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Financial Surveillance: The Ultimate Surveillance Black Hole?

Cato Surveillance Week 2026, Day Two — October 13, 2026

Moderator: Patrick G. Eddington, Senior Fellow, Cato Institute
Panelists: Nicholas Anthony, Research Fellow, Center for Monetary and Financial Alternatives, Cato Institute; Carole House, Nonresident Senior Fellow, GeoEconomics Center, Atlantic Council; Aaron Klein, Miriam K. Carliner Chair and Senior Fellow in Economic Studies, Brookings Institution

Patrick Eddington: Well, welcome to day two of Cato Surveillance Week 2026. I’m Patrick Eddington, senior fellow here, at the institute. Just a very, quick, note to our folks who are out there watching right now. You’ve got the ability to submit pages for this, or submit pages. Submit questions. Not enough sleep. Bear with me. Submit questions via the webpage, Facebook, YouTube, and X, and, we will of course work those questions in as we go through the questions that I’ve already prepared for our panel, and I would like to take this opportunity to introduce them at this particular time. I am joined by my Cato colleague, Nick Anthony, who is a research fellow in the Center for Monetary and Financial Alternatives. We’re also joined by Carole House, non-resident senior fellow in the Geoeconomic Center at the Atlantic Council.

And finally, Aaron Klein, the Miriam K. Carliner Chair and senior fellow in economic studies at the Brookings Institution. My thanks to all of you for carving out the time to be with us today. I’m especially excited about this particular panel because this gets into an area of surveillance that I will candidly admit I have not spent nearly as much time in. Certainly not nearly as much time, as Nick has. And so I’m hoping that we’re gonna really be able to kinda give folks a sense of, you know, why financial surveillance exists, why we need to have it, and whether or not there are things that perhaps need to be done to alter, how it’s actually carried out in the United States here. So I just wanna open with kind of the most obvious question is, why was the Bank Secrecy Act enacted in the first place in 1970?

I’ll just open that up to any of you who wanna kinda jump in and give us the quick and dirty on that.

Nicholas Anthony: Well, I think it kinda depends on when you’re asking that question because in 1970, this originated with talks in Congress about concerns about tax evasion, and that was a really pressing concern where law enforcement was coming into congressional hearings through ’68, ’69, ’70 saying Americans are moving their money to Swiss bank accounts, and it’s difficult to get that money, to trace it, to find out where it’s going, and to find out if they owe taxes on it. But even before that was also the case where people were allegedly, evading taxes during World War II, and that started some of the early rumblings of this. Then fast-forward, you have the war on drugs. You have the war on terror. Today, there’s concerns about immigration, about cryptocurrency, about financial fraud.

And with each time, there’s been new additions put on the plate in terms of what’s being followed, what’s being traced. But the core theme has been law enforcement has faced a problem, some sort of crime, and said that warrants are too difficult to get or take too much time to get. And so what they wanted was sort of a fast pass, an all-access exclusive to be able to get at financial records to then track down and hopefully stop the bad guys.

Aaron Klein: Of course, there was an attempt to get organized crime, the mafia- I wondered about that in the ’60s in there. Keep in mind, Al Capone, right, who at one time was the, you know, in theory, the mob boss of the country, didn’t go to jail for murder. He didn’t go to jail for running an organized crime syndicate. He didn’t even go to jail for bootlegging. He went to jail for tax evasion. So the idea in part was tax evasion, exactly as Nick said, but another corresponding part of it was the mafia, which was organized crime focused on earning profit, right? There was– The mafia wasn’t just in it to look cool and gangster and be immortalized in Hollywood, right? It was, it was making money. Much of that money was going overseas back to Italy, although other parts of that money were staying in the US. And the idea was it’s really hard to convict people sometimes of brutal crimes.

It can be a lot easier to convict people of financial crimes. And so it was a combination of tax evasion and going after the mafia in the ’60s. Bobby Kennedy was, w- was spearheading that at Department of Justice. Richard Nixon was a law and order president proposing to crack down on crime, and so it was a combination. Organized crime de- deserves a mention here in the, in the genesis of it.

Carole House: I’ll plus one to everything. Of course, they’re right in highlighting that, this understanding that most crime is or involves financial crime. Everybody may not believe in the same ideology or leaders or forms of govern- governance, but, most folks believe in money and need it. In fact, in most cases, crime is the deliberate purpose, in fact, for, what the conduct of it is. And it certainly is needed to be able to fuel and sustain those operations, hence why the tax evasion and stopping organized crime-related money laundering activity was really the nexus and the origin story, of the Bank Secrecy Act coming out of the ’60s. And then, of course, the real resurgence in growth, especially of additiona- and expansion of additional requirements that came after 9/11. And then just highlighting what– So then what is the Bank Secrecy Act? And it is.

Like, it just, it requires that certain records exist and be kept, and then that certain information gets reported to the government. So those kinds of distinctions, I know we’re gonna get into the weeds on the differences between there. But basically, like, it puts a lot of parameters around the, around the fact that these records have to be highly useful in criminal tax or regulatory proceedings. So all of that really led to this, to, like, the creation of the Bank Secrecy Act framework.

And I know I have a lot of thoughts and, feelings that Nick and I got to testify about this recently, about how there’s a lot of overlap between things like the anti-money laundering regime, but also the rest of what you need in revenue mechanics and- Other regulatory requirements, to allow for things like civil proceedings, trying to get lines of credit, you know, maintaining tax regimes, dealing with sanctions evasion, all of which have a massive amount of overlap with anti-money laundering requirements. So it’s, it’s hard to talk about one without talking about the others because requirements of things like identity and knowing who your customers are sit in things like counter fraud and taxes and, you know, offering, and I mentioned extending lines of credit the same way that they do in AML.

So there’s a lot of different overlap that I also just wanted to give a little bit of a bridge to since I know we’ll be talking about it a bit today.

