Tag: regulation

World Bank: Anti–Money Laundering Rules Hurt the Poor

I’ve complained many times about the pointless nature of anti–money laundering laws. They impose very high costs and force banks to spy on their customers, but they are utterly ineffective as a weapon against criminal activity. Yet politicians and bureaucrats keep making a bad system worse, and the latest development is a silly scheme to ban $100 bills!

It also seems that poor people are the main victims of these expensive and intrusive laws. According to a new World Bank study, half of all adults do not have a bank account, with 18 percent of those people (click on the chart below for more info) citing documentation requirements—generally imposed as part of anti–money laundering rules—as a reason for being unable to participate in the financial system.

But this understates the impact on the poor. Of those without bank accounts, 25 percent said cost was a factor, as seen in the chart below. One of the reasons that costs are high is that banks incur regulatory expenses for every customer, in large part because of anti–money laundering requirements, and then pass those costs on to consumers.

Here are some of the key points in the World Bank report:

The data show that 50 percent of adults worldwide have an account at a formal financial institution… Although half of adults around the world remain unbanked, at least 35 percent of them report barriers to account use that might be addressed by public policy.

…The Global Findex survey, by asking more than 70,000 adults without a formal account why they do not have one, provides insights into where policy makers might begin to make inroads in improving financial inclusion.

…Documentation requirements for opening an account may exclude workers in the rural or informal sector, who are less likely to have wage slips or formal proof of domicile. …Analysis shows a significant relationship between subjective and objective measures of documentation requirements as a barrier to account use, even after accounting for GDP per capita (figure 1.14). Indeed, the Financial Action Task Force, recognizing that overly cautious Anti–Money Laundering and Terrorist Financing (AML/CFT) safeguards can have the unintended consequence of excluding legitimate businesses and consumers from the financial system, has emphasized the need to ensure that such safeguards also support financial inclusion.

One would hope leftists, who claim to care about the poor, would join with libertarians to roll back absurd anti–money laundering requirements. Heck, one would hope conservatives, who claim to be against pointless red tape, would join the fight as well.

Here’s the video I narrated on the general topic of money laundering laws. I think it makes very good points, but I wish these data had been available when I did the video so I could explain in greater detail how low-income people are the main victims.

Last but not least, I should point out that statists frequently demagogue against so-called tax havens for supposedly being hotbeds of dirty money, but take a look at this map put together by the Institute of Governance and you’ll find only one low-tax jurisdiction among the 28 nations listed.

P.S. You probably didn’t realize you could make a joke involving money laundering, but here’s one starring President Obama.

Politico: Opponents Are Winning the Debate over ObamaCare ‘Exchanges’

Politico has a great story about how free-market groups are defeating ObamaCare Exchanges at the state level:

Conservatives like John Graham of the Pacific Research Institute have also been touring states with the platform provided by the American Legislative Exchange Council to help kill off state-based exchanges, a key piece of health reform that will help millions of people purchase insurance coverage — often with federal subsidies — starting in 2014.

“Our approach has to be absolute noncollaboration, civil disobedience — well, not civil disobedience but resistance … by whatever means,” said Graham.

Two years into the law’s implementation, conservative emissaries have contributed to impressive stats. Almost all red states are holding off on exchange legislation at least until the Supreme Court decides on the Affordable Care Act, and in most of those states, exchange-building legislation has crawled to a stop.

I have to point out three problems with the story, though. First, the Cato Institute and I are libertarian, not conservative.

Second, the article identifies Cato, ALEC, and AFP as being “funded partly by the Koch brothers.” Even though these groups have no direct or indirect financial interest in this issue, and even though Cato currently receives no funding from the Kochs, and even though Cato is currently fighting a hostile takeover attempt by the Kochs, I guess that’s a fair categorization. What isn’t fair is how the article fails to disclose that Leavitt Partners has a direct financial interest in this issue: Leavitt is getting paid by states to help implement Exchanges. (See “Health Exchanges: A New Gold Mine,” Politico, June 27, 2011.) It would have been nice if the article mentioned that all the moneyed interests – including health insurance carriers and many Chambers of Commerce – are on the pro-Exchange side. But it at least should have mentioned Leavitt’s financial interest.

