Feeds:
Posts
Comments

Posts Tagged ‘Money Laundering’

Trump has been President for more than 200 days and those of us who want more economic liberty don’t have many reasons to be happy.

Obamacare hasn’t been repealed, the tax code hasn’t been reformed, and wasteful spending hasn’t been cut.

The only glimmer of hope is that Trump has eased up on the regulatory burden. More should be happening, of course, but we are seeing some small steps in the right direction.

Let’s share one positive development.

Professor Tony Lima of California State University opined back in January in the Wall Street Journal that Trump could unilaterally boost growth by ending a reprehensible policy known as “Operation Choke Point.”

…the Trump administration could shut down Operation Choke Point. This program, enforced by the Federal Deposit Insurance Corp., targets “risky” banking customers and pressures banks to deny them credit. It’s unnecessary: If these industries are really risky, banks would not want their business. The real purpose of Operation Choke Point is to target industries that are out of favor…, among them: Coin dealers, money-transfer networks and payday lenders. Sales of ammunition and firearms (Second Amendment, anyone?) and fireworks (legal in some states). …Other legal goods and services such as surveillance equipment, telemarketing, tobacco and dating services. …Denying credit hampers an industry’s growth. Eliminating Operation Choke Point would encourage growth. It costs nothing. And someday it may reduce enforcement spending.

And Professor Charles Calomiris from Columbia University echoed those views a few weeks later.

Imagine you have a thriving business and one morning you get a call from your banker explaining that he can no longer service your accounts. …That’s what happened to many business owners as the result of an Obama administration policy called Operation Choke Point. In 2011 the Federal Deposit Insurance Corp. warned banks of heightened regulatory risks from doing business with certain merchants. A total of 30 undesirable merchant categories were affected…the FDIC explained that banks with such clients were putting themselves at risk of “unsatisfactory Community Reinvestment Act ratings, compliance rating downgrades, restitution to consumers, and the pursuit of civil money penalties.” Other FDIC regulatory guidelines pointed to difficulties banks with high “reputation risk” could have receiving approval for acquisitions.

Keep in mind, by the way, that Congress didn’t pass a law mandating discrimination against and harassment of these merchants.

The Washington bureaucracy, along with ideologues in the Obama Administration, simply decided to impose an onerous new policy.

In effect, the paper pushers were telling financial institutions “nice business, shame if anything happened to it.”

But at least when mobsters engage in that kind of a shakedown, there’s no illusion about what’s happening.

Professor Calomiris explained that this regulatory initiative of the Obama Administration made no sense economically.

It is rather comical that regulators would use the excuse of regulatory risk management to punish banks. Banks are in the business of gauging risk and have every incentive to avoid customer relationships that could hurt their reputation. Regulators, on the other hand, have shown themselves unwilling or unable to acknowledge risk, the most obvious example being the subprime mortgage crisis in 2008.

And he also explained why Operation Choke Point was such a reprehensible violation of the rule of law.

The FDIC’s regulators never engaged in formal rule-making or announced penalties for banks serving undesirable clients. Such rule-making likely would have been defeated in congressional debate or under the Administrative Procedures Act. Instead, regulators chose to rely on informal decrees called “guidance.” …Financial regulators find regulatory guidance particularly expedient because it spares them the burden of soliciting comments, holding hearings, defining violations, setting forth procedures for ascertaining violations, and defining penalties for ignoring the guidance. Regulators prefer this veil of secrecy because it maximizes their discretionary power and places the unpredictable and discriminatory costs on banks and their customers.

Well, we have some good news.

The Trump Administration has just reversed this terrible Obama policy. Politico has some of the details.

The Justice Department has committed to ending a controversial Obama-era program that discourages banks from doing business with a range of companies, from payday lenders to gun retailers. The move hands a big victory to Republican lawmakers who charged that the initiative — dubbed “Operation Choke Point” — was hurting legitimate businesses. …House Judiciary Chairman Bob Goodlatte…and House Financial Services Chairman Jeb Hensarling (R-Texas), along with Reps. Tom Marino (R-Pa.), Blaine Luetkemeyer (R-Mo.) and Darrell Issa (R-Calif.) praised the department in a joint statement. “We applaud the Trump Justice Department for decisively ending Operation Choke Point,” they said. “The Obama Administration created this ill-advised program to suffocate legitimate businesses to which it was ideologically opposed by intimidating financial institutions into denying banking services to those businesses.”

And Eric Boehm of Reason is pleased by this development.

A financial dragnet that ensnared porn stars, gun dealers, payday lenders, and other politically disfavored small businesses has been shut down. Operation Choke Point launched in 2012… It quickly morphed into a questionably constitutional attack on a wide range of entrepreneurs who found their assets frozen or their bank accounts closed because they were considered “high-risk” for fraud. …Assistant Attorney General Stephen Boyd called Operation Choke Point “a misguided initiative” and confirmed that DOJ was closing those investigations… “Law abiding businesses should not be targeted simply for operating in an industry that a particular administration might disfavor,” Boyd wrote. …The repudiation of Operation Choke Point is a welcome development, says Walter Olson, a senior fellow at the libertarian Cato Institute.

I shared a video last year that explained Operation Choke Point in just one minute. But that just scratched the surface, so here’s a video from Reason that explains in greater detail why Operation Choke Point was so repulsive.

Kudos to the Trump Administration for reversing this awful policy.

But hopefully this is just the first step. Regulators are still squeezing financial institutions in an attempt to discourage them from doing business with low-tax jurisdictions. This policy of “de-risking” exists even though so-called tax havens generally have tighter laws against dirty money than the United States.

Trump should put an end to that misguided policy.

Ultimately, what’s really needed is a complete rethink of money-laundering laws and regulations.

Amazingly, some politicians actually want to make these laws even worse. Ideally, Trump will move completely in the other direction.

P.S. While it’s good that Trump has reversed Operation Choke Point, his Administration has moved in the wrong direction on civil forfeiture policy. One step forward and one step backwards is not a recipe for more growth and prosperity.

Read Full Post »

Thanks to decades of experience and research, we now know several things about so-called anti-money laundering (AML) laws.

It’s not that the theory behind these laws is without merit. The original notion was that perhaps we could reduce crime by figuring out ways to prevent crooks from utilizing the banking system. That’s a worthy goal. But it turns out that it doesn’t work.

For all intents and purposes, AML laws are a misallocation of law-enforcement resources.

So you would think that policy makers would be endeavoring to repeal these counterproductive rules and regulations, right?

But you would be wrong. Some of them actually want to double down on failure. To be more specific, four senators have introduced a bill to make these laws more intrusive and onerous.

Senate Judiciary Committee Chairman Chuck Grassley and Ranking Member Dianne Feinstein, along with Senators John Cornyn and Sheldon Whitehouse, today introduced legislation that modernizes and strengthens criminal laws against money laundering – a critical source of funding for terrorist organizations, drug cartels and other organized crime syndicates.  The Combating Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017 updates criminal money laundering and counterfeiting statutes, and promotes transparency in the U.S. financial system.

It’s quite possible that these politicians actually think this new law will somehow reduce all the bad things they put in the bill’s title (I’m surprised they didn’t add tooth decay and cancer to the list).

But if past experience is any guide, the real-world result will be more abuse of law-abiding citizens.

Writing for the Blaze, Justin Haskins warns how the new legislation can endanger innocent people.