Patrick Eddington: Well, let’s, let’s get into the weeds, excuse me, a little bit here. I see acronyms like SAR, CTR, all the rest of these kinds of things. If you all can kind of break it down for us, what exactly are the kinds of things that need to be reported? Who do those reports go to? I mean, is there an automatic reporting mechanism essentially? You know, one of the things that I’ve, I’ve been kind of wondering about is, you know, with the Patriot Act changes, one of them, of course, was this $10,000, essentially trigger, if you will. And one of my questions was, if I happen to deposit $9,999 and 99 cents in my bank, is that gonna get me flagged? My guess is the answer is yes, but I’d, I’d like for us to kinda get into if you are an average consumer, a user of a, of a bank, a credit union, whatever your preference is, what’s getting reported, right? What are they keeping track of?

And do you actually have to be the target, I think this is the most important thing, do you actually have to be the target of a criminal investigation, for example, in order for any of these things to kind of basically kick in? So I’ll just open it up to anybody.

Aaron Klein: So let me, let me, let me start and, I won’t get the whole panoply of acronyms, but I’ll, I’ll try to get a few. A suspicious activity report, SAR, is filed by a bank, when it sees something. The thesis of anti-money laundering, AML, is that a bank should know your customer, KYC. And so when you know your customer, if your customer is doing something that’s suspicious, you’re supposed to file a report to law enforcement. A lot of people think the goal of this regime is to keep criminal activity and criminals out of the banking system, to debank them. That is not the goal of the regime. The goal of the regime is the opposite, which is to be able to find, use following the money to find the criminals. So a bank absolutely can bank a known criminal. It just has to report that. If they’re not sure they know you and something’s suspicious, they file a suspicious activity report.

If you deposit a set amount of cash, that is the $10,000 limit, which was actually set in 1970, unindexed for inflation, they have to file a currency transaction report, CTR. By the way, governments are exempt from CTRs, and I’ll get to why that’s important in a second. If you walk into a bank and you at one point pull out $9,999 and 99 cents, that in and itself is suspicious because it seems like you know something about $10,000 and you’re just trying to avoid under it. If you just one time pull out 9,000 bucks once, that itself is not suspicious. If you are constantly pulling in and out numbers around just under the $10,000 limit, that is suspicious. It is actually a crime itself called structuring. I will tell you two people who went to jail for structuring who should be well known.

In the political circle, it would be Denny Hastert, the former Speaker of the House who just passed away, who pled guilty not to the crimes of child molestation for which many accused him, but of the stru– fact of structuring, that he knew of this limit and he was repeatedly withdrawing $9,000, in a documented way and sending it to a specific person who also apparently had accused him of assault. So that was structuring. The second person, who’s actually the one I think more Americans are familiar with, is The Situation, which is a Jersey Shore character for those of us who were not, in hip MTV reality television. And The Situation was the smartest guy on the Jersey Shore, in my opinion, which is he was the only guy who knew this $10,000 limit existed because the Jersey– Snooki was not deep in the weeds of bank regulation.

But he also thought, “If I got all this money from DJing and I got a $15,000 DJ contract and I got him to give me a check for 9,900 and then a check for 5,100, I could fi– deposit both of them and not report it as tax revenue. And nobody would know ’cause I’m the smartest guy on the Jersey Shore, and I can outsmart the government.” And actually, when he pled guilty to tax evasion, part of the plea agreement was structuring because he was depositing his checks in that way to avoid taxes. So short answer to your question, Patrick, the exact dollar amount you said, yes, they’d file a SAR. Long answer, if you once or twice in your life do that, probably not. Repeatedly, not only will they file, if you are future investigated, that itself is a crime. Nick, Carole, anything?

Carole House: I’ll, I’ll, I’ll chime in on kinda some of the holistic requirements there, ’cause I know you hit on CTRs. I know, like Aaron mentioned, the, just the plethora of acronyms that we have here, and we love our acronyms in regulatory land. So currency transaction reports, or CTRs, are some of those obligations for cash or like so coin and paper currency. And as he mentioned, there’s these requirements, to be able to report that information proactively to the government, whenever there’s transactions, either depository or withdrawal for over $10,000. So as he mentioned, like that kind of a cash transaction would not inherently- Would not necessarily inherently trigger law enforcement scrutiny if it’s a one-off.

If it, if it gives reason to suspect to the institution, to like whatever bank that you’re at, that it looks like it’s designed in order to evade Bank Secrecy Act reporting and record-keeping obligations, that’s where the structuring, where the stru-structuring suspicion, and criminal violation or suspected criminal violation potentially kicks in and why there might be additional scrutiny from the institution and then more proactive reporting, potentially in the form of a suspicious activity report, or not. Like, a‑and hey, if you brought in, like, if you brought in five hundred dollars of cash and it was covered in blood, like, that might, trigger suspicious activity reports. There have been SARs like that.

And like, so there’s– it– there’s a lot of different other factors that get, that get brought into the consideration from the financial institution and why I wanted to really reinforce, since your question really tees up the set of, like, what information gets collected by the institution and then what gets proactively reported to the government, since those tiers, implicate different levels of privacy consideration and what information is made available to whom under what conditions, permissions, and protections, which is really what privacy means. When you think about things like the NIST privacy framework, it doesn’t typically mean the complete absence of data. It may mean that there is very highly sensitive data, but who should be able to get access to it and under what controls and permissions? And this is where you have some things that the institution collects about you.

For example, KYC. I don’t know if every– Like, a lot of people are familiar with KYC or know your customer requirements. That’s where certain information, for some financial institutions have to collect certain information about l- you, like your name, a physical address, not a PO box, an identifier number and information, versus other kinds of institutions like cryptocurrency exchanges and money services businesses and transmitters like the Western Unions of the world don’t have explicit rules-based requirements like name and identifier, and it’s more risk-based on the kind of information that you collect under AML obligations.

Now, I’ll still point to the fact that there’s other things that still have to be collected, like let’s say for tax and Title Twenty-six purposes, which are separate from AML, but there’s a lot of overlap, with things like identity information, so we can get into some of the weeds there. But a lot of that information gets collected, under AML. Then it would get reported in certain contexts, like we talked about CTRs, FBARs, foreign bank account reporting obligations, so if you hold a certain amount in foreign, in foreign, banking institutions. And then of course, suspicious activity reporting, where the idea is that the institution suspects or has reason to suspect that some kind of money laundering activity, or other, criminal violation has occurred.

