Money Laundering and Terrorism: A Failed Past and a Bleak Future
December 1, 2003John Pickering
By: John Pickering
Now more than ever, national security requires that the people of the United States have the benefit of the best military, intelligence, and law enforcement tools available to combat terrorism. However, not every tool is useful, and some tools may even be counterproductive. Particularly suspect are those approaches that have failed in the past when employed against similar or analogous threats. The history and results of money laundering prohibitions in the United States raise a substantial question about whether the strategy of targeting terrorists by focusing on money laundering would be a useful tool for the task at hand.
On the surface, fighting terrorism by fighting money laundering may appear efficient and productive. After all, the terrorists who attacked on September 11 lived in the United States for several years while planning their attack. They probably supported themselves in part during those years using money illegally funneled into this country through a variety of sophisticated and unsophisticated money laundering techniques. So, focus on the money laundering, starve the terrorists of financial means, and catch them while they're still planning the next attack (or lock them up for money laundering offenses before their plans crystallize).
The problem is, we've heard this argument before. In fact, we have conducted a nearly thirty year experiment (roughly the latter half of that time in earnest) in using this approach to combat pernicious, criminal, well-organized violence in the United States in the form of the war on drugs. Unfortunately, the history of money laundering regulation as a tool in that war doesn't bode well for the recently engaged war on terrorism.
I. A Brief History of Money Laundering Legislation and Enforcement in the War on Drugs
1970 to 1984
Money laundering legislation began in the United States in 1970 with the passage of the Bank Secrecy Act ("BSA") in response to the growing cash revenue of organized crime, particularly the traffic in illegal drugs. The BSA imposes recordkeeping and reporting requirements on financial institutions and international travelers. Financial institutions are required to file Currency Transaction Reports ("CTRs") whenever an individual conducts one or more cash transactions in a single day which involve a total or more than $10,000. Compliance and enforcement were relatively lax until the mid-1980s. By 1984, when civil penalties for BSA violations were increased from $1,000 per violation to $10,000, annual CTR volume was only a few hundred thousand, well below full compliance level .
Even with relatively low compliance levels by financial institutions with the BSA, money launderers developed new techniques to avoid detection through CTRs. "Structuring" or "smurfing" involves splitting large cash deposits into multiple smaller deposits to avoid the $10,000 CTR reporting threshold. Launderers also began to shift their laundering to casinos and to invest their cash in real estate, businesses and high value consumer goods. Complex systems of front companies were established to legitimize high dollar bank deposits. And in a decidedly low-tech means around the BSA, launderers resorted to smuggling large quantities of cash across the border (often for later transmittal back into the U.S. by wire transfer).
1985 to 1987
In a high-profile case in 1985, the Bank of Boston pled guilty to BSA criminal violations and was fined $500,000 for failing to file CTRs on transactions totaling $1.2 billion. The Bank of Boston case gave the BSA and CTRs significantly higher priority for banks and bank regulators. Dozens of banks came forward to admit CTR irregularities after internal audits . Then, in 1986, Congress passed the Money Laundering Control Act, criminalizing the act of money laundering itself. Prior to 1986, money laundering wasn't a crime; the government was interested in tracking it merely as a way to reach the criminal enterprises that generated the money in the first place. The 1986 Act also outlawed structuring and introduced civil and criminal forfeiture penalties for BSA violations. Following the Bank of Boston case and the 1986 Act, CTR filings skyrocketed -- to 3.6 million in 1986 alone. Yet in 1987, only 17 people were charged with money laundering, and only 1 was convicted.