Four U.S. senators have proposed legislation that would significantly expand the power of the federal government to seize citizens’ money when traveling in or out of the United States. …several troubling provisions in the law could put law-abiding American citizens at risk of losing tens of thousands of dollars for doing nothing more than failing to fill out a government form. Under current federal law, travelers transporting $10,000 or more in cash or other monetary instruments are required to report those funds to U.S. Customs and Border Protection. Failure to report funds, even if unintentional, can lead to the seizure of the money and criminal or civil penalties.

That approach already produces horrible abuses of innocent people.

And imagine what will happen if this new law is enacted.

The Combating Money Laundering, Terrorist Financing and Counterfeiting Act would expand “monetary instruments” covered under current law to include “prepaid access devices, stored value cards, digital currencies, and other similar instruments.” This is particularly problematic because digital currencies, such as Bitcoin, are theoretically always transported by the owner of the digital currency account wherever he or she goes, which means digital currency owners with accounts valued at $10,000 or more must always report their funds or risk having them seized. Even more troubling is the law treats all blank checks as though they are financial instruments valued in excess of $10,000 if the checking account contains at least $10,000, which means if a traveler accidently fails to report a blank check floating around in his or her luggage, the account holder could face stiff penalties — even if there is no suspicion of criminal activity.

Some of you may be thinking that it’s okay to subject innocent people to abuse if it achieves a very important goal of stopping terrorists.

But that’s not happening. In a must-read article for Foreign Affairs, Peter Neumann points out that AML laws are grossly ineffective in the fight against Islamo-fascism.

…the war on terrorist financing has failed. Today, there are more terrorist organizations, with more money, than ever before. …Driven by the assumption that terrorism costs money, governments have for years sought to cut off terrorists’ access to the global financial system. They have introduced blacklists, frozen assets, and imposed countless regulations designed to prevent terrorist financing, costing the public and private sectors billions of dollars.

And what’s the result of all this expense?

It hasn’t stopped terrorism.

…there is no evidence that it has ever thwarted a terrorist campaign. Most attacks require very little money, and terrorists tend to use a wide range of money-transfer and fundraising methods, many of which avoid the international financial system. …Terrorist operations are cheap, and according to a 2015 study by the Norwegian Defense Research Establishment, over 90 percent of the jihadist cells in Europe between 1994 and 2013 were “self-funded,” typically through savings, welfare payments, personal loans, or the proceeds of petty crime. …many jihadists have used their own savings and welfare payments or taken out small loans; others have borrowed money from their friends or family. …Financial tools cannot stop lone attackers from driving cars into crowds.

But it has imposed major burdens on innocent parties.

…the focus on the financial sector proved ineffective; it has also harmed innocent people and businesses. To address policymakers’ demands, financial institutions have “de-risked” their portfolios, shedding investments and clients that might be linked to terrorist financing. …De-risking, moreover, has resulted in the de facto exclusion of entire countries, mostly poor ones such as Afghanistan and Somalia, from the global financial system. The bank accounts of refugees, charities that operate in regions torn apart by civil war, and even Western citizens with family links to so-called risk countries have been closed. Practically no Western bank now offers cash transfers to Somalia, for example, although 40 percent of the population depends on remittances from abroad.

And what is the author’s bottom line?

Simply stated, the current system is a failure.

Instead of continuing to look for needles in a haystack, governments should overhaul their approach to countering terrorist funding… Otherwise, they will waste time and money on a strategy that cannot deliver security for many more years to come. .. Policymakers need to acknowledge that the war on terrorist financing, as it has been conducted since 2001, has often been costly and counterproductive, harming innocent people and companies without significantly constraining terrorist groups’ ability to operate.

I agree.

Indeed, I wrote an article for Pace Law Review, published back in 2005, that made many of the same points, including a lot of attention on theoretical role of cost-benefit analysis.

Law enforcement policy should include cost/benefit analysis so that resources are best allocated to protect life, liberty, and property. This should not be a controversial proposition. Cost-benefit analysis…already is part of the public policy process. For instance, few people would think it is acceptable for a city of 10 million to have just one police officer. Yet it is also true that few would want that city to have five million police officers. In other words, there is a point where additional law enforcement expenditures – both public and private – exceed the likely benefits. Every government makes such decisions. Cost-benefit analysis applies to aggregate resource allocation choices, such as how many police officers to employ in a city, but also to how a given level of resources are utilized. In other words, since there are not unlimited resources, it makes sense to allocate those resources in ways that yield the greatest benefit. On a practical level, city officials must decide how many officers to put on each shift, how many officers to assign to different neighborhoods, and how many officers to allocate to each type of crime. The same issues apply in the war against terrorism. Officials must decide not only on the level of resources devoted to fighting terrorism, but they also must make allocation decisions between, say, human intelligence and electronic surveillance.

Now let’s shift from theory to evidence.

I argued AML laws didn’t pass the test.

…while anti-money laundering laws theoretically help the war against terror, this does not mean that they necessarily are justified by cost-benefit analysis. A…book from the Institute for International Economics…strongly supports anti-money laundering laws and advocates their expansion. But the authors admit that these laws imposed costs of $7 billion in 2003, yet they admitted that, “While the number of suspicious activity reports filed has risen rapidly in recent years…total seizures and forfeitures amount to an extremely small sum (approximately $700 million annually in the United States) when compared with the crude estimates of the total amounts laundered. Moreover, there has not been an increase in the number of federal convictions for money laundering.” The private sector bears most of the cost of anti-money laundering laws, but the authors also note that, “Budgetary costs for AML laws have tripled in the last 20 years for prevention and quadrupled for enforcement.” The key question, of course, is whether these costs are matched by concomitant benefits. The answer almost certainly is no. …the government seizes very little dirty money. There are only about 2,000 convictions for federal money laundering offenses each year, and that number falls by more than 50 percent not counting cases where money laundering was an add-on charge to another offense.

Let’s close with passages from a couple of additional articles.

First, Richard Rahn explains why all anti-money laundering laws are misguided in a very recent column for the Washington Times.

…what is even more shocking is the extent to which various government organizations monitor and, in many cases, restrict financial freedom, and seize assets without criminal conviction. …The government argues that it must collect financial data and then share it with many domestic and foreign government organizations in order to stop tax evasion, money laundering, drug dealing, other assorted criminality, and terrorist finance — all of which sounds good at first glance, until one looks at what really happens. If you think that the war on drugs has been a failure, look at the war on money laundering, tax evasion and terrorist finance for an even bigger failure. …money laundering is a crime of intent, rather than actions, in which two different people can engage in the same set of financial transactions, but if one has criminal intent he or she can be charged while the other person is home free. Such vague law is both ripe with abuse and difficult to prove. …The financial information that government agencies now routinely collect is widely shared, not only with other domestic government agencies, but increasingly with foreign governments — many of which do not protect individual liberty and other basic rights.

And here are some excerpts from a column in Reason by Elizabeth Nolan Brown.

American and British banks are monitoring customers’ contraception purchases, DVD-rental frequency, dining-out habits, and more in a misguided attempt to detect human traffickers… Their intrusive and ineffective efforts come at the behest of government agencies, who have been eager to use asset-forfeiture powers… The U.S. and U.K. banks RUSI researchers interviewed said they were happy to help law enforcement prosecute human traffickers and had little problems turning over financial records for people already arrested or under investigation. But proactively finding potential traffickers themselves proved more difficult. As RUSI explains, “the often unremarkable nature of transactions related to” human trafficking made finding criminals or victims via transaction monitoring a time-consuming and unfruitful endeavor. Yet financial institutions are boxed in by regulations that threaten to punish them severely should they participate in the flow of illegally begotten money, however unwittingly. The bind leaves banks and other financial services eager to cast as wide a net as possible, terminating relationships with “suspicious” customers, monitoring the bank accounts of people they know, or turning their records over to law enforcement rather than risk allegations of not doing enough to comply.