There’s a lot of predicate offenses to money laundering, over two hundred and fifty predicate offenses, so things like fraud and violations of the Computer Fraud and Abuse Act, one of my favorites as a former cyber nerd. And you know, whether it’s cartel activity or human trafficking, just tons of different kinds of violations serve as those predicate offenses to subsequent money laundering. So there’s a mix of, a mix of different thresholds, different kinds of information, depending on the kind of financial institution that you are. Check cashers have to report different information than banks, than broker-dealers and futures commission merchants do. So it’s a mix of different things depending on the kind of instrument, the kind of activity, and whether it’s about suspicion of illicit activity or even things like CTRs, or eighty-three hundreds.

Basically, if you walk in with ten grand in cash or over ten grand in cash to, like, to purchase a car, for example, that has to get reported by not even just financial institutions, but by a car dealership. And those relate not just to anti-money laundering, but also for tax and revenue purposes. So there’s a lot of different overlapping frameworks here, and I’m sure Nick wants to comment. I just wanted to give a little bit of an overview of different kinds of obligations and some of their purposes.

Nicholas Anthony: Thank you. Well, just a couple things. I’ll, I’ll try to be brief because Aaron and Carole really hit all the headline points. One thing to Carole’s last point, we’re probably gonna be talking in the context of banks and credit unions through most of this conversation, but she’s absolutely right. Under the law, financial institution as a term means a whole laundry list of things, and that includes car dealerships, pawn shops, precious metal dealers, and the like. So it’s not just banks and credit unions, but that kinda dominates the conversation, and that’s where the bulk of this is. And then back to one of your last questions, Pat, it is really important to be clear that really in most cases, most people are not subject to a formal criminal investigation to be caught up in all of this. They’re not being reported because a cop or an FBI agent came knocking.

That’s the default of the system is that you go over this threshold or you do something a little strange, and then it gets reported, and then later something might happen with that. And then to my last point is there’s a lot of benchmarks that are throughout this. There’s the predicate offenses. There’s things like the thresholds as ten thousand dollars and others. But a lot of this is also sort of a smell test. One of the most common reasons to have a suspicious activity report filed on a customer is not because they came in and, cops were chasing them into the bank or that the money’s covered in cocaine or anything like that. Rather, it’s the bank doesn’t know where you got this money from, or they’re worried that you might be evading the currency transaction report by staying under the ten thousand dollars.

There’s been cases in the past of, farmers just coming in, and they happen to make close to ten thousand dollars at the farmers’ market, and that was kind of their average revenue that they were bringing in. And it wasn’t that they were committing a crime on purpose or anything like that, but it’s just that’s where they fell. And so the banks kinda have to take a risk assessment on the spot to say Is this bad? Is this okay? And a lot of times it might not look very bad, but they’re gonna report it anyway because that’s the safer option for them, to just give all the information over to FinCEN so that it can go in the database so that law enforcement across the country can query it, and then they have their, theirselves covered and they don’t have to worry quite as much about it.

Patrick Eddington: I wanna pick up on that particular thread, and then I wanna turn to a question that we literally just had come in here. This sounds to me like essentially a form, a statutory form of outsourcing a law enforcement function to a third party. I have deep concerns about that, essentially on multiple levels. But what I’m trying to kind of really get a handle on here, and you’ve, you’ve, you’ve touched on this to a degree, but I wanna see if we can kind of narrow this down. If a particular deposit that a person makes subsequently triggers a law enforcement investigation that does not result in charges being filed, right? Will that person who is the subject of that investigation ever be notified essentially that that took place?

Aaron Klein: No. So I’m pretty confident. I’ve had SARs filed on me. And I mean, I won’t know for certain, but I’m, I’m highly confident. You’ll never know. In fact, judging on the millions of SARs that have been filed, there’s a good chance that all four of us have had SARs filed on us. At one point after 9/11, buying a one-way plane ticket was briefly considered suspicious. Now, did everybody who bought a one-way plane ticket get filed on? But keep in mind, your credit card, people think they have a Visa credit card.

In fact, the Federal Reserve, who’s supposed to be regulating this, is so stupid that in one of their governor’s ethics requirements, and of course, we know the Federal Reserve doesn’t really have ethics based on, enforced ethics based on this governor, who was subsequently illegally and unethically trading, reported that she had a credit card loan from Visa, and the Fed Ethics Office and the General Counsel’s Office was so stupid, they actually published that. Nobody has a credit card loan from Visa. Visa doesn’t lend you any money. A bank lends you money. A bank uses Visa or MasterCard or Discover or American Express to process. Well, American Express is actually a bank. But like, you know, anybody who thinks they have a loan from Visa, you’re wrong. And anybody at the Federal Reserve who thinks Visa lends money, you should be fired- for gross incompetence.

But that bank, you’re a customer of that bank if you have that bank’s credit card, and that bank, if they see something s- suspicious. So the answer is no. The second point, Patrick, I just wanna make is you have this predicate that a SAR triggers a law enforcement action. My experience is a law enforcement lead leads to a query of the SAR database. So in theory, you might say, “Oh, you know, this elderly woman walked in and said, ‘This unre- related person named Aaron Klein has put himself on my bank account, and I’m afraid I’m getting elderly abused and they’re taking money.’ ” Because SARs isn’t just about, you know, terrorism or mafia. It’s also about elder abuse. It’s actually one of the fastest-growing forms of financial crime.

And you would say, “Oh, well, they’re gonna file something,” and then that county local elder abuse authority is gonna come pick up the phone and go and do an investigation, right? That’s not usually, from my experience, what happens. It may be what should happen. What’s more likely to happen is for some reason, law enforcement gets a tip and they go, “Oh, let me see if anybody’s filed on Aaron,” and it’s the other way around. But nobody knows what’s in this giant black box, and I If somebody in Congress required everybody who’d gotten a SAR to be notified, I suspect we’d be getting a lot of mail. Like, a lot of mail. One other- And there- Sorry, go on. No, go ahead, Nick. I’m sorry.

