Tag: know your customer

Unintended Consequences of Money-Laundering Laws, Cont’d

As Dan Mitchell pointed out this morning, proposals to abolish the $100 bill, on the grounds that it’s too easily used in underground-economy activities such as tax evasion and drug dealing, are another instance in which ordinary citizens are called on to sacrifice convenience and privacy to help in the ever-expanding federal fight against “money laundering.” I’ve long been fascinated by the unintended consequences that arise from these laws, especially from the federal “know your customer” rules under which banks (and increasingly other businesses) are required to pry into their customers’ earnings sources, family relationships, overseas ties and other sensitive matters. Those who cannot furnish satisfactory answers – such as Americans who lack a suitable recent domestic credit record because they have long lived as dependents, overseas, or even as nuns in convents – may find that banks turn them away as customers or even freeze their existing accounts. The same is true of established customers who cannot explain a large or irregular series of cash deposits or remittances from abroad to a bank officer’s satisfaction.

A new example of this has emerged this fall, and it’s embarrassing even by the standards of federal government foul-ups. According to a Foreign Policy report last month, no fewer than 37 foreign governments with embassies in the United States are on the brink of losing, or have already lost, access to the routine banking services they need to pay their staff salaries and keep the lights and heat on in their consulates. The reason? These governments cannot prove to the satisfaction of U.S. banks that their accounts are not potentially open to use for illicit money transfers. From the banks’ point of view, there is no particular benefit to be had from an account which is relatively small in the first place – the countries involved are mostly poorer nations, many in Africa, with small embassy staffs – when these are dwarfed by the paperwork costs and potential legal exposures from a misstep.

The consequences for American foreign interests have already been unpleasant, and will become more so if the problem isn’t fixed. Angola, which saw its accounts closed down by Bank of America, has already had to cancel planned national independence day celebrations and has hinted at retaliation against unrelated U.S. companies that happen to do business in Angola. Extend that sort of anger to 37 countries, and some significant international frictions could result.

Now, I have no doubt that some embassy bank accounts, of smaller and bigger countries alike, are pressed into service for improper or even criminal money transfers. (I always assumed the whole point of “diplomatic pouches” was to transfer things back and forth that the host country would have preferred to stop and inspect). But the odds are near zero, I think, that the latest wave of bank refusals-to-deal was somehow a planned or intended consequence of the original federal calls for wide-ranging bank regulation in the name of money-laundering prevention. How many such unintended consequences will the new Dodd-Frank law turn out to have?