In other words, these laws are a costly – but ineffective – burden.

Which is what I said in this video for the Center for Freedom and Prosperity.

P.S. In closing, 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.

Even the State Department’s most recent list of vulnerable jurisdictions shows only a handful of international financial centers.

Yes, places Cayman and Bermuda are on the list, but so are countries such as Canada, China, India, Italy, Netherlands, Russia, and the United Kingdom. In other words, it’s basically a random list of jurisdictions rather than a helpful guide.

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

Read Full Post »

President Trump says he wants to roll back the burden of regulation. Give the morass of red tape that is strangling the economy, this is a very worthy goal.

It’s also a daunting task. Fixing the sprawling regulatory state is the modern version of cleaning the Augean stables and I’m not brimming with confidence that Trump and his appointees have Herculean powers.

That being said, if they’re deciding where to focus their deregulatory efforts, cost-benefit analysis would be a very useful guide. Simply stated, go after the red tape that imposes the highest costs while yielding the fewest benefits.

And if that’s the approach, so-called anti-money laundering regulations should be on the chopping block. Banks and other financial institutions are now being forced to squander billions of dollars in order to comply with laws, rules, and red tape that require them to spy on all their customers. The ostensible purpose of AML policies is to discourage criminal behavior, but experts have concluded that this approach has been a failure.

To the extent that AML policies have had an impact, it’s been negative. In addition to high costs and inefficiency, the laws and regulations have disproportionately harmed poor people.

Richard Rahn, in a column for the Washington Times, says AML laws are the modern version of prohibition, well-meaning in theory but counter-productive in practice.

Money laundering fits under the definition of vague law because, unlike murder or robbery, it is not a crime of an act but one of “intent.” …This leads to many problems and substantial prosecutorial abuse. It is not only banks and financial institutions that are supposed to know the source of their clients’ funds, but also such diverse people as car dealers, pawnbrokers, real estate agents, and on and on. Often, it is not considered good enough to know the source of a customer’s funds (often a near-impossibility), but the source of the funds of the customer’s customer. …The result is that banks and other financial institutions increasingly refuse to open accounts for low-income people… There is a very high fixed cost for banks and others to do “due diligence” on their customers — the costs being roughly the same for a $5,000 deposit, a $500,000 deposit or a $5,000,000 deposit. Given the massive penalties banks and other financial institutions are subject to for making even an unintentional mistake, their safest course of action is to drop small customers. …Recent academic and think tank studies show the situation only getting worse — all cost and no gain. …the poor, including poor countries, and the honest pay a huge price for all of the additional compliance costs, which reduces productive global capital formation and real incomes.

And the price isn’t trivial for the nations that get targeted, as I pointed out in testimony to the Organization for American States.

A working paper from the Center for Global Development digs into the numbers.

The past fifteen years have seen an unprecedented level of attention on anti-money laundering…issues by financial regulators…the total value of fines levied by regulators peaked at $15 billion in 2014 in the US alone. …Between 2010 and 2015, the Financial Action Task Force (FATF), an international group tasked with setting common AML standards across the globe, added over fifty different countries to an internationally-recognized list of high risk countries. …there are growing concerns that this increase in regulatory activity is leading to a chilling effect on cross-border economic activity as banks limit their exposure to high risk clients or jurisdictions, a process known as ‘de-risking’… This contraction of the correspondent banking network has sounded a number of alarm bells, as these services are seen as being crucial for most cross-border services… The ICC survey reported that over 40% of respondents felt that AML and know-your-customer (KYC) requirements were a significant impediment to trade finance, with nearly 70% reporting they declined transactions that year…a large number of money transfer companies in the US, the UK and Australia have lost access to banking services as a result of banks’ desire to reduce their exposure to regulatory risk, potentially leading to a reduction to a decrease in formal remittances to developing countries, a critical source of development finance… The combined effect of all of these pressures should be leading to declines in the aggregate flow of cross-border payments.

And here are the results of the new empirical research in the study.

The combination of large scale fines, higher compliance costs and international naming-and-shaming has – anecdotally – led many banks to withdraw from certain lines of business or geographic areas, to the potential detriment of cross-border economic activity. …We find evidence that greylisting by the FATF is consistent with up to a 10% reduction in the number of payments received by an affected country. …Issues of economic impact aside, these results suggest there is more work to be done on assessing both the effectiveness and the efficiency of the global AML/CFT regulatory regime. …First, the reduction in payments received by countries subject to greater regulatory scrutiny raises the spectre of potential losses to these countries. Second, that there is either no effect or a positive effect of FATF greylisting on the number of payments leaving a designated country suggests that increased scrutiny may not do much to prevent illicit money from leaving high risk countries and entering the international financial system at large.

In other words, lots of costs, mostly borne by poor people and poor nations, but no evidence that criminals and terrorists are being stopped.

Rather than imposing lots of red tape and requiring banks to spy on everybody, it would be much better if the government followed normal rules in the fight against crime. By all means, it should investigate real crimes, collect evidence and build cases (within proper limits), and work to punish those who inflict harm on others.

But don’t squander resources in ways that aren’t effective.

Some have suggested that it would make sense to have banks monitor a discrete list of potential bad guys rather than promiscuously spy on all customers.

That might be a step in the right direction, but this story from the UK-based Times shows that this approach leaves something to be desired.

A controversial “blacklist” used by British banks to identify terrorists and potential money launderers has grown so bloated that it includes details of a three-year-old member of the royal family… World-Check, a database of more than two million “high-risk” individuals including criminals and senior politicians, is used by 49 of the world’s 50 biggest banks to carry out compliance checks on existing and potential clients. Customers who are flagged up face extra scrutiny and their accounts…hundreds of individuals were included partly on the basis of unverified blog posts and even far-right or extremist websites.

Wow. Since some of my leftist friends consider International Liberty a “far-right” and “extremist” website, this doesn’t bode well for me. I guess I’m lucky that I still have a bank account.

Here’s more from the story.

Thousands of others were listed on the database, which dates from 2014, only because they were relatives or friends of minor public figures. …Maud Windsor…was listed at nine months old. The apparent justification was that she was a family member of a “politically exposed person” (PEP), a reference to her father, who is the son of Prince Michael of Kent and 43rd in line to the throne. …Other British PEPs on the database include Sir Neil Cossons, a historian and former chairman of English Heritage. …Heather Wheeler, a Conservative MP listed on the database, told parliament this year that her bank of 30 years informed her that she was “high risk” and that it “would not deal with me anymore and that it was closing my account.”

These absurd results are driven by government policies that force financial institutions to treat all customers as potential crooks.

And given the huge fines that are being levied on banks and other firms, you can understand why they drop customers and charge high fees. They are forced to act defensively.

Thomson Reuters, the media company that makes millions of pounds compiling and selling the database, does not inform individuals if they are included and banks have no obligation to tell clients why they have been denied services. …Many financial institutions have become risk-averse… “You have an arms race where there’s this immense pressure to build a ‘robust’ database,” one expert on World-Check said. “They’ll pack this database with as many names of individuals as possible. You end up getting a ton of false positives.”