Nicholas Anthony: Well, just very quickly, I’ll say, there is a key reason for this as well. With suspicious activity reports specifically, they are confidential. And that is by law, so you cannot be told by your bank that there was a problem with your transaction that led them to file a suspicious activity report. They can’t even tell you that one exists. And it even goes further because of the concerns within banks as a regulated institution that they will not tell that internally to staff. So if you have a problem and you call customer support, there’s a high likelihood that that customer support person will not even know what’s going on there, that that was the key concern.

They might have something, like a flag to their anti-money laundering compliance department but they won’t have the key details that let you know that, “Hey, if you do a transaction like this, it’ll actually trip up our system, even though you’re perfectly innocent, nothing wrong, but it caught these flags.” And that’s been especially unfortunate within the debanking conversation that’s really heated up in the past two or three years or so, where we’ve seen a lot of people saying they feel like they’ve been left in the dark, and it’s very possible that that could be one of the drivers there. But I’m sorry, Carole, please.

Carole House: And I lo– and I’m glad that you brought up de-risking, in this context. I think, didn’t the Fair Like, the Fair Credit Reporting Acts came out, like, the same year at the same, around the same time. Like, it’s really interesting thinking about the alignment of all of these different mutually, what should be mutually reinforcing frameworks, and where it’s really important for us to try to distill what is a policy issue, what is an authority issue. I know, of course, I know there’s a lot of feelings about what is constitutional, so sitting on constitutionality to policy, but then also where implementation is broken in some cases.

And where I think in a lot of cases there are instances of r- of automated redlining and de-risking, certainly that’s happening based on, too arbitrary set standards by institutions, which in most cases I would say is actually, it’s an implementation problem, not a policy problem. The point of the BSA isn’t to, isn’t to drive arbitrary de-risking. But of course, if there is a massive implementation issue, we need to look really hard at what the policy is that’s driving some of this.

I will also say that I think that there’s times where AML gets painted as the bad guy, and the boogeyman behind why, a lot of this is happening, which a lot of very undesirable outcomes, of arbitrary de-risking, when in fact the determiner is actually much more predicated around credit and the fact that many of those accounts are, like, low do- like, low amounts, thresholds that institutions just don’t find, like, worth, being able to bank, and so they blame AML. So I’m not saying that it’s not worthy of looking at AML. It de- it demands reform, it must.

But it really requires looking more holistically at how a lot of these different requirements are intersecting, and how much of this is a policy issue, how much of it is more implementation, where enforcement and things like defensive s- and defensive filing are miscalibrated and driving the wrong kinds of incentives in what we want for implementation here. And Pat, you really brought up, like, I know a really important issue, driving a scalpel into the heart of this, of you highlighting that there’s a big question here around how much should be on an institution and the private sector versus how much should be a law enforcement or a government-focused, requirement and obligation. And of course, the information that gets reported goes to FinCEN directly. Now, that, now, FinCEN is a regulator.

And we, oh, sorry, we, I used to be at FinCEN for years, just for context, for anyone who doesn’t know me who’s listening. But FinCEN makes a lot of that information available to law enforcement, ranging from federal all the way down to state and local at differing, varying levels. There’s a lot of controls and guardrails and restrictions about getting access to some of that, sometimes too much so that, law enforcement can’t access the data. And then i- in other cases, like, a lot of, a lot of our key partners were able to get access to and use that data regularly. Like IRS-CI published a great fact sheet on the utility of Bank Secrecy Act data in their investigations.

But I’ll, I’ll just close on this to highlight that I will, I would argue to defend the multi-tier system that we have and why we want financial institutions to be the ones keeping some of those records on hand, which are useful for them for a lot of reasons. They’re also useful in civil proceedings, as well as things like tax purposes and other kinds of issues, like if you are dealing with a contentious divorce or bankruptcy filings and lots of things. A lot of those records that are needed for AML are also really needed for other kinds of civil process. But then the fact that they are the ones that are best placed to understand the nature of the customer relationship is why they are the ones that sit with the requirement to detect suspiciosity, and then report that into FinCEN.

But then also why there are very strict guardrails and criminal violations for if disclosure of those confidential SA- SARs, as Nick mentioned, happen, there have to be those critical protections that are in place. I just wanted to give a little bit of a, of a shout-out to the fact that I think that that multi-tier system is needed, because those financial institutions really are on the front lines of understanding how they’re being exploited. But then we do need to tee up that information in ways that are useful to law enforcement. But it does, it is worthy of looking at how we can make that information more useful.

Patrick Eddington: I will, I will circle back to, another question I have. Well, actually many questions that I have that are law enforcement related. But we’re getting some, questions in from, our viewers. One of these is a relatively niche question, but because my wife is a real estate broker, I’m gonna ask it because I’m kind of interested now at this point. And the question is this: Do escrow companies report real estate transactions and distributions to sellers and third parties? Does anybody know the answer to that question? We have an audience question that has maybe stumped the panel. This would be a first for me.

Carole House: I’m trying to recall exactly what all of our obligations are for escrow. And of course, like if some of the Like, ’cause some entities that do engage in escrow activity, like are regulated financial institutions, but also there is an exception, for, oh gosh, it’s the integral exemption for like payment processors. Basically, there are some companies where if in the course of providing a key service or business, they may have an exemption for basically receiving and transmitting funds. Escrow was one of the administrative rulings, as a determining, as a determining factor that that could be like an integral service that is provided that would exempt you from needing to register as a money transmitter.

So, I don’t wanna give a blanket answer because there may be different categories of institutions that do still fit as a financial institution separately, but I, anyway, so I won’t bother this, yeah, I won’t derail the panel by getting into the weeds, but I’d be happy to follow up, and learn a little bit more about the specific facts and circumstances here.