Once the anti-money laundering crusade began in earnest in the mid-1980s, new legislation multiplied. In 1988, the Money Laundering Prosecution Improvement Act imposed additional liability on accomplices of money launderers and required car dealers and real estate closing personnel to file CTRs. Criminal referrals by financial institutions were mandated for "suspicious" activity by their customers, turning banks into police informants. In 1990, when money laundering in the United States was estimated at $500 billion a year out of $2.4 trillion in bank transactions , the Depository Institution Money Laundering Amendment Act gave the federal government authority to request assistance from foreign banking authorities in investigations and law enforcement, and to provide reciprocal assistance. Then, following the high-profile BCCI money-laundering scandal, the Annunzio-Wylie Anti-Money Laundering Act of 1992 added the banking equivalent of the death penalty (charter and deposit insurance revocation) to the government's arsenal in the war on money laundering. Annunzio-Wylie also laid the groundwork for a consolidated Suspicious Activity Report ("SAR") to replace the cumbersome criminal referral form and charged the Federal Reserve and the Treasury Department with developing regulations regarding verification and record-keeping requirements for wire transfers .
One might suppose that this flurry of legislation on money laundering followed promising results from earlier efforts. However, in some ways, just the opposite had occurred. Law enforcement had been overwhelmed with CTRs (50 million filed by 1993 , 4.5 million in 1993 alone by the nation's 368 largest banks at a cost of $72 million ), yet in 1993, only 1,546 people were charged with money laundering, leading to only 857 convictions (and 22 acquittals).  The overwhelming volume of paperwork led to the 1994 Money Laundering Suppression Act, which aimed to reduce the volume of CTRs by streamlining the CTR process with mandatory and discretionary exemptions for certain classes of customers. The Act also made foreign bank drafts reportable monetary instruments and formalized the replacement of the old criminal referral forms with the SAR, which was issued by the bank regulatory agencies in 1995. The Financial Crimes Enforcement Network ("FinCEN"), the network of government agencies with responsibility for monitoring enforcement of anti-money laundering laws, implemented the 1994 Act's changes through regulations issued over the next several years. The Federal Reserve and the Treasury Department issued their recordkeeping requirements for wire transfers in 1994 (to become effective in 1996). Between 1987 and 1995, 3,000 money laundering cases were filed, resulting in 7,300 defendants charged, 2,295 guilty pleas, and 580 guilty verdicts .
During this period, it is no stretch to say that financial institutions became law enforcement's first line of defense against money laundering. Criminals got the message, shifting their emphasis out of the regular banking system and into increased smuggling, greater use of nonbanks (e.g., "casas de cambio" and "giro houses" (nonbank currency exchanges catering to Mexicans and Columbians)), front companies and wire transfers, and increased reliance on technological advances in payment systems and internet banking . By 1994-95, the U.S. Postal System was being described as one of the safest and most efficient ways to smuggle cash and negotiable instruments out of the country, and estimates suggested that smuggling cash across the border accounted for laundering of $50 billion annually. It was also estimated that all the effort and expense put into money laundering enforcement caught roughly one percent of illegally laundered funds.
But what about the war on drugs? Anti-money laundering laws had been proposed and supported in the name of prosecuting the drug war. The increased compliance and stronger laws of the mid-1980s (particularly the 1986 Act, which made money laundering itself a crime) should have made these laws effective. Unfortunately, there is little indication that these laws had any significant effect on the illegal drug trade. According to statistics posted on the web site of the Office of National Drug Control Policy, between 1987 and 1995, the wholesale (dealer) price of cocaine and heroin dropped by more than half (indicating that the drug continued to be freely available) while the purity of both drugs showed a slight increase. In roughly the same period, occasional users of cocaine dropped in half (but still remained at 3,000,000), but "hardcore" users of cocaine and heroin dropped less than 10% (and remained at over 3,500,000 for cocaine and 850,000 for heroin). Occasional users of heroin jumped 150%. Other surveys and statistics show some signs of progress, including meaningful reductions in the supply of cocaine in the U.S. during this period and drops in the number of self-reported drug users. But it is easy to misread some of the statistics: a 42% drop in U.S. expenditures on illegal drugs between 1988 and 1995 can be explained in significant part by the corresponding drop in drug prices -- not exactly a signal of impending victory over the drug lords, who seem to have been responding more to competitive market pressures from other drug dealers than to increased risk and expense in doing business. Finally, it is understandably difficult to get reliable statistics on the number of users of and the supply of illegal drugs.