And some of those “false positives” are mentioned in this video I narrated for the Center for Freedom and Prosperity.

P.S. Statists frequently demagogue against so-called tax havens for supposedly being hotbeds of dirty money, but take a look at this map put together a few years ago by the Institute of Governance and you’ll find only one supposed haven among the 28 nations listed.

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

P.P.P.S. But when you look at the real-world horror stories that result from these laws, you realize that the current system on money laundering is no laughing matter.

P.P.P.P.S. And you won’t be surprised to learn that the statists have learned the wrong lesson. They see that AML laws have been a failure and think the right response is to go nuclear and ban cash entirely.

Read Full Post »

The War against Cash is a battle that shouldn’t even exist. But politicians don’t like cash because it’s hard to control something that people can freely trade back and forth. So folks on the left are arguing that governments should ban or restrict paper money.

  • In Part I, we looked at the argument that cash should be banned or restricted so governments could more easily collect additional tax revenue.
  • In Part II, we reviewed the argument that cash should be curtailed so that governments could more easily impose Keynesian-style monetary policy.
  • In Part III, written back in March, we examined additional arguments by people on both sides of the issue and considered the risks of expanded government power.
  • In Part IV, a few months ago, there was additional discussion of the dangers that would be unleashed if politicians banned cash.

Now let’s add a fifth installment in this series, and we’ll focus on the destructive turmoil resulting from India’s decision earlier this month to ban “large” notes.

The Financial Times explains what happened.

India unexpectedly scrapped all larger-denomination banknotes overnight… Prime Minister Narendra Modi said 500 and 1,000 rupee notes — worth around $7.50 and $15, respectively — would cease to be legal tender from midnight on Tuesday. The announcement stunned Indians, who were given four hours’ notice that much of their cash would be “mere paper”. RBI data suggests that the Rs500 and Rs1,000 notes account for 86 per cent of the value of all cash in circulation in India at present. …The shock move is the latest step by Mr Modi’s administration to crack down on the vast shadow economy, which remains beyond the reach of India’s tax authorities.

Before delving into why this is an unfortunate development, I can’t resist pointing out that banknotes worth $7.50 and $15 are neither large nor inappropriate for an economy at India’s level of development.

When the United States had a similar level of per-capita GDP (back in the late 1800s), there were $500 and $1000 notes. Yet America didn’t have serious problems with corruption and tax evasion. So why should the existence of far smaller bills be a problem in India today?

I’ll return to that question in the conclusion, but let’s first look at the impact of Prime Minister Modi’s unilateral attack on currency. A column in the New York Times explains why the policy does more harm than good.

On Nov. 8, the Indian government announced an immediate ban on two major bills that account for the vast majority of all currency in circulation. …In the two weeks after the measure was announced, millions of Indians stricken with small panic rushed out to banks; A.T.M.s and tellers soon ran dry. Some 98 percent of all transactions in India, measured by volume, are conducted in cash. …So far its effects have been disastrous for the middle- and lower-middle classes, as well as the poor. And the worst may be yet to come.

The ripple effect of the policy is large and unpleasant.

…demonetization is a ham-fisted move that will put only a temporary dent in corruption, if even that, and is likely to rock the entire economy. …Anyone seeking to convert more than 250,000 rupees (about $3,650) must explain why they hold so much cash, or failing that, must pay a penalty. The requirement has already spawned a new black market to service people wishing to offload: Large amounts of illicit cash are broken into smaller blocks and deposited by teams of illegal couriers. Demonetization is mostly hurting people who aren’t its intended targets. Because sellers of certain durables, such as jewelry and property, often insist on cash payments, many individuals who have no illegal money build up cash reserves over time. Relatively poor women stash away cash beyond their husbands’ reach.

As is so often the case, the bogeyman of terrorism is being used as a rationale for bad policy, even though everyone realizes that terrorists won’t be affected.

When the government announced demonetization, it also justified the measure as a way to curb terrorism financing that relies on counterfeit rupee notes… Catching fake notes already in circulation neither helps trap the terrorists who minted them nor prevents more such money from being injected into the economy. It simply inconveniences the people who use it as legal tender, the vast majority of whom had no hand in its creation.

I’m sympathetic, by the way, to the notion that the government should fight counterfeiting. Crooks printing up fake notes is even worse than central banks printing up too many real notes.

In any event, this indirect attack on the shadow economy imposes considerable costs on regular Indians.

In a country like India, where the illegal economy is so intimately intertwined with the mainstream economy, one inept government intervention against shadow activities can do a lot of harm to the vast majority, who are just trying to make a legitimate living.

Writing for Bloomberg, Elaine Ou has a negative assessment of this proposal.

India is conducting a big test of the idea that getting rid of cash can help address crime and corruption. Unfortunately, it might achieve nothing more than a lot of inconvenience. Criminals and corrupt officials often conduct business in cash, because it’s hard to trace. So in a sense it’s logical to assume that abolishing cash will help reduce criminal activity. …This rationale has led Indian Prime Minister Narendra Modi to declare a surprise cancellation of the nation’s two highest-denomination notes, effectively invalidating 86 percent of total currency in circulation. Anyone with outstanding notes must either deposit them in a bank — potentially incurring a tax — or exchange them for replacements in strictly limited sums.

Ms. Ou explains that the policy will be traumatic for the hundreds of millions of Indians who don’t have bank accounts.

In a country where most transactions are conducted in cash, many people have been unable to pay for necessities like food or medical services. Banks have had to work overtime to handle the exchange, bringing other financial services to a halt. It’s certainly likely that the sheer trauma will leave people less keen to hoard rupees, creating a big incentive to move economic activity out of cash and into banks. Except that a huge number of Indians don’t have a bank account.

In any event, she points out, banning cash won’t have much impact on corruption since politicians and public officials have plenty of ways to extort wealth from the productive sector.

…the prevalence of cash is far from a foolproof indicator of criminality and corruption. Consider Nigeria, which is perceived as one the world’s most corrupt countries and has a currency-to-GDP ratio even lower than Sweden’s… Nigerians have abandoned cash because they have so little trust in government-issued currency. Instead of using banks, they tend to transact in mobile airtime minutes. …Those with more substantial wealth put it in foreign currency. By undermining faith in its cash notes, India may go the way of Nigeria. Villagers are already resorting to barter. …corrupt public officials were believed to have their wealth in real estate and gold.

A news report highlights the real-world impact of the Indian government’s bad policy. Starting with the impact on a poor single mother.

With demonetisation, Sayyed’s family has been forced to cut costs across the board to make sure their limited cash resources don’t get exhausted faster than the banks can exchange money. “Last week it took me four hours of waiting in line to get my old notes exchanged,” said Sayyed. “And because no one had change for a Rs 2,000 note, I had to buy ration on credit for six whole days.” Vegetables and foodgrains, says Sayyed, have grown more expensive in the past 10 days, because of the impact of demonetisation on wholesalers and retailers.

And the impact on a small-business owner.

His salon, which charges Rs 40 for a haircut, used to make anywhere between Rs 1,000 to Rs 1,200 on the weekend. But now, he said, that has fallen to Rs 500. …How is he coping with this liquidity crunch? Not by going cashless. In part because he doesn’t have a bank account. “I tried to open one but they wanted too many proofs of identity,” Sharma said.

By the way, Sharma is a victim of pointless anti-money laundering laws, something even the World Bank recognizes as being particularly harmful for the poor.

A farmer also has been hit hard.