Aaron Klein: I think what the question highlights is twofold. Number one, real estate’s often used as- It is a method to stash illegal and ill-gotten gains. If your realtor’s in, say, the South Florida market and is buying properties for people from Russia that’s probably that situation. Unfortunately Because of what I would call weak beneficial ownership rules, which have been hollowed out by this administration who is very soft on cri- I mean, it is hard to imagine a softer on crime Treasury Department right now than the way s- Treasury Secretary Bessent has gutted beneficial ownership requirements passed on a bipartisan basis by, in Congress designed to go after Russian oligarchs. Quite interesting at the same time the Treasury Department is selling, fuel to f- fuel to fuel Putin’s war, right?

On the other hand, if you’re thinking about the type of escrow that I would- I’m gonna presume the four of us have on our properties, where you pay a mortgage person or mortgage servicer who’s often a bank and they’re sitting on escrow and it’s this same thing that you get this annoying 1099 on your interest income from the little money that sat on your escrow. That’s generally a covered financial institution.

Nicholas Anthony: I think one thing that, problem that the question highlights is that criminals are smart, particularly when you get to highly organized crime. Let’s hold the situation aside. And if there’s a weakness in this apparatus, they’re gonna flow towards the weakness. And what you’re gonna end up with is a very expensive and, costly AML compliance regime that’s essentially complying people that are compliant, and then a little loophole where organized crime is gonna be able to go to move effectively money, some of which is under this beneficial ownership, much of which can be handled under real estate. And so it’s a wise question to focus on that, and part of the problem is we keep kind of It’s a cat and mouse game. You expand the net, the criminals move. You catch them, the criminals move. The outcome of that is a net that keeps capturing more and more and more people.

And you wonder the question like, you know, “If we’re all caught in this net, what’s the point?” Yeah.

Carole House: Well To- And to- I’ll just highlight, I totally forgot that, y- yeah, I was focusing on escrow, not real estate. There was the residential, like, there was the real estate rule that was being proposed and being implemented right now. It’s been paused and vacated. Th- there’s some litigation that’s currently ongoing, and FinCEN has pa- has paused it, and I don’t know if they’re gonna end up just repealing it en- entirely. So a really great point, on the mortgage side. I wasn’t– I was focusing much more on escrow than I was on the real estate side.

Patrick Eddington: So Aaron, you said earlier that this $10,000 limit, the original one that was imposed via the statute, there’s no indexing to inflation, right? So has that potentially made things, Has it contributed to the additional surveillance that we’re talking about here?

Aaron Klein: Oh, absolutely. It’s insane. I’m an economist. Economists hate unindexed numbers. If you’d indexed $10,000 to inflation in 1970, you’d be around $75,000. So when they originally passed the law, you could walk into a car dealership, we mentioned cars earlier and buy a fully loaded brand-new Cadillac in cash and not trigger the CTR. In fact, you could buy two, right? Celebrate your new Cadillac. In this situation today, right, you can’t buy a used Chevy Bolt and not trigger a CTR. So this type of creep, right, i- i- is structural and endemic in this situation. Whatever you wanna say about the original purpose of it, and we can debate if it was a good or bad idea or this or that, it was not designed to catch people buying cars in cash. Even fancy cars, even cars that mobsters drove. Now it would catch any American buying even many used cars, most used cars in cash.

And so it’s, it’s It creates a very costly structure. Part of the problem here, a- and Carole and I kind of disagree a little bit on the utility of this multi-model structure. And my disagreement on that roots from an experience I had where I was discussing a law enforcement officer about this growth in stuff. And I said, “Look, you know, I’m, I’m, I’m a simple economist. I, everything I need to know I learned in econ kindergarten,” right? You know, there’s marginal cost and marginal benefit, and, you know, these CTRs have a marginal cost, and when their marginal cost exceeds their marginal benefit, we should stop it. And the law enforcement said, “What do you mean? There’s a cost.” And I said, “Well, you know, there’s a cost.” He says, “No, there’s not. I just query the database. Doesn’t matter.” And from law enforcement’s point of view, there’s no marginal cost to filing.

There’s just a potential marginal benefit which is they may catch you. So from their point of view, an infinite number of filings, marginal benefit exceeds marginal cost. From the financial institution side, there’s a marginal cost to filing each person, each CTR, each SAR. And there may be a marginal benefit on their end or to society’s end, but what we’ve done is we’ve put one person getting the benefit, one person getting the cost, and these things don’t cross in either way, and that has led to a system that I think has gotten completely out of control.

Nicholas Anthony: One quick thing I just want to add to that. I fully agree with Aaron, and I think one thing that’s really important on in- intent is that when the Supreme Court looked at this in the 1970s, there were concurrent opinions that explicitly said that this is gonna be given the green light, obviously paraphrasing, but this is gonna be given the green light because it’s an unusually high amount. And to Aaron’s point, that was an unusually high amount. Most people are not buying two brand-new cars in cash o- on the spot at that time. And what we have now, though, i- is something that is very different. And to a broader point to any, policymakers, staffers included that are listening, I very much beg you, any number that you’re putting in your legislation to index to inflation.

If I could snap my fingers, that’s one of the things I’d like to change across the board is just have that built in across because that’s about keeping it as it was designed in the moment that it was debated so that it can live through time rather than have something that really grows out of proportion without any checks and balances.

Patrick Eddington: Electronic surveillance arena that I live with, have to deal with every single day from a policy standpoint. One of the arguments that I make over and over, and I’m hardly alone in this, my friends at the ACLU, the Brennan Center, IJ, other places make the same argument. A mass surveillance system, by definition, is creating a lot of noise compared to the signal that you’re actually looking for. And if I’ve heard you correctly, Aaron and Nick so far, there is a massive noise to signal ratio that’s being created here in the quest to try to find actual criminals. Is that an accurate analogy there?

Nicholas Anthony: That’s something that has been brought up for decades now, that it is a needle in a haystack and hay keeps getting piled on top. The one caveat or caution I’d give to that is that also for decades, people have been asking for serious data about the effectiveness to find out what that signal is. And that has been like pulling teeth. I have found people dating back to the ’90s making these requests and you can see, countless hearings of FinCEN leadership appearing before Congress saying they just don’t know. Now, to their credit, in the past couple years, FinCEN has started to produce reports. Their annual reports include information about the use of Bank Secrecy Act data. But at the same time, it is not what people have been asking for.

To give you just one statistic that I don’t get to talk about very often, they put in the, in the headline that there’s 90-plus percent effectiveness, which that sounds amazing. That sounds like a huge win for them. However, if you read the fine print, that 90% Number is referring to they surveyed law enforcement and law enforcement said that they like it. And that gets back to Aaron’s point of, well, of course they like it because it seems costless. It is beneficial, so you have the beneficiary of a subsidy saying the subsidy is beneficiary. And that is very hard to square. And I understand there are technical challenges with auditing anything, but again, I have seen people asking this very basic question dating back to the ’90s, and it really should have been something that was set up on day one to say, “We’re gonna do this big thing.

Here’s how we’re gonna have accountability behind it to measure to make sure the signal and the noise is an appropriate ratio.” Carole, looks like you wanna jump in there. Have at it.

Carole House: Oh, I do. And of course, I love the focus of this, of this debate and discussion. I know it was the nature of a lot of our testimony too. And I understand this instinct, but I think there has to be an understanding also of what the purpose of those amounts are. It’s not all just about purchasing power. Also thinking about what’s anomalous. In this case, think about what, like, large transactions largely shifting to other forms of digital payments and cards and other transactions and not to cash. In a digital economy, that size of cash transactions have actually become more rare in a lot of ways. So again, I’m not– Like, CTRs are not meant to be direct indicators. Like, they’re not indicators of suspiciousness, but there’s a lot of, there’s a lot of different factors that all need to be accounted for that go way beyond thinking about inflation.

And we’ve seen figures that have come in from law enforcement agencies, and trust me, I want a lot more work to be done focusing on measuring efficacy. This is a big, this is a big issue, I think, across many agencies, just generally in the government, and then certainly for the Bank Secrecy Act. There’s, um– It’s a really tough issue trying to measure things like the benefits of a deterrent, and then also I’ve mentioned that, like, the multi-prong and multi-vector nature of the AML framework and how much it overlaps with and reinforces so much else of what is needed to make an economy work, to make civil, to make, civil due process work.

So when you think about, like, IRCI on their fact sheet had highlighted that, I think they said that, like, two-thirds of their investigations had a primary subject with a CTR, and about half of them were, like, reporting transactions that were under 20K, basically pointing to how much, how much you erase if you raise these thresholds to certain amounts. And I’m not saying that there shouldn’t be really hard, good work done on thinking about how to recalibrate those thresholds, but I have yet to see that work done, in some of the figures that have been proposed, by those in Congress. I think there’s a lot of work that really needs to be done to look at recalibrating many of the different obligations, whether it’s threshold amounts or type of information.

And then also on timeliness is a, is a, is a great example there, and I know we disagree on the benefits of there being a multi-tier system and framework. I remember when I was at FinCEN, there were some institutions that had responded to an RFI, a request for information that we had about how to modernize, certain parts of our obligations. And certain digital payments companies had said, “You know what? We don’t wanna do this compliance stuff. It’s too burdensome. It’s too costly. What if we just give you all the information, FinCEN? You be our financial intelligence unit.

You be the compliance function.” And that was wild to me because some of these entities claim to be the major privacy advocates, and I was like, “You wanna give all of your information to the government?” like, not only is this impractical from a– Like, the amount of taxes and the size that you would have to get FinCEN to be able to be in order to ingest and conduct that function, not to mention that FinCEN doesn’t have the understanding of the nature of customer-by-customer relationships, that financial institutions do. Like, it’s a privacy nightmare. It’s a, it’s a monetary nightmare. And so I’ll still defend, the multi-tier nature of that system and why certain records get kept, certain ones get reported, but I think it’s fair to debate around the utility of different ones of these measures, and a lot of work should be done by great economists.

We need more of them in Treasury to focus on the illicit finance side, and to look at the benefits.

Aaron Klein: Economists would tell you to do less. Because, you know, what are we after here? Look, uh according to the GAO, the number of CTRs filed has increased by over 60% From 2002, and they increased sharply after 2015. So the idea that cash is gone- there are many more $100 bills in circulation now than there were before. You know, our group may not use cash, but cash is king everywhere, particularly in illicit finance, but also in places like cannabis. We’ve had massive increase in cannabis, which by the way, there’s state licensed cannabis. There’s no legal cannabis. People say, “Oh, you know, there’s state licensed…” No. You know, like we debated nullification, Calhoun lost, right? Cannabis is illegal business.

Now, I think it’s completely idiotic that we’re filing CTRs and suspicious activity reports on cannabis companies because if you wanna find them, there’s something called Google Maps. It’s way more effective than querying the SAR and CTR database. It’ll list you everywhere, and if you wanna know who owns these companies, they have much better beneficial ownership reporting than any other company I’m aware of. Go to your state capitol. You’ll have fingerprints and licensing for all these folks. If you wanna go and arrest them, go and arrest them. They’re committing federal crime. You can do that, or not, but we’re filing on them. By the way, interestingly, governments are exempt from CTRs.

You go to Humboldt County, California, you go to Denver, Colorado, the cannabis folks, because they’ve been debanked because banks don’t wanna deal with all this filing stuff, are going, driving armored trucks to their state government, depositing the cash. If you applied this CTR framework to states, you’d be E- every state has a bank, right? You know, it’s not like states put money in private banks. Are we gonna flag the state of Colorado for being a m- a drug cartel? What about the debt issuers who get state revenue bonds from Humboldt County? Where’s Humboldt County derive most of their revenue from? Cannabis tax. Do you want, do you wanna send grandma a SAR because she has a municipal bond fund in California? This $10,000 limit was lowered to $300 by this administration for money transmitters. By the way, Western Union is one of the top five SAR filers.

