fact that many Banks already kept these records for their own purposes and that the US Treasury Department had been receiving currency and other reports for many years before these provisions were codified in the Bank Secrecy Act.
Intriguing though, 2 justices who supported the majority opinion cautioned that whilst they supported the provisions of the Bank Secrecy Act as far as domestic reporting requirements were concerned “a significant extension of the regulations reporting requirements, however, would pose substantial and difficult constitutional questions” explaining that “Financial transactions can reveal much about the persons activities, associations, and beliefs. At some point, government intrusion upon these areas would implicate legitimate expectations of privacy. Moreover, the potential for abuse is particularly acute where, as here the legislative scheme permits access to this information, without invocation of the judicial process. In such instances, the important responsibility for balancing societal and individual interests is left to unreviewed executive discretion, rather the scrutiny of a neutral magistrate. Both justices decided though due to the limited scope of the BSA at that time, they sided with the Government and Congress.
The Justices that decided the BSA Case in 1974 were the Justices that decided the Roe v Wade case a year earlier in 1973.
A dissenting justice was scathing about the legislation, stating the new regulations “show the depth and extent of the quicksand in which our financial institutions must now operate. It is estimated that a minimum of twenty billion checks and perhaps thirty billion will have to be photocopied, and that the weight of these little pieces of paper will approximate one hundred and sixty six million pounds a year it would be highly useful to governmental espionage to have like reports from all our bookstore, all our hardware and retail stores, all our drug stores. These records too might be “useful” in criminal investigations. “
He went further. “One’s reading habits furnish telltale clues to those who are bent on bending us to one point of view. What one buys at the hardware and retail stores may furnish clues to potential uses of wires, soap powders, and the like used by criminals. 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. The records of checks — now available to the investigators — are highly useful. In a sense, a person is defined by the checks he writes. By examining them, the agents get to know his doctors, lawyers, creditors, political allies, social connections, religious affiliation, educational interests, the papers and magazines he reads, and so on ad infinitum. These are all tied to one’s social security number; and now that we have the databanks, these other items will enrich that storehouse and make it possible for a bureaucrat — by pushing one button — to get in an instant the names of the 190 million Americans who are subversives or potential and likely candidates.”
As to the cost of compliance with the BSA, the dissenting Justice stated that, “There is saddled upon the banks of this Nation an estimated bill of US$6 million a year to spy on their customers.” (Estimated at US$40-50 million in 2020 after accommodating for inflation).
The comparisons in terms of circumstances and responses between the enactment of the AML Act 2020, with those of the BSA 1970 are compelling, though the time between them suggests the fight against financial crime will continue to be a long one and that legislation alone will not suffice. That’s why there is more to the AML Act than dealing with so called shell companies and increased beneficial ownership transparency, including improving co ordination and information sharing between the public sectors and between the public and the private sectors.
As with the compromises made to gain support to pass the AML Act 2020, in particular those regarding privacy, these new arrangements will need to be well considered and adequate safeguards guaranteed. The challenge is to come up with the right measures to combat financial crime, working together across sectors respecting and accommodating legitimate privacy rights
Policy Makers, Financial Crime Fighters & Privacy Advocates must Collaborate
Whilst the dissenting Supreme Court Justice opinions, in the BSA Case, supported by 2 others, did not carry the day, they reflect an opinion on the importance of financial information and how that information should be protected that is as important today as it was then. Indeed likely more so.
Policy makers and financial crime fighters, who still support increased transparency of beneficial ownership including corporate registries and increased levels of collaboration, of information sharing and public private partnerships need to ensure at all times that they maintain an appropriate balance between the two, and that they can justify any compromises and ensure safeguards are in place. Privacy advocates also need to work with AML Policy makers and financial crime fighters recognising that rights to privacy are not absolute.
The EU Convention on Human Rights states through Article 8 that “Everyone has the right to respect for his private and family life, his home and his correspondence” and that “there should be no interference by a public authority with the exercise of this right except such as in accordance with law and as is necessary in a democratic society in the interests of national security, public safety, or the economic well being of the country, for the prevention of disorder or crime, for the protection of health or morals, or for the protection of the rights and freedoms of others.”
Whilst the right to privacy, such as it is under the US Constitution, and alluded to in the 1st, 4th and 5th Amendments, was not sufficient to defeat the provisions of the Bank Secrecy Act, the discussion nearly 50 years ago at the US Supreme Court remains instructive, particularly for all policy makers and financial crime fighters and privacy advocates. Whilst the court sided with the Government in a 6-3 majority, even 2 supporting justices made it clear that they had concerns about too much information being reported. Whether if the same justices saw the level of reporting today that started under the Bank Secrecy Act, the result might have been a 5 – 4 majority the other way, which would be an interesting debate.
Whilst the passing of the US AML Act 2020 may be a big deal for some and still not enough for others, it isn’t first time and it won’t be the last where privacy compromises are made to find a balance to move forward on fighting financial crime. In fact, you might go so far as to say how these are balanced going forward will shape how effective the effort will be. As collaboration across the Aisle has proved essential in the US Congress to get this passed into law, so future collaboration between policy makers, financial crime fighters and privacy advocates will be essential not just in the US, but in the EU, UK and all around the world.