It has been three weeks since Vedagiri’s single acre of land had been tilled and paddy seedlings had been sown. …“The cooperative bank cannot lend us money now, so for the whole of last week, our crop has been standing without pesticides,” said Vedagiri. Several times last week, Vedagiri and the other farmers of Royalpattu were turned away by bank employees. New currency notes have been slow to reach most rural cooperative banks across India. While sowing the crop, Vedagiri had employed 20 labourers. But he has been unable to pay any of them since he had not still received the rest of the money…Vedagiri does not know how he will get through this cropping season without incurring a loss.

Bloomberg reports on some of the bizarre unintended consequences of this bad policy.

Indian ingenuity is being stretched by Prime Minister Narendra Modi’s cash ban to crackdown on unaccounted money. India’s cash economy has been thrown into turmoil since Modi announced last week that 500 and 1,000 rupee notes would cease to be legal tender and would have to be deposited at banks by year-end, leaving about one-seventh of currency in circulation. …Here are some unintended consequences. Indian defense jets are on standby to airlift cash from mints across India to remote corners of the country. …wealthy Indians rushed to make costly purchases with unaccounted cash. One luxury watch outlet in north-west Mumbai saw 45 units of Rolex watches sold on a single day, according to a representative of a watchmaker, who was present when the sales took place. Demand matched what the shop would usually sell in a month and the store had to turn away customers… A new gold rush also emerged soon after Modi’s announcement. “Jewelers who had shut shop for the day on Nov. 8 had to reopen their stores within a couple of hours and were selling gold up to 4 a.m.,” Chirag Thakkar, a director at gold wholesaler Amrapali Group, said by phone… Customers paid as much as 52,000 rupees per 10 grams, almost double the current prices, he said. …About half of an estimated 9.3 million trucks under the All India Motor Transport Congress were off the road eight days after the announcement as drivers abandoned vehicles mid-way into their trips after running out of cash, according to Naveen Gupta, secretary general of the group. India’s roads carry about 65 percent of the country’s freight. Drivers don’t have enough money for food, truck maintenance and to make payments at border check posts. …Compounding the problem of pumping new money into the system is the need to reconfigure the country’s 220,000 cash machines so that they can dispense the new 500 and 2,000 rupee notes, which do not fit into existing ATM cash trays.

To be fair, some of these costs are transitory in nature, so it’s important to distinguish between those consequences and others that might linger.

Though the part of this story that doesn’t make sense is that the government plans on issuing new high-value banknotes. So the Prime Minister is not actually banning large banknotes (or even all non-digital currency), which is the usual goal of the war-on-cash crowd.

So why did the Modi cause so much turmoil with an overnight ban rather than allow for an orderly transition? I’m assuming that the answer has something to do with inconveniencing those with large cash holdings, some of whom will be crooks or counterfeiters or corrupt public officials.

As already noted, the battle against counterfeit currency surely is worthwhile.

But I have considerable doubts about whether this currency swap will have much impact on the shadow economy or public corruption.

And that brings me back to the rhetorical question I posed early in this column about why the United States didn’t have massive problems with crime and public corruption back in the late 1800s (when our per-capita GDP was akin to India’s today according to the Maddison data), even though we had banknotes that were far more valuable ($500 and $1000 compared to $7.50 and $15).

The answer, at least in part, is that the United States had a very tiny government. Government spending consumed at most 10 percent of economic output, with most of that spending at the state and local level. And there was no income tax.

And since people weren’t penalized for earning money and creating wealth, there was no incentive to be part of the shadow economy. And since government was small, there weren’t that many favors to distribute, so there wasn’t much need to bribe politicians or bureaucrats.

If Prime Minister Modi wants a vibrant, above-ground economy with minimal corruption, maybe that’s the path he should follow.

Let’s close with a very sage warning from Richard Fernandez’s column in PJ Media.

Money in its various forms has become the new battleground between a State that needs to reward its constituencies with and the actual economy which produces most of the real goods and services required to do it. The sad experience of command economies suggests in end the Real always wins over the Official.  As Ramesh Thakur said of India’s demonitization policy: “a better solution would have been to shift the balance of economic decision-making away from the state to firms and consumers; simplify, rationalize and reduce taxes; cut regulations and curtail officials’ discretionary powers; eliminate loopholes; and widen the tax net.”

And my favorite Russian-Irish-Californian economist also has a very apt summary of this issue.

Remember, if the answer is more government, you’ve asked a very silly question.

P.S. If he wants more future prosperity, Modi also should make sure the government no longer attacks private schools.

P.P.S. And it also would be a good idea to reform civil service rules so that it doesn’t take two decades to get rid of no-show bureaucrats.

Read Full Post »

Beginning in the 1970s and 1980s, the federal government (as well as other governments around the world) began to adopt policies based on the idea that crime could be reduced if you somehow could make it very difficult for criminals to use the money they illegally obtain. So we now have a a bunch of laws and regulations that require financial institutions to spy on their customers in hopes that this will inhibit money laundering.

But while the underlying theory may sound reasonable, such laws in practice have been a failure. There’s no evidence that these laws, which impose heavy costs on business and consumers, have produced a reduction in criminal activity.

Instead, the only tangible result seems to be more power for government and reduced access to financial services for poor people.

And now we have even more evidence that these laws don’t make sense. In a thorough study for the Heritage Foundation, David Burton and Norbert Michel put a price tag on the ridiculous laws, regulations, and mandates that are ostensibly designed to make it hard for crooks to launder cash, but in practice simply undermine legitimate commerce and make it hard for poor people to use banks.

Oh, and these rules also are inconsistent with a free society. Here are the principles they say should guide the discussion.

The United States Constitution’s Bill of Rights, particularly the Fourth, Fifth, and Ninth Amendments, together with structural federalism and separation of powers protections, is designed to…protect…individual rights. The current financial regulatory framework is inconsistent with these principles. …Financial privacy can allow people to protect their life savings when a government tries to confiscate its citizens’ wealth, whether for political, ethnic, religious, or “merely” economic reasons. Businesses need to protect their private financial information, intellectual property, and trade secrets from competitors in order to remain profitable. Financial privacy is of deep and abiding importance to freedom, and many governments have shown themselves willing to routinely abuse private financial information.

And here are the key findings about America’s current regulatory morass, which violates the above principles.

The current U.S. framework is overly complex and burdensome… Reform efforts also need to focus on costs versus benefits. The current framework, particularly the anti-money laundering (AML) rules, is clearly not cost-effective. As demonstrated below, the AML regime costs an estimated $4.8 billion to $8 billion annually. Yet, this AML system results in fewer than 700 convictions annually, a proportion of which are simply additional counts against persons charged with other predicate crimes. Thus, each conviction costs approximately $7 million, potentially much more.

By the way, the authors note that their calculations represent “a significant underestimate of the actual burden” because they didn’t include foregone economic activity, higher consumer prices for financial services, lower returns for shareholders of financial institutions, higher financial expenses for unbanked individuals, and other direct and indirect costs.

And what are the offsetting benefits? Can all these costs be justified?

Hardly. David and Norbert point out that we’re all paying more and getting very little in return for the higher burdens.