So we’ve talked about banks, we’ve talked about other people. You wanna talk about who’s filing, let’s start with Western Union, because they’re a massive filer, right? It was dropped to $300. I bet you ICE, when they were going after folks, had a very high use of the CTR database. So if our metrics of success is did law enforcement use a database to go after somebody they were gonna go after, that’s a very I mean, that’s a fair metric. I query whether it’s a reactive or proactive metric. But I also point out you ought to be careful here because this an- AML regime is being used by ICE through Western Union to go after a certain group of people. Now, maybe some of us want more ICE agents to round up people that are wiring 500 bucks home to their mom, because they’re not here in a documented fashion, and that’s a policy dispute. And if you think that’s the proper role of government, okay.

But you know, I come from a little more of a tradition where today it’s the guy sending 500 bucks home to mom, tomorrow it’s somebody else that, you know, and Thursday it’s me. Because I’m now an undesirable person. And so I’m pretty wary of that especially lowering it. And we did lower the threshold. By the way, administratively, I’m not quite sure how we’re dubious legal- legally.

Carole House: I think it was th- th- these were the geographic targeting orders on the border, right? So it was in certain ZIP codes, and I know it was like it was changing to CTRs and some of your earlier examples like the predicate of reporting things like CTRs and 8300s, so like the cash above 10K amount versus SARs, which are suspected violation, like suspected money laundering, like, and associated predicate offenses. It’s illegal activity. A cannabis company with a bank the bank should file every trans There’s even a special E‑cannabis thing, right?

Aaron Klein: Which again, this is why banks charge cannabis companies tens of thousands of dollars to have an account, sometimes hundreds of thousands a year, which then debanks cannabis, which makes state licensed cannabis more expensive than black market cannabis, which actually goes against the whole purpose of the licensing cannabis regime to try and get it out of criminal enterprises and into legitimate businesses. We have such a strange, a schizophrenic world on cannabis. You have companies trading on the stock exchange selling cannabis who are having suspicious activity reports filed on them. Well, yeah, you- If you wanna shut them down, shut them down. If you don’t, don’t.

Patrick Eddington: I will say that it never ceases to amaze me how the lessons of prohibition, just have never really been learned, you know, when it comes to these kinds of things. We are, beginning to, kind of run short on time here, so I wanna see if we can get a few more audience questions in. There’s one here asking specifically about the Corporate Transparency Act. This is the actual question. The CTA required beneficial ownership reporting by most US domestic and small businesses. Libertarians objected to it and there are all kinds of libertarians, just to be clear here. There are different tribes of libertarians.

So, but anyway, libertarians objected to it as regulating, quote, “status,” end quote, but also as unnecessary because banks have tools, AMLs, the B- the BSA overall and AMLs, for law enforcement to, quote, “follow the money.” Do you all agree with that or disagree with that characterization?

Carole House: I think I agree. I think no, go ahead, Nick.

Nicholas Anthony: Oh, well, I’ll, I’ll just say briefly, I think I agree, and right now the current status of it is, applying primarily to, foreign-owned companies. But one of the eye-opening moments- For me, especially with that kind of goes outside of the conversation we’ve had thus far, is just the degree to which it was affecting the average person, especially in the small business conversation. I could say I have family who are working in law firms, and it was kind of insane when this was coming up and I was getting questions from family about the Bank Secrecy Act and the Corporate Transparency Act, and I was just like, “Wait, you listen to me at Thanksgiving?” And they said, “No. We– That’s not it. We– It’s not what you said at Thanksgiving.

It’s we’re getting calls from our clients,” who are, who are mostly mom-and-pop shops, because they got letters saying that they have to start filling out all this information. And there’s a lot of pieces to that, but I think maybe the one, 30,000-foot piece that I’ll, I’ll leave with is just the question of, where does it stop? And to Aaron’s point, it’s, it’s very much, it starts with a good target of the worst of the worst, then it gets into a gray area, and then it’s me.

And I think that was a big wake-up call to a lot of Americans around the country for this larger system because unfortunately, when we surveyed the– when the Cato Institute surveyed the American public, the vast majority think they have a standard of financial privacy that just does not exist at all, and this was really the first time that they were getting it right in front of their face saying, “Yes, you need to report all this information.”

Aaron Klein: I’m gonna disagree, not just ’cause I’m a disagreeable person- but because I actually think the other way on this, right? So banks don’t have tools. You can have an anonymous shell company. Paul Manafort had about six in Delaware. And you can’t have an anonymous personal bank account. When you go in, as a person to set up a bank account, you have to prove your identity sometimes six ways to Sunday, right? But you can go up as Anonymous Shell Bank, Anonymous Shell Company, Inc., and not pr- provide that level of same information. So yes, it was a big requirement for small businesses in the sense that you had to fill out a piece of paper. I have a small business. I had to fill out the piece of paper. Like, and you had to say who owned the company, and some people don’t wanna say that. Paul Manafort had six or seven of these. We know why.

Almost every other major company– country in the G20, I believe, has this requirement. I think like Kenya and Argent– There are a couple countries that don’t, but it’s very rare. And so I think beneficial ownership was a bipartisan point. The banks don’t have these tools. In fact, Patrick, the banks asked for this bill. The banks were among the biggest supporters of this legislation because the banks said, “You’re requiring us to know our cu- our customer and then r- allowing us to bank someone anonymously. We can’t do our job.” And so the banks wanted this legislation to be able to do their job. Congress responded on a bipartisan basis to do it. Now, you may not agree with that law, but it was a law, and then the Treasury Department just said, “Yeah, we’re not gonna follow that law.” Funny, you know, this is the law that would’ve helped catch Paul Manafort.

But you know, again, I said this was the softest on white-collar crime Treasury Department in my lifetime, and now you’ve just given me one more piece of evidence to talk in my corner.

Carole House: Aaron really reinforces a good point with CTA, which is that, like, the banks were originally really backing and behind this, and this was passed in a bipartisan way. So I’ve been really, I’ve been really saddened to see this dismantled, especially when even threats that this administration says are some of its top priorities, and certainly we also were, prioritizing them in the last administration. Like Chinese money laun- laundering organizations, cartels, oligarchs, like all of these major threats, although a coup- like, I guess more cartels especially, like if you wanna go after them, you have to have beneficial ownership, and we’ve dismantled a lot of the tools. Like, we’re kicking the ladder out from under ourselves in trying to be able to target and go after a lot of these illicit networks.

