Don’t Follow the Money

The July/August issue of Foreign Affairs has an excellent article by Professor Peter Neumann of King’s College London entitled: “Don’t Follow the Money: The Problem with the War on Terrorist Financing.” It debunks the orthodoxy that financial surveillance has some role in controlling and countering terrorism. Simply put, terrorism is not particularly expensive. Monitoring financial flows has more costs than benefits. Those costs run into the billions of dollars for financial services firms, which pass them on to customers and shareholders in the form of higher prices and lower profits and dividends. For no security gain, we’re getting substantial financial loss.

Another important dimension of cost are the effects on the global economy. Especially when banks are pressured to control financial flows in the name of terrorism, they practice “de-risking”—that is, exiting entire sectors and regions so as to avoid the massive penalties and damage to reputation that might come from proximity to even a tiny transaction involving terrorists. A good resource on the topic is a recent Center for Global Development report entitled: “The Unintended Consequences of Rich Countries’ Anti–Money Laundering Policies on Poor Countries.”

It is bad for our security to stunt economic development in parts of the world where it is badly needed. Economic development would help produce stability, a rule of law, police, and court systems that are more effective than any U.S.-led effort to suppress terrorism. For infinitesimal or imaginary near-term gains, financial surveillance and control may undermine our long-term security.

I’m particularly struck by how the financial surveillance regime in the United States, which dates back to passage of the Bank Secrecy Act of 1970, undercuts the privacy of law-abiding Americans. In cases ratifying the BSA’s financial surveillance mandates, the U.S. Supreme Court laid the groundwork for what is now known as the “third party doctrine.” That’s the idea that information you share with a third party is available to the government without a warrant, even when contract and regulation requires them to keep it in confidence on your behalf. My most recent piece on the Fourth Amendment, published by the National Constitution Center, argues that the Court should abandon such doctrine. It’s entitled: “Administering the Fourth Amendment in the Digital Age.” [pdf]

The good news is that Congress is beginning to reconsider the expensive and counterproductive overhang of the BSA’s anti-money-laundering (AML) regulation.

Last week, the House Financial Services Committee’s Financial Institutions and Consumer Credit Subcommittee held a hearing entitled “Examining the BSA/AML Regulatory Compliance Regime.” In opening the hearing, Chairman Luetkemeyer (R-MO) captured some of the challenges of financial surveillance, saying, “[T]he reality is that well-intentioned regulation has spiraled out of control. … Today, regulators essentially deputize credit unions and banks as law enforcement and allow for a regulatory regime that’s both opaque and punitive.”

Less salutary was the opening statement of Rep. Carolyn Maloney (D-NY), who called the current financial surveillance regime “an incredibly important tool for combatting terrorist financing.” The state of our knowledge about financial surveillance and terrorism has moved beyond this orthodoxy. Here’s hoping that Congress ends the financial mass surveillance regime in favor of what’s both constitutional and effective very soon.