The original goal of the BSA/AML rules was to reduce predicate crimes, such as illegal drug distribution, rather than money laundering itself. Judged by this standard, very little empirical evidence suggests that the rules have worked as designed. In fact, even though BSA/AML rules have been expanded consistently throughout the past four decades, it remains difficult to discern any net benefit of the overall BSA/AML regulatory framework. Even though there is no clear evidence that the rules materially reduce crime, the BSA/AML bureaucracy began relentlessly expanding internationally—primarily through the Financial Action Task Force (FATF)—more than two decades ago. One comprehensive study reports that even though the FATF proceeds as if these rules have produced only public benefits, “[t]o date there is no substantial effort by any international organization, including the International Monetary Fund, to assess either the costs or benefits of” this regulatory framework. In fact, BSA/AML regulations have been sharply criticized as a costly, ineffective approach to reducing crime. …compliance costs are high for financial companies, with a disproportionate burden falling on smaller firms…, where hiring even one additional employee can lower the return on assets by more than 20 basis points. Other research suggests that the increasing compliance burden in the banking industry is at least partly responsible for the trend toward consolidation and the disappearance of smaller banks. …an American Bankers Association (ABA) publication highlights a small bank that reports it has to dedicate more than 15 percent of its employees to compliance-related tasks. An ABA survey also suggests that the cumulative cost associated with compliance has caused banks to offer fewer services and raise fees, thus harming consumers. …the BSA/AML regime has been a highly inefficient law enforcement tool. At the very least, a high degree of skepticism about further expansion of these and similar requirements is in order. Given the billions of dollars spent annually by the private sector on the existing elaborate and costly AML bureaucracy, a serious data-driven cost-benefit analysis of the existing system is warranted.

If anything, I think they’re being too nice.

The cost-benefit analysis already exists. The laws and regulations don’t work.

Let’s expand our look at the issue. The Wall Street Journal notes that the current approach has myriad negative consequences as banks sever relationships with customers (in a process called “derisking”) because they don’t want to deal with the hassle, expense, and liability of money-laundering red tape.

…financial firms, faced with strict penalties over counterterror and anti-money-laundering rules, have severed accounts of thousands of customers in recent years over fears of heightened risk. The consequences of shuttered accounts were detailed this week in a Wall Street Journal investigation showing how money-transfer firms whose bank accounts have been closed have been pushed out of the global banking system. In addition, nonprofit organizations operating in Syria and Lebanon have faced challenges after losing their bank accounts. …In February of this year, more than 50 nonprofits asked the U.S. Treasury to publicly affirm that nonprofit organizations aren’t inherently high risk. …Two studies by the World Bank in late 2015 found that money-service businesses—which include money transmitters—and foreign banks were both seeing account closures at increasing rates.

Amen.

This process has made life much more difficult for people and businesses seeking to engage in legitimate commerce.

Not to mention that the government abuses the enormous powers it has accumulated, as we can see from the Obama Administration’s odious “Operation Choke Point.”

Another report from the WSJ explains that the rules actually make it harder for law enforcement to monitor the people who might actually be doing bad things.

U.S. banks have closed thousands of accounts held by people and organizations considered suspicious, high-risk or difficult to monitor—including money-transfer firms, foreign banks and nonprofits working abroad. Closing accounts for fear their customers may be up to no good evicts from the financial system the innocent as well as those the U.S. government would most like to watch, a consequence not anticipated by Washington. Comptroller of the Currency Thomas Curry this month acknowledged the potential danger. “Transactions that would have taken place legally and transparently may be driven underground,” he told an international conference of bankers and regulators in Washington. …Fearing steep financial penalties for failing to spot a wayward customer, many banks now shun anyone who looks risky. That leaves ostracized companies to seek alternatives—such as toting bags of cash overseas—a practice that allows hundreds of millions of dollars to leave the global banking system… “The whole flow of money goes underground, and that becomes counterproductive to the original purpose of being able to track” it, said Dilip Ratha, head economist of the World Bank’s unit that studies remittances. “It’s a bit paradoxical.” U.S. officials said they didn’t intend banks to close whole categories of customer accounts.

So potential bad guys are harder to track.

And financial institutions waste lots of money (which translates into higher costs for consumers).

Risky accounts should be managed, officials said, not avoided altogether. …Western Union said it now spends $200 million a year watching for suspicious activity… J.P. Morgan Chase & Co….now has about 9,000 employees dedicated to anti-money-laundering and has cut off thousands of customers viewed as higher-risk. …Jaikumar Ramaswamy, a Bank of AmericaCorp. compliance executive and former federal prosecutor, said, “I’m surprised at how much of my time is spent not focusing on the guilty but chasing the innocent.” Instead of looking for needles in haystacks, he said, the system demands banks “turn over every piece of hay.”

The good news is that some nations are looking to adopt a more rational approach, as evidenced by this Bloomberg report from 2015.

The U.K. government said it will look to relax anti-money laundering controls as part of a plan to save British companies 10 billion pounds ($15.4 billion) over the next five years. …The government said it wants to protect the country without putting “disproportionate burdens” on legitimate businesses. …“This new review is about making sure the rules we have to protect our strong financial services industry from abuse are not unintentionally holding back new and existing British business,” Business Secretary Sajid Javid said. “I want firms to come forward and tell us where regulation is unclear or its enforcement ineffective.”

Though, as reported by the Times, the U.K. government has a bizarrely inconsistent approach to these issues. Even to the point of threatening to steal people’s property unless they can somehow prove that it was purchased with innocent money.

People who amass suspicious quantities of wealth in Britain will be ordered to prove that it was not obtained through corruption, under proposals being considered by the Home Office. New “unexplained wealth orders”, which would reverse the burden of proof to compel the recipient to justify the source of the questionable cash.

Sigh.

Here’s a novel idea. Why doesn’t law enforcement engage in actual, old-fashioned police work. In other words, instead of having costly burdens imposed on everybody, governments should use the approach which historically has successfully reduced crime – i.e., policies that increase the likelihood of apprehension and/or severity of punishment.

But don’t hold your breath waiting for that to happen.

Instead, we actually get politicians and policy makers coming up with schemes to expand the burden of money laundering laws. Some of them want to ban the $100 bill, or perhaps even ban cash entirely. All so government can more closely monitor the private financial choices of innocent people.

If you want more information, here’s a video I narrated on this topic for the Center for Freedom and Prosperity.

Last but not least, let’s return to the Heritage study, which includes this very important warning about a very risky and dangerous treaty that may be considered by the U.S. Senate.

…the willingness to impose costs on the private sector and to violate the privacy interests of ordinary people should be less in the case of information sharing for tax purposes than for the purposes of preventing terrorism or crime. Moreover, tax-information-sharing programs are quite often a veiled attempt to stifle tax competition from low-tax jurisdictions. Tax competition is salutary and limits the degree to which governments can impose unwarranted taxation. …The U.S. Senate is currently considering the “Protocol Amending the Multilateral Convention on Mutual Administrative Assistance in Tax Matters,” which would impose a wide variety of new information-reporting requirements on financial institutions to help foreign governments collect their taxes. A second treaty—worse than this protocol—is the follow-on OECD treaty known as the “Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information.” This follow-on treaty implements both the protocol and the 311-page OECD “Standard for Automatic Exchange of Financial Account Information in Tax Matters.” Together, the protocol, the Multilateral Competent Authority Agreement, and the OECD Standard constitute the three main parts of a new automatic information-exchange regime being promoted by the OECD and international tax bureaucrats. If the U.S. ratifies the protocol and implements the new OECD standard, Washington would automatically, and in bulk, ship private financial and tax information—including Social Security and other tax identification numbers—to Argentina, China, Colombia, Indonesia, Kazakhstan, Nigeria, Russia, and nearly 70 other countries. In other words, foreign governments that are hostile to the U.S., corrupt, or have inadequate data safeguards, would automatically have access to private financial (and other) information of some U.S. taxpayers and most foreigners with accounts in the U.S.