And it’s not just in, like, thinking about traditional money laundering, but in like supply chain and other economic warfare that other, that even like the Department of Defense is really focused on. Issues around supply chain and being able to pierce through the gray zone of who in fact is sitting behind these layers of shell companies continues to be the greatest issue. Even Treasury’s own anti-money laundering risk assessment highlights that this is the biggest gap that exists, and we’ve decided not to implement it. I’ll highlight that I think that that, it sort of also reinforces the issue with cannabis banking. Like, you know, this is where what happens when you have a federal Congress and states, you know, making different things different levels of legal or illegal.

So when it’s the federal AML regulator, it puts FinCEN in a really bad position, when federal law says something and it’s their job, to give guidance. But like, so it’s, it’s just a tough, it’s a tough issue. But on the CTA, like this one is a really, it’s a really imp- important topic, and a really important framework that I just, I don’t see how we get around this. And I do think there are tools, and I’m glad that the question asker mentioned that there are tools. But a lot of tools exist also for things like identity fraud, and they’re filled with synthetic identities. So we have major issues where the benefits of the CTA repository was supposed to provide an authoritative reference point that the banks could get access to as well as law enforcement under lawful protections and utility, and we’ve just decided not to fix it and make it better, but instead to dismantle the regime.

Patrick Eddington: So we are down to our last two to three minutes. I wanna ask each of you, and I’ll start with Aaron and we’ll finish with Carole- If you could make one change to the BSA that you think would have an outside effect, or hopefully an outside effect, on dealing with some of the problems that we’ve been discussing here today, and in my mind it’s the signal-to-noise ratio, I just keep coming back to that over and over again now in my mind, what change would that be? Aaron?

Aaron Klein: Well, the, if I could make one change, that change would be to raise the number from 10 to 75 and index it going forward, which is essentially returning it to the policy threshold set, in 1970. If I could make two changes, it would be, to do the first change and, get rid of SARs filings for state-owned cannabis that are, or put them to the same standard as any other entity. So if you’re a state licensed cannabis entity, you should be treated the same as any other business. And again, if we wanna get rid of state licensed cannabis, you know where to find them. The last thing in the world you need is for the banking system to file this paperwork.

If I could make three changes, it would be the, first two changes above, and the third would be the reporting requirements that would show how many of these are filed, how many are filed that are used in a criminal investigation, and then how many filings start investigations, which I think you’d find to be almost zero. And if I could make a fourth change, it would be to prioritize elder abuse filings as the way to start, an invest- a thing. This is a personal Maslow’s hierarchy, and I think one thing that we’ve struggled with is we keep using this thing for more and more and more and more different things. And how you catch Al-Qaeda is very different than how you catch a Mexican drug cartel, is very different than how you catch, tax cheats.

And so I am very guilty of saying, “Well, this is the thing I care about, and so we should prioritize it.” But I do think elder abuse is a massively growing problem based on nothing other than demographics and the distribution of cash and wealth in society and in terms of protecting the vulnerable. And I think it’s one of the where- whereas I think there are other ways that you’re gonna be more likely to figure out a terrorist group than trying to track one-way flight tickets, or other ways. I think it’s very hard to spot elder abuse, other than– But I think bank tellers see it way more than most other frontline people. And that would be my rationale and I’ve already been greedy on your question.

Patrick Eddington: A skillful exploitation of an extremely, patient moderator. Nick.

Nicholas Anthony: I’ll, I’ll resist the list and do a different framing. The easy change I would want is just to require proper data on what’s happening here so we can have an informed policy conversation about what needs to change. The hard change I’d like to see is just reform the Right to Financial Privacy Act so that a warrant is required. Banks can still collect the records or should still collect the records, but make it so that we have a proper check and balance akin to what most Americans think is already in operation. Actual plain text of the Fourth Amendment requires.

Patrick Eddington: Carole.

Carole House: Oh, so you just opened up a whole other topic that we should get into- about, like, how if you just focus on warrants, you don’t get administrative subpoenas and, like, lots of other things and steps that you miss out on, and you can’t do things like ba-bankruptcy or having, victims getting their money back in the course of fraud if you have to wait. There’s lots of other, types of due process. Anyway, but my fixes that I would propose are, learning the lessons that we did in cyber on the need for standards, and taxonomies and ontologies around data.

We need instantaneous sharing of s- of indicators of suspiciousness, as well as the kinds of, the kinds of structures and understanding of mapping different money laundering typologies that can allow for things like the use of better AI across multiple types of institutions, that can allow for privacy enhancing implementations and architectures, that can ensure, that can in fact help us limit the kinds of data that gets culled, in the case of certain kinds of detection. We haven’t done, we haven’t, we haven’t really done that work yet, but I think, like, the moment is here. We have the right impetus to be able to do that can allow for a lot of the other implementations and innovations that people really want. But we have to look at those underlying building blocks, which I think also lead to the ability to do things like measure efficacy of the system and deterrent.

It requires a much more holistic and complex model of understanding things like d‑deterrents and the intercomplexities with other systems. So I think a lot of work needs to be done on data and analysis. I appreciated that point. And then I would say stronger expectations for identity assurance. We have not invested in identity infrastructure enough in this country to defend ourselves against this authenticity crisis moment that is AI-fueled fraud. And identity exploit is at, is at play in most money laundering activity. So I think a lot more of that needs to happen that will help us calibrate expectations, and help achieve some of the greater desires on privacy balance.

Patrick Eddington: Aaron Klein, Nick Anthony, and Carole House, thank you so much for an extremely informative and engaging discussion. And my thanks to you, our audience. I invite you all back tomorrow for day three of Cato Surveillance Week, where we’ll be talking about how governments at multiple levels monitor the way that you fly, the way that you take trains, the way that you get in your car and try to go somewhere thinking that you have an actual, right to privacy. It is most definitely under threat there, and we will have a great panel on that tomorrow. Until then, I’m Pat Eddington for the Cato Institute. Thanks so much for being with us.