Third, I’m not sure what basis there is for saying “most legal experts think” the federal government can offer tax credits and subsidies in federal Exchanges. My co-author Jonathan Adler and I have been following that debate closely. Only a handful of scholars have even commented on the issue, and they are fairly evenly split. If I’m unaware of others who have weighed in, I’d like to hear about them.

The Egg on the EU’s Face

The European politicians love to talk about the “huge” benefits of membership in the European Union. It is certainly true that the “single” market between the EU member states has brought tangible benefits, but those have been declining in importance as technological change made access to services and capital cheaper and easier, and trade liberalization progressed world-wide. Moreover, as the Brussels-based EU bureaucracy expanded, economic liberalization gave way to regulation that helped to strangle European growth (see the graph below). Consider the latest absurdity to emerge from Brussels—a poultry regulation, which aimed to increase the comfort of the egg-laying chickens, but resulted in a drastic cut in egg production and a 100% increase in the price of eggs.

The EU bureaucracy may not appreciate the problem of unintended consequences, but ordinary Europeans are beginning to realize that the EU no longer is what it used to be—a byword for prosperity and stability. In the Czech Republic, for example, a record number of citizens do not trust the EU (63 percent) and the EU Parliament (70 percent). If the EU elite persist in killing jobs and growth, it may bring about the ultimate unintended consequence—the break up of the EU.

Suing the IRS for Fun and Liberty

This blogpost was coauthored by Cato legal associate Chaim Gordon.

On Tuesday, the Institute for Justice brought a lawsuit to stop recent IRS regulations that require independent tax return preparers to pay a yearly registration fee, take a competency exam, complete 15 hours of IRS-approved continuing education every year, and possibly subject themselves to mandatory fingerprinting. Our colleague Dan Mitchell observed two years ago that these regulations appear to be the result of “regulatory capture.” As the Wall Street Journal explained:

Cheering the new regulations are big tax preparers like H&R Block, who are only too happy to see the feds swoop in to put their mom-and-pop seasonal competitors out of business.

Indeed, as others have already noted, one of the architects of this licensing scheme is Mark Ernst, former CEO of H&R Block. These protectionist regulations were even cited by UBS as a reason to buy H&R Block stock, on the grounds that they will “add barriers to entry (or continuation) for small preparers.”

In defending the need for these regulations, IRS Commissioner Douglas Shulman’s most insightful explanation was that “in most states you need a license to cut someone’s hair.” This statement undoubtedly caught IJ’s attention because that “merry band of litigators” has devoted itself to fighting such senseless and corrupt regulations (including in hair salons).

But these regulations are not just misguided and corrupt.  They are, as IJ’s complaint contends, simply beyond the IRS’s regulatory authority. The IRS claims the power to regulate tax return preparers under 31 U.S.C. § 330. But that statute only authorizes the IRS to regulate “the practice of representatives of persons,” and tax return preparers do not represent persons before the IRS and do not “practice” in the sense that lawyers do when they appear before a court. Taxpayers are only “represented” when they authorize someone to act on their behalf before the IRS in an exam, controversy, or litigation setting. This is especially clear in light of the statute’s plain purpose, which is to ensure that such representatives have the “competency to advise and assist persons in presenting their cases” (emphasis added).

Moreover, under the IRS’s expansive reading of the law, which puts under the agency’s purvey “all matters” connected with a “presentation” to the IRS, anyone who advises another about the tax aspects of a particular transaction could theoretically be guilty of unauthorized practice before the IRS. Congress clearly meant no such thing. In fact, Congress specifically amended 31 U.S.C. § 330 to allow the IRS to regulate the provision of written advice that the IRS “determines as having a potential for tax avoidance or evasion.” Such additional authority would be unnecessary under the IRS’s broad reading of the original statute.