A truly awful pact. And keep in mind it also would be the genesis of a World Tax Organization.

P.S. Since we closed by discussing the intersection of tax and money laundering, 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 a few years ago by the Institute of Governance and you’ll find only one low-tax jurisdiction among the 28 nations listed.

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

P.P.P.S. But when you look at the real-world horror stories that result from these laws, you realize that the current system on money laundering is no laughing matter.

Read Full Post »

For all his faults, you have to give President Obama credit for strong convictions. He’s generally misguided, but it’s perversely impressive to observe his relentless advocacy for higher taxes, bigger government, more intervention, and limits on constitutional freedoms.

That being said, his desire to “fundamentally transform” the United States leads him to decisions that run roughshod over core principles of a civilized society such as the rule of law.

Consider, for instance, the Obama Administration project, known as “Operation Choke Point,” to restrict banking services to politically incorrect businesses such as gun dealers.

It doesn’t matter than these companies are engaged in legal activities. In pursuit of its ideological agenda, the White House is using regulatory bullying in hopes of getting banks to deny services to these businesses.

For more information, click here to read about recent efforts to end this thuggish initiative. Also, here’s a very short video explaining the topic.

Well, there’s an international version of Operation Choke Point.It’s called “de-risking,” and it occurs when banks are pressured by regulators into cutting off banking services to certain regions.

The Wall Street Journal has a column on this topic by two adjunct professors from Fordham Law School.

…a widespread trend in banking called “de-risking.” Reacting to pressure by various government regulators…, banks are rejecting customers in risky regions and industries. Throughout 2014 J.P. Morgan Chase dropped more than 100,000 accounts because they were considered risky… Between 2013 and 2014, Standard Chartered closed 70,000 small and medium-size business accounts, and ended hundreds of relationships with banks in Latin America and Central Europe. …In yet another form of de-risking, the European Central Bank reports that banks have steadily cut their correspondent relationships—that is, the other banks they work with in sending money around the globe. HSBC alone closed more than 326 correspondent bank accounts between 2010 and 2012. …the banks’ actions are understandable. They face unprecedented regulatory penalties, unclear legal standards, high litigation costs and systemic risks to their business. In 2012 HSBC settled with the Justice Department, paying $1.9 billion in fines for such failings as “ignor[ing] the money laundering risks associated with doing business with certain Mexican customers.” …A bank with a single mistaken customer relationship could be put out of business. Banks have concluded that they will be punished anytime money reaches criminals, regardless of their own efforts. It’s better to drop all supposedly risky customers.

The authors explain that there should be “safe harbor” rules to protect both banks and their customers. That’s a very sensible suggestion.

And there are easy options to make this happen. I’m not a big fan of the Financial Action Task Force, which is an OECD-connected organization that ostensibly sets money-laundering rules for the world. Simply stated, the bureaucrats at FATF think there should be no human right to privacy. Moreover, FATF advocates harsh regulatory burdens that impose very high costs while producing miserly benefits.

That being said, if a nation is not on the FATF blacklist, that should be more than enough evidence that it imposes very onerous rules to guard against misbehavior.

Unfortunately, bureaucrats in the United States and Europe don’t actually seem interested in fighting money laundering. Or, to be more precise, it appears that their primary interest is to penalize places with low tax rates.

Many Caribbean jurisdictions, for instance, are being victimized by de-risking even though they comply with all the FATF rules. And this means they lose important correspondent relationships with larger banks.

To address this issue, the Organization of American States recently held a meeting to consider this topic. I was invited to address the delegations. And since other speakers dealt with the specific details of de-risking (you can watch the entire event by clicking here), I discussed the big-picture issue of how low-tax jurisdictions are being persecuted by harsh (and ever-changing) demands. Here are my remarks, with a few of my PowerPoint slides embedded in the video.

Now for the most remarkable (and disturbing) development from that meeting.

Many of the Caribbean nations offered a rather innocuous resolution in hopes of getting agreement that de-risking is a problem and that it would be a good idea if nations came up with clear rules to eliminate the problem.

That seems like a slam dunk, right?

Not exactly. The U.S. delegation actually scuttled the declaration by proposing alternative language that was based on the notion that other countries should put the blame on themselves – even though these nations already are complying with all the FATF rules! You can read the original declaration and proposed changes by the U.S. by clicking here, but this is the excerpt that really matters.

Wow, what arrogance and hypocrisy by the Obama appointees. These jurisdictions, most with black majorities, are suffering from ad hoc and discriminatory de-risking because the Administration doesn’t like the fact that they generally have low taxes.

But rather than openly state that they favor discrimination against low-tax nations, the political hacks put in place by the Obama White House proposed blame-the-victim language, thus ensuring that nothing would happen.

P.S. Perhaps the most surreal part of the experience is the strange bond I felt with the Venezuelan delegation. Regular readers know I’m not a fan of the statist and oppressive government in Caracas. But the Venezuelan delegation apparently takes great pleasure in opposing the position of the U.S. government, so we were sort of on the same side in the discussion. A very bizarre enemy-of-my-enemy-is-my-friend situation.

Read Full Post »

Politicians hate cash.

That may seem an odd assertion given that they love spending money (other people’s money, of course, as illustrated by this cartoon).

But what I’m talking about is the fact that politicians get upset when there’s not 100 percent compliance with tax laws.

They hate tax havens since the option of a fiscal refuge makes confiscatory taxation impractical.

They hate the underground economy because that means hard-to-tax economic activity.

And they hate cash because it gives consumers an anonymous payment mechanism.

Let’s explore the animosity to cash.

It’s basically because a cashless society is an easier-to-tax society, as expressed by an editorial from the U.K.-based Financial Times.

…unlike electronic money, it cannot be tracked. That means cash favours anonymous and often illicit activity; its abolition would make life easier for a government set on squeezing the informal economy out of existence. …Value added tax, for example, could be automatically levied. …Greece, in particular, could make lemonade out of lemons, using the current capital controls to push the country’s cash culture into new habits.

And some countries are actually moving in this direction.

J.D. Tuccille looks at this issue in an article for Reason.

Peter Bofinger of the German Council of Economic Experts…wants to abolish the use of cash… He frets that old-fashioned notes enable undeclared work and black markets, and stand in the way of central bank monetary policy. So rather than adjust policy to be more palatable to the public, he’d rather leave no shadows in which the public can hide from his preferred policies. The idea is to make all economic activity visible so that people have to submit to control. Denmark, which has the highest tax rates in Europe and a correspondingly booming shadow economy, is already moving in that direction. …the Danmarks Nationalbank will stop internal printing of banknotes and minting of coins in 2016. After all, why adjust tax and regulatory policy to be acceptable to constitutents when you can nag them and try to reinvent the idea of money instead?

By the way, some have proposed similar policies in the United States, starting with a ban on $100 bills.

Which led me to paraphrase a line from the original version of Planet of the Apes.

Notwithstanding my attempt to be clever, the tide is moving in the wrong direction. Cash is beginning to vanish in Sweden, as reported by the New York Times.

