Wednesday, December 21, 2005
If You're Alive, You're A Suspect
If You're Alive, You're a Suspect
Today's comment is by Mark Nestmann, a member of the Sovereign Society Council of Experts and author of The Lifeboat Strategy, a book on privacy rights and tax planning.
You might not know it, but when you establish a relationship with a US bank or broker, thereafter you're being watched--continuously.
US law requires financial institutions and many other businesses to spy on their customers, and report any "suspicious transactions" of US$5,000 or more to the Financial Crimes Enforcement Network (FinCEN), the US Treasury Department's "Financial Intelligence Unit."
The definition of "financial institution" was at first restricted to banks and credit unions, but has now been extended to money transmitters and securities brokers. And the obligation to report suspicious transactions also applies to securities brokers, mutual fund companies, pawnshops, travel agents, jewel and precious metal dealers, car, boat and airplane dealers, insurance companies, real estate agents and title companies.
Businesses that fail to report transactions they should have regarded as "suspicious" face fines, and, in the case of banks, loss of their banking charters. Their owners or employees can also be jailed. And it's against the law for the bank or business to inform the customer that they are under suspicion or that a report has been filed -- forever.
As a result of all these legal threats to banks and businesses, FinCEN receives tens of thousand of suspicious activity reports, or "SARs." The total number of SARs filed nationwide has more than tripled since 2001, surpassing 685,000 in 2004.
What happens if a bank thinks you've done something "suspicious?" You might lose access to the assets in your account unless you can convince your bank -- and the US Treasury -- that you're not a crook. I know of one situation in which a bank depositor mistakenly deposited a large personal check in his business account. He immediately transferred the proceeds to his personal account. A few hours later, he tried to withdraw money from this account at an ATM. He couldn't -- the account was frozen. It took several days of frantic phone calls to get access to his funds. It seems the deposit and transfer of his own legal funds was "suspicious" enough to freeze his cash.
If a filed SAR claims that you broke a law -- knowingly or unknowingly -- the results could be even worse. For instance, federal law requires that cash transactions over US$10,000 with a "financial institution," or with many types of businesses, be reported to FinCEN. Every day, FinCEN receives about 13,000 of these reports.
Some uninformed people make the mistake of "structuring" large cash transactions by breaking them into smaller amounts to avoid the reporting requirements. That's a very bad idea. Structuring is a criminal offense, punishable by fines, imprisonment and confiscation of "all funds" involved. That might not just be the $11,000 you split into two $5,500 transactions to avoid the reporting requirement, but also the entire $100,000 account in which you deposited it! There's no requirement that you know that structuring is illegal in order to be convicted of this offense. In fact, the US Congress removed a requirement that structuring be "willful" in order to be convicted of this offense.
Aside from "structuring" a cash transaction, what's suspicious? Turns out, just about everything! The SAR rules provide that any transaction must be reported as suspicious: "if the bank knows, suspects, or has reason to suspect...The transaction ...is not the sort of transaction in which the particular customer would normally be expected to engage..." That's a pretty big range. Aside from obvious triggers, such as attempting to wire transfer funds to Osama bin Laden, the definition is remarkably broad. When the FBI tried to design a profile of how a bank might be used by terrorists it only came up with one main characteristic: large deposits with withdrawals of cash in a series of small amounts. That's not particularly helpful, since this profile matches the account activity of around 25% of US bank customers.
So it's no exaggeration to say, if you're alive, you're a suspect.
Since businesses don't know in advance which customers, if any, are engaged in illegal activity, all customers are subjected to pervasive, systematic and continuous surveillance. Software companies now promote programs used by almost all banks that scan millions of transaction records for triggers that might indicate a problem. Promoters hold seminars teaching businesses how to analyze customers' behavior to determine whether or not it's suspicious. Other companies create profiles of suspicious customers that financial institutions and businesses covered by these rules might wish to avoid. One firm, World-Check, offers a list of more than 300,000 people who, in their opinion, may present a "heightened risk" to financial institutions.
What can you do to protect yourself?
First and foremost, banks -- and the expensive software they use to track suspicious transactions -- tend to pay the most attention to transactions that don't fit the general profile of a customer or his or her past pattern of use of the account. For example: Say that you have an average balance in your bank account of US$2,500. One day, you sell your car for US$7,500 in currency and deposit the proceeds in your bank account. Is the transaction suspicious? Yes, because it exceeds $5,000 and it's "not the sort in which the particular customer would be expected to engage." Still, the bank isn't obligated to report the transaction as suspicious if you can provide a reasonable explanation as to what occurred. When you deposit the cash, inform the teller -- or preferably, a bank officer -- that the transaction is a one-time event, and be prepared to show proof where the money came from.
Yes, this strategy implies consent to a hugely unjustified violation of privacy by the government. But it could avoid your account being frozen, or your arrest for trying to protect your financial privacy.