More reliable, perhaps, are the statistics on the symptoms of drug use -- drug-related arrests, estimates of the number of people needing treatment for drug abuse, and the growth in incarcerated drug offenders. These numbers aren't encouraging, either. From 1991 to 1996, the estimated total number of persons in the U.S. needing drug abuse treatment rose from approximately 9 million to approximately 9.4 million. Drug-related arrests rose from 1.36 million to 1.47 million, but that relatively modest increase must be read in light of the fact that many of the drug offenders arrested in 1989 were no longer on the streets in 1995; the number of people in federal and state prisons for drug offenses rose from slightly under 150,000 in 1989 to nearly 280,000 in 1995, just six years later.
Taken as a whole, the statistics on the drug war between 1987 and 1995 can be read to indicate some progress, but only at the margins. Even then, it's not clear that anti-money laundering laws accounted for any of the minimal progress. The relatively few money laundering convictions account for only a handful of the hundreds of thousands of incarcerated criminals, and some proportion of the money laundering convicts weren't even involved in the drug trade.
The picture doesn't change for the last five years. To be sure, Congress and law enforcement haven't given up on anti-money laundering enforcement as a magic bullet. The 1998 Money Laundering and Financial Crimes Strategy Act called on the Treasury and Justice Departments to develop national strategy to combat money laundering and related financial crimes by coordinating federal, state and local law enforcement. In the same year, the bank regulatory agencies proposed their ill-fated "Know Your Customer" regulations implementing parts of the BSA. These regulations required financial institutions to conduct invasive due diligence on their customers to be sure the customers weren't criminals. However, the American people took notice of this effort to expand mandatory information collection by banks under the auspices of the BSA. The agencies received over 300,000 negative written comments, and the proposed regulations were withdrawn four months after they were issued. Legislative and regulatory developments on money laundering ended there for the most part until the attacks of September 11, which paved the way for the enactment in the 2001 Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (popularly known as the PATRIOT Act) of a number of miscellaneous "loophole closing" provisions that had been proposed and rejected in past Congresses, including special due diligence requirements for correspondent accounts and private banking accounts, a prohibition on correspondent accounts with foreign shell banks, and numerous other devices aimed at the international aspects of money laundering.
Meanwhile, the flood of BSA reports and paperwork continued with no end in sight. The "streamlined" SARs started somewhat modestly with only 52,069 filed in 1996 . That same year, compliance costs for U.S. banks under anti-money laundering statutes were estimated at $10 billion annually . The following year saw a 36% increase in SAR volume, and between 1998 and 2000, over 279,000 SARs were filed. CTRs continued to be filed as well; by 1997, aggregate CTR filings surpassed the 100 million mark .
Evidence on the drug war during the same period is mixed. Cocaine wholesale prices fell slightly between 1996 and 1998, but retail prices increased a bit. All heroin prices fell modestly, but purity for both drugs showed little change. Projected "occasional" cocaine users were down significantly again, but the number of hardcore users was expected to drop by less than 100,000 between 1996 and 2000. Heroin use was anticipated to increase by several percentage points for both occasional and hardcore users. Consistent with the relatively constant prices, total U.S. expenditures on illegal drugs were projected to change little between 1996 and 2000. Self-reported drug use actually increased in some categories, and domestic drug consumption (measured in hundreds of metric tons, not a very encouraging unit of measure) dropped slightly for cocaine between 1996 and 2000 but increased for heroin, marijuana and methamphetamine during the same period. By 1998, the estimated number of people needing treatment for drug abuse had fallen, but only back to 1991 levels (just under 9 million). 1,532,200 people were arrested for drug abuse violations in 1999, an increase of 56,000 over 1995 levels. And by 1998, 316,000 people sat in state and federal prisons for drug crimes, an increase of 11% over the number in 1995, just three years earlier.
The Anecdotal Evidence
A handful of anecdotal examples give life to these statistics. A few years ago, Mexican authorities arrested Raul Salinas de Gortari, brother of former Mexican President Carlos Salinas de Gortari, for the assassination of Jose Francisco Ruiz Massieu, Secretary General of Mexico's Institutional Revolutionary Party. They uncovered over $300 million in seventy different bank accounts in seven countries, all allegedly belonging to Raul. It was suspected that the money came from Raul's links to Mexican drug cartels, extortion and bribery. Strengthening these suspicions was the fact that Raul's annual salary had never averaged over US$190,000. The United States investigated as well, and the General Accounting Office released a report concluding that Citibank had ignored its own anti-money laundering policies to permit Salinas to transmit more than $90 million out of the U.S .
One would like to assume that, had Citibank followed its policies, Raul wouldn't have gotten away with his laundering activities for so long. Unfortunately, it's not clear that such an assumption is warranted. In a case involving a civil forfeiture action in a Houston federal court, the U.S. government was permitted by the jury to keep $7.9 million of $9 million seized from the former Deputy Attorney General of Mexico, Mario Ruiz Massieu, on the grounds that the money came from illegal narcotics proceeds. Notably, it came out in the trial that Massieu's aide had on twenty-four separate occasions made cash deposits at Texas Commerce Bank. These deposits totaled more than $9 million. Although Texas Commerce Bank dutifully filed all the required reports (and even noted the suspicious nature of ten of the deposits), and although the aide had completed the required Customs forms when crossing the border with the cash, apparently no U.S. government agency took any action .
But what about catching terrorists? Unfortunately, we've already seen the system fail on this front, too. Sometime in 2000, Mohamed Atta, the likely ringleader of the September 11 hijackers, received several wire transfers from the United Arab Emirates totaling $100,000. According to the Wall Street Journal article reporting on this incident:
The bank that handled Mr. Atta's $100,000 transaction was sufficiently suspicious that some crime was involved that it alerted authorities last year . . . But the first time [FinCEN], which is the chief reviewer of [SARs], became aware of the document in its own file was after Mr. Atta is believed to have flown a plane into the side of the World Trade Center. . . . James Sloan, director of FinCEN, declined comment on the report filed about Mr. Atta, citing legal constraints .
This is not a promising beginning for money laundering enforcement as a tool against terrorism.
So does the system ever work? Yes, sometimes the money laundering laws trigger action by law enforcement. The following example was given by then-Rep. Jim Bunning of Kentucky on the House floor in 1990:
[P]oor Sam Donaldson and Diane Sawyer. Sam and Diane took their prime time news team on the road recently to Covington, KY, in my Fourth Congressional District to try and pull off the crime of the century. What they were looking for was money laundering. What they found were honest banks and sharp employees. In short, Mr. Chairman, they got busted. What prime time did was send a news crew with a hidden camera and a briefcase filled with $20 bills to Covington. The news crew went to several banks and savings and loans trying to launder bills into recently opened checking accounts. By the time they got to their final bank, the other institutions had already called the police. The first bank was approached at noon and by 6:00, when they left the last bank, the Covington police swept in and arrested the prime time news crew in a parking lot adjacent to the bank. The "prime time drug cartel" came to Covington, KY, wanting to look like a scene from "Miami Vice" and ended up looking like a clip from "America's Funniest Home Videos." In fact, all they got for their efforts was a bill from the city of Covington for $1,021 for the overtime the police spent on the case. I guess crime just does not pay .
While this example certainly isn't representative (there have been hundreds of successful prosecutions of presumably guilty launderers who weren't members of the news media), it illustrates the diversion of bank and law enforcement resources brought about by money laundering prohibitions. This diversion might be acceptable if it materially contributed to winning the war on drugs or the war on terrorism. The fact that it has failed to make a material difference in the first war should make us skeptical about deploying it in the second.
II. Why Stronger Money Laundering Laws and Regulations Won't Help
Congress and the President have already strengthened money laundering legislation in the wake of September 11. Additional proposals are on the table and more are likely to follow. However, in examining these proposals, it is important to bear in mind several principles.
First, as explained above, the history of anti-money laundering regulation shows that it has proven singularly ineffective in making any substantial progress in the war on drugs. There is little reason to believe that it will prove any more effective when deployed against terrorists. It is true that the September 11 attackers left financial fingerprints and footprints, notably the SARs filed on the cash transfers to Mr. Atta. These clues have helped the authorities greatly in reconstructing the terrorists' movements and activities before September 11. However, it is quite likely that future terrorist groups will conduct a post mortem on the September 11 attacks and determine that next time they should cover their tracks so that they and their allies cannot be identified so easily after the fact. But even if they don't, it must be borne in mind that the money laundering approach to catching terrorists gave us usable information only after the terrorists had killed over 3,000 people. And then it was too late to prosecute Mr. Atta for money laundering.
Even if the anti-money laundering approach had been successful in the war on drugs, it still wouldn't be suited to the war on terrorism. The theory behind pursuing money laundering as a way to fight and catch drug dealers is that drug dealers are really more interested in money than drugs anyway, and any drug dealer worth his reputation will be moving large amounts of currency through the financial system in order to further his goal of accumulating wealth. In other words, the drug dealer is just an entrepreneur with no ethics. Terrorists, on the other hand, aren't primarily concerned with accumulating wealth - why bother, when you're going to be dead soon, anyway? Sure, they need considerable amounts of money to finance their training and operations, but the critical difference between the money used to finance terrorism and the money used to make drug dealers rich is that terrorist money can be, and often is (or appears to be), clean when it is transferred and spent, whereas the drug money is dirty at the beginning of the process. It's widely recognized that Osama bin Laden's money came from his father's construction business, not from "terrorist for hire" operations. So if the anti-money laundering approach didn't work in the context of the large-dollar, tainted transactions in the drug market, why should we believe it will work in the context of the comparatively small-dollar, often untainted transactions necessary to fund terrorist operations?
Additionally, there is a good argument to be made that the reason our anti-money laundering laws have proven so ineffective in the war on drugs is not that they are not strong enough or have too many loopholes, but that they have not been seriously enforced. The laws already in place are sufficient to produce convictions when they are rigorously applied; perhaps increased enforcement resource should be applied in the system we already have before we burden financial institutions with even more regulation and American citizens with even more government intrusion.
Heading further down the trail we're on with anti-money laundering legislation also raises questions about whether our approach makes sense at a basic level. The question here is not privacy versus law enforcement; the debate about money laundering legislation isn't about whether law enforcement should be able to access bank records with reasonable cause. The debate is about whether and to what extent bankers should be deputized to become, in effect, law enforcement officers themselves (or at least informers) by regularly turning over information on millions of transactions and customers, with special emphasis on "suspicious" transactions and customers. Bankers have no law enforcement training; they have only a limited vocational knowledge of what types of transactions look "suspicious" (i.e., they might be good at catching check-kiters and credit card fraud rings, but drug dealers and terrorists?); and their basic orientation is to serve their customers, not protect the public from their customers. Does it really make sense to continue to pile more law enforcement duties on bankers?
The ill-suitedness of anti-money laundering tools to address the terrorist threat is reason enough to be skeptical about their use in this context. However, in addition, because the tools aren't suited for the task at hand, their use is likely to cause significant collateral damage in two ways. First, new money laundering devices aimed at catching terrorists will be counterproductive because they constitute nothing more than "feel good" legislation - not unlike legislating in favor of sunny days. Legislators and the President might get a short-term benefit; bipartisan action on a money laundering bill might be sold to the American public for a time as a tough blow to terrorists. But when attacks continue, and when it is revealed that the new mechanisms didn't work (or, as in the case of Mr. Atta's wire transfers, worked as designed but produced results that were overlooked by law enforcement in a flurry of paper and filings), the benefits will evaporate rather quickly and Congress and the President will lose credibility in the fight against terrorism.
New anti-money laundering rules will have a second counterproductive effect in that they will add additional frustrations and burdens to the nation's financial institutions at a time when they are struggling to weather an economy suffering from the recessionary aftereffects of the September 11 attacks (not to mention the burdens imposed by all the already-existing money laundering regulation). The frustrations are quite real - it's relatively common for a banker to file an SAR against his customer on clear evidence of wrongdoing and see no response from law enforcement for months, if ever. In the mean time, the banker tries to protect the institution's exposure as best he can and worries (or hires lawyers to worry) about whether he's filing his SARs and CTRs correctly and on time.
Finally, there's the privacy issue. Understandably, Americans are willing to consider giving up a considerable amount of privacy from government intrusion to prevent future terrorist attacks. But this doesn't mean that Americans don't care about privacy at all. Remember Know Your Customer? Providing even more government access to private financial records can only be justified if there is reasonable cause to believe that the government will be able to put the information to use against terrorists. Neither the history of anti-money laundering enforcement in the war on drugs nor the theoretical case for stronger legislation indicates that the government will be able to do so.
1. Gerhardstein, "Reporting of Large Cash Transactions to IRS Surges Sharply, American Banker, Aug. 27, 1990, at 8 (as cited in Laura M.L. Maroldy, "Recordingkeeping and Reporting in an Attempt to Stop the Money Laundering Cycle: Why Blanket Recording and Reporting of Wire and Electronic Funds Transfers Is Not the Answer", 66 Notre Dame L. Rev. 863, 879 (1991)).
2.See Scott Sultzer, "Money Laundering: The Scope of the Problem and Attempts to Combat It", 63 Tenn. L. Rev. 143, 158 (1995).
3. "Clean Getaway for Money Launderers, Pressure on Banks Yields Few Results", Journal of Commerce (Dec. 10, 1996) at 3A.
4. Sultzer, supra note 2, at 215.
5. Henry B. Gonzales, "New and Continuing Challenges in the Fight Against Money Laundering", 20 Fordham Int'l L.J. 1543, 1546 (1997).
6. U.S. Congress, Office of Technology Assessment, Information Technologies for Control of Money Laundering, OTA-ITS-630 (Washington, DC: U.S. Government Printing Office, September 1995) at 17.
7. Sultzer, supra note 2, at 177.
8. "Clean Getaway for Money Launderers; supra note 3, at 3A; "Know Your Customer" Rules: Privacy in the Hands of Federal Regulators, House Hearing (March 4, 1999) (Prepared statement of Rep. Ron Paul).
9. Sultzer, supra note 2, at 184-197.
10.. Data on SAR filings taken from Bank Secrecy Act Advisory Group, The SAR Activity Review Issue 3 (October 2001), at 5.
11. "Clean Getaway for Money Launderers", supra note 3.
12. Gonzales, supra note 5, at 1546.
13. Madelyn J. Daley, Effectiveness of United States and International Efforts to Combat International Money Laundering, 2000 St. Louis-Warsaw Transatlantic L.J. 175, 195-96.
14. Daley, supra note 13, at 196; Gonzales, supra note 5, at 1548-49.
15. Paul Beckett, Carrick Mollencamp, and Michael Phillips, "Withdrawal Pains: In the Financial Fight Against Terrorism, Leads Are Hard Won," The Wall Street Journal, October 10, 2001, pg. 1.
16. 136 Cong. Rec. H1701 (Apr. 25, 1990) (Statement of Rep. Bunning).