…many of the country’s banks no longer accept or dispense cash. Bills and coins now represent just 2 percent of Sweden’s economy, compared with 7.7 percent in the United States and 10 percent in the euro area. This year, only a fifth of all consumer payments in Sweden have been made in cash, compared with an average of 75 percent in the rest of the world, according to Euromonitor International. …Cash machines, which are controlled by a Swedish bank consortium, are being dismantled by the hundreds

Though the article notes that there is some resistance.

Not everyone is cheering. Sweden’s embrace of electronic payments has alarmed consumer organizations and critics who warn of a rising threat to privacy and increased vulnerability to sophisticated Internet crimes. …The government has not sought to stem the cashless tide. If anything, it has benefited from more efficient tax collection, because electronic transactions leave a trail; in countries like Greece and Italy, where cash is still heavily used, tax evasion remains a big problem. Leif Trogen, an official at the Swedish Bankers’ Association, acknowledged that banks were earning substantial fee income from the cashless revolution.

What matters, by the way, is not the degree to which consumers prefer to use alternatives to cash.

That’s perfectly fine, and it explains much of what we see on this map.

The problem is when governments use coercion to limit and/or abolish cash so that politicians have more power. And (gee, what a surprise) this is why the French are trying to crack down on cash.

Writing for the U.K.-based Telegraph, Matthew Lynn mentions the new policy and France and also explores some worrisome implications of this anti-cash trend.

France is banning the use of cash for transactions worth more than €1,000…part of a growing movement among academics and now governments to gradually ban the use of cash completely. …it is a “barbarous relic”, as some publications loftily dismiss it. The trouble is, cash is also incredibly efficient. And it is a crucial part of a free society. There is no convincing case for abolition. …When it comes to creeping state control, it is no surprise to find the French out in front. …A cashless economy would be far easier to both tax and control. But hold on. Is that something we really want? In reality, cash is far too valuable to be given up lightly. In truth, the benefits of abolition are largely oversold. While terrorists and criminals may well use cash to buy weapons, or deal in drugs, it is very hard to believe that they would not find some other way of financing their operations if it was abolished. Are there really any cases of potential jihadists being foiled because they couldn’t find two utility bills (less than three months old, of course) in a false name to open an account?

Amen. Banning cash to stop terrorists is about as foolish as thinking that gun control will thwart jihadists.

In any event, we need to consider trade-offs. Chris Giles highlighted that issue in a piece for the Financial Times.

…an unfortunate rhetorical echo of Maoist China. It is illiberal… Some argue there would be beneficial side effects from abolishing notes and coins through the regularisation of illegal activities. Really? …Cash would have to be abolished everywhere and the BoE does not have those powers, thankfully. The anonymity of cash helps to free people from their governments and some criminality is a price worth paying for liberty.

Though I suppose we should grudgingly give politicians credit for cleverly trying exploit fear to expand their power.

But never forget we’re talking about a bad version of clever. If they succeed, that will be bad news for freedom.  J.D. Tuccille of Reason explains in a second article why a growing number of people prefer to use cash.

Many Americans happily and quietly avoid banks and trendy purchasing choices in favor of old-fashioned paper money. Lots of business gets done that way…the Albuquerque Journal pointed out that over a third of households in the city either avoid banks entirely (the “unbanked”) or else keep a checking account but do much of their business through cash, check-cashing shops, pawn shops, money orders, and other “alternative financial products” (the “underbanked”). A few weeks earlier, the Kansas City Star reported a similar local situation… In both cities, the phenomenon is growing. …Twenty-six percent cite privacy as a reason for keeping clear of banks – bankers say that increased federal reporting and documentation requirements drive many customers away. “A lot of people are afraid of Uncle Sam,” Greg Levenson, president and CEO of Southwest Capital Bank, told the Albuquerque Journal. …It’s a fair bet that those who “have managed to earn income in the shadow economy” and want to keep their income unreported to the feds and undiminished by fees are heavily overrepresented among the unbanked. …most people aren’t idiots. When they avoid expensive, snoopy financial institutions, it’s because they’ve decided the benefits outweigh the costs.

Very well said, though I’d augment what he wrote by noting that some of these folks probably would like to be banked but are deterred by high costs resulting from foolish government money-laundering laws.

More on that later.

Let’s stay with the issue of whether cash should be preserved. A business writer from the U.K. is very uneasy about the notion of a society with no cash.

…tax authorities have become increasingly keen on tracking everything and everyone to make absolutely certain that no assets slip under their radars. The Greeks have been told that, come 2016, they must begin to declare all cash over €15,000 held in safes or mattresses, and all precious stones, gold and the like worth more than €30,000. Anyone else think there might be a new tax coming on all that stuff? …number-crunchers…are maddened by the fact that even as we are provided with lots of simple digital payment methods we still like to use cash: the demand for £20 and £50 notes has been rising. …They are maddened because “as untraceable bearer instruments, it is not possible to locate where banknotes are being held at any one time”… Without recourse to physical cash, we are all 100% dependent on the state-controlled digital world for our financial security. Worse, the end of cash is also the end of privacy: if you have to pay for everything digitally, every transaction you ever make (and your location when you make it) will be on record. Forever. That’s real repression.

She nails it. If politicians get access to more information, they’ll levy more taxes and impose more control.

And that won’t end well.

Last but not least, the Chairman of Signature Bank, Scott Shay, warns about the totalitarian temptations that would exist in a cash-free world. Here’s some of what he wrote in a column for CNBC.

In 2010, Visa and MasterCard, bowed to government pressure — not even federal or state law — and banned all online-betting payments from their systems. This made it virtually impossible for these gambling sites to continue operating regardless of their jurisdiction or legality. It is not too far-fetched to wonder if the day might come when the health records of an overweight individual would lead to a situation in which they find that any sugary drink purchase they make through a credit or debit card is declined. …You might think then that the person can always pay cash and remain outside the purview of these technologies. This may be the case for the moment, but we are well on the road to becoming a cashless society. …there is…a sinister risk…a cashless society would certainly give governments unprecedented access to information and power over citizens.

And, he warns, that information will lead to mischief.

Currently, we have little evidence to indicate that governments will refrain from using this power. On the contrary, the U.S. government is already using its snooping prowess and big-data manipulation in some frightening ways. …the U.S. government is becoming very fond of seizing money from citizens first and asking questions later via “civil forfeiture.” Amazingly, the government is permitted by law to do this even if it is only government staff members who have a suspicion, not proof, of wrongdoing. …In recent years, it made it increasingly difficult for companies to operate or individuals to transact by adding compliance hurdles for banks wishing to deal with certain categories of clients. By making it too expensive to deal with certain clients or sending the signal that a bank should not deal with a particular client or type of client, the government can almost assuredly keep that company or person out of the banking system. Banks are so critically dependent on government regulatory approval for their actions… It is easy to imagine a totalitarian regime using these tools to great harm.

Some folks will read Shay’s piece and downplay his concerns. They’ll say he’s making a slippery slope argument.

But there are very good reasons, when dealing with government, to fear that the slope actually is slippery.

Let’s close by sharing my video on the closely related topic of money laundering. These laws and regulations have been imposed supposedly to fight crime.

But we’ve slid down the slope. These policies have been a failure in terms of hindering criminals and terrorists, but they’ve given government a lot of power and information that is being routinely misused.

P.S. The one tiny sliver of good news is that bad money laundering and know-your-customer rules have generated an amusing joke featuring President Obama.

P.P.S. If politicians want to improve tax compliance in a non-totalitarian fashion, there is a very successful recipe for reducing the underground economy.

Read Full Post »

Older Posts »

%d bloggers like this: