Here’s another way to look at it. The Fourth Amendment to the United States Constitution protects your privacy from government intrusions. If the police suspected you of money laundering or anything else, they would need a warrant to legally see your private papers. The “know your customer” proposal forces banks to become agents of the police, spying and reporting on their own customers — without ever obtaining a warrant. It’s an appalling attempt to do an end run around our constitutional rights of privacy.
In essence, under the proposed rule the banking system would act like a network of police spies — not unlike the neighborhood committees of retired party members in communist China (known as a “a bridge between the government and the masses”). Those committees of elderly women with bound feet were known as the “KGB with tiny feet.” They padded about to report their neighbors for having too many children or a dirty house or harboring “capitalist roaders.” There are differences between the two systems — “know your customer” isn’t intended to support a Communist Party program. But there is a key similarity: in both systems, an overly ambitious program of regulation requires the government to force the private sector to help by reporting on everybody, everywhere. This is a sure sign that the government is on the wrong track.
Hunger for centralized information collection by the state means the ambitions of the government have exceeded its capabilities. Individual rights to privacy take a back seat to rhetoric about pursuing some “social good.” The government would sacrifice the rights of all to catch a tiny number of alleged wrongdoers — of the 7,300 defendants charged with money laundering from 1987 and 1995, only 580 were convicted, in almost all cases the “small fry.”
Our legal system is choked with paperwork offenses like money laundering. A wide range of behavior that violates no one’s rights has been criminalized. And so it’s no surprise when normal methods of investigation become almost useless. It’s no bad thing, either, or almost everyone would be in jail for something. The problem is too much law, not too little surveillance. The answer is not to treat ordinary people like money launderers but to focus the resources of the legal system on behavior that hurts others in a direct way.
In a free society, there’s no need to turn private businesses into spy agencies. Most laws are self‐reporting. If I murder someone, his relatives will demand justice; if I defraud him, he will complain himself and do his best to see that I am caught; if I spill foul chemicals into his stream, he will complain loudly when he finds out. There’s no need to force bankers, grocers or neighbors to report that kind of behavior, or to threaten them with the forfeiture of their property if they don’t. Using neighbors or private businesses as spies is a sure sign that the state has departed from the central job it is supposed to perform — protecting our liberties and rights.
The complexity of our lives and the government’s lack of knowledge about them are a bulwark against authoritarianism that is as important as the Constitution. As James C. Scott noted in Seeing Like A State: How Certain Schemes to Improve the Human Condition Have Failed, all through history governments have struggled to collect more information about citizens. But the more they strive, the more unlikely it is that their goals can be compatible with the complex, fast‐moving life in free society. No American citizen should be treated like a suspect. The “know your customer” rule has no place in a free country.