IJ had previously warned the IRS that its then-proposed regulations were unfair to mom-and-pop tax return preparers and exceeded its statutory authority, but the IRS neither altered its plan nor explained why it thinks that it has the authority to regulate tax return preparers in the first instance. Now the IRS will have to explain its power grab to a federal judge.

Watch IJ’s excellent case launch video.  IJ attorney Dan Alban explains the case in an editorial here and in an interview here.

Why Is Massachusetts Trying to Ban Truthful Information About Hedge Funds?

The Massachusetts Uniform Securities Act prohibits general solicitation and advertising by anyone offering unregistered securities, ostensibly for the purpose of furthering state and federal disclosure schemes. Yet this ban on public communications has been applied so broadly that it has undermined those purported disclosure goals.  For instance, the ban has prevented individuals who have no interest in investing in any security – such as journalists, academics, students, and others who are not wealthy or financially sophisticated – from receiving truthful, non-misleading information about hedge funds.

In Bulldog Investors v. Massachusetts, an investment company maintained an interactive website that provided information about its products. Because Bulldog was not registered in Massachusetts, however, the State filed an administrative action against the firm, demanding it take down its online content.

In response, Bulldog joined a group of other firms and individuals – including some who have no interest in investing but wish to read the website information – in a lawsuit claiming that the Massachusetts ban violates their First Amendment rights. The Supreme Judicial Court of Massachusetts upheld the ban, so the plaintiffs have asked the U.S. Supreme Court to take the case.

Cato, along with the Competitive Enterprise Institute and a group of journalists and academics, has now filed an amicus brief supporting that request and arguing that the Massachusetts law is an unconstitutional ban on free speech. We show that the state’s claim that the ban furthers a larger federal regulatory scheme ignores the judgment of many federal officials (from both parties) who have concluded that such bans undermine these goals.

The state’s alleged disclosure interest is just a pretext for coercing companies to register in Massachusetts, and is therefore an unconstitutional attempt at circumventing federal preemption. But even if the ban furthers a legitimate state interest, it is so broad that it is has substantially chilled both truthful, non-misleading commercial speech and noncommercial speech alike.

A law so repugnant to the First Amendment cannot stand.

Credit Where It’s Due: Sarah Kliff Edition

On Friday, President Obama announced an “accommodation” to those who object to his contraceptives mandate. Since then, I have been astonished at how many reporters have portrayed the president’s announcement as some sort of compromise, even though it would not reduce – not by one penny – the amount of money he would force Catholics and others with a religious objection to spend on contraception.

In fact, the only reporter who seemed to grasp this may also have been the first out of the box. The Washington Post’s Sarah Kliff:

“If a charity, hospital or another organization has an objection to the policy going forward, insurance companies will be required to reach out to directly offer contraceptive care free of charge,” one administration official explained…

Numerous studies have shown that covering contraceptives is revenue-neutral, as such preventive measures can lower the rate of pregnancies down the line…

“Contraceptives save a lot of money,” a senior administration official argued.

The catch here is that there’s a difference between “revenue neutral” and “free.” By one report’s measure, it costs about $21.40 to add birth control, IUDs and other contraceptives to an insurance plan. Those costs may be offset by a reduction in pregnancies. But unless drug manufacturers decide to start handing out free contraceptives, the money to buy them will have to come from somewhere.

Where will it come from, since neither employers nor employees will be paying for these contraceptives? That leaves the insurers, whose revenues come from the premiums that subscribers pay them. It’s difficult to see how insurance companies would avoid using premiums to cover the costs of contraceptives.

The Post’s subsequent coverage would have benefited from such scrutiny of the president’s spiel. If I missed such scrutiny in the Post or elsewhere, I hope someone will let me know.