Asset Protection BLOG - Mark Nestmann

Austrian Bank Secrecy is Secure No Matter Who’s in Charge

Austria is one of the hidden gems of the international financial world.  With its strategic location, first-class banking system, political stability, and one of the world’s strongest bank secrecy laws, keeping a portion of your assets in Austria makes a great deal of sense in uncertain times.

However, Austria is undergoing an identity crisis.  Inflation is at a 15-year high.  An aging population has forced the government has scaled back social spending.  And, an explosion of immigrants from Turkey and Eastern Europe has led to a backlash against the newcomers.

Austria’s electorate has reacted to these developments by rejecting “politics as usual.”  In yesterday’s national election, Austria's Social Democrats (SPÖ) won the most votes, but the two right-wing parties made large gains, winning 29% of the vote.  That’s the largest voting block they’ve attracted since the end of World War II. 

Now, the SPÖ, led by Werner Faymann, must form a government.  It won’t be easy.  Two years ago, after the last election, the SPÖ and Austria’s Conservative Party (ÖVP) formed a coalition government.  But since then, the SPÖ and ÖVP spent most of their time spewing vitriol at each other.  It’s no surprise that voters reacted by electing politicians that promised change.

In theory, the SPÖ and ÖVP could revive their coalition, as together the parties occupy more than 50% of the seats in the Austrian Parliament.  But given the failure of the last coalition, the SPÖ may need to enlist the right wing to form a government.

One possible coalition partner is the Freedom Party (FPÖ), which garnered 18% of yesterday’s vote.  Its leader, former dental technician Heinz-Christian Strache, demands a halt to immigration, an end to globalization, a ministry for repatriating foreigners to their native countries, and the return of powers conceded to the EU. Strache also wants to ban Islamic dress and legalize the display of Nazi symbols such as the swastika. 

Another possible partner is the Alliance for the Future of Austria (BZÖ), which gathered 11% of the votes.  Its head Jörg Haider formerly led the FPÖ, but in 2005 Haider and several other party leaders left to form the BZÖ.  The split left Haider and Strache bitter rivals. 

However Faymann decides to form a government, if he includes either one or both of the right-wing parties, he’ll risk EU retaliation.  In 2000, when Haider and the FPÖ won 28% of the vote and gained a place in the coalition government with the ÖVP, the EU imposed sanctions against Austria.   Yet, if Faymann fails to take the right wing into the government, he will find it difficult if not impossible to form a governing coalition.

The good news, though, is that no matter which parties Faymann includes in a coalition, Austria’s future as an international financial center remains bright.  For instance, one of the few things that all of Austria’s badly splintered political parties (with the exception of the Green Party) agree on is the need to protect bank secrecy.  They clearly understand that giving foreign tax collectors access to information about Austrian accounts would not only sacrifice Austrian sovereignty, but would massively damage the country’s financial status.  And that’s a reassuring thought to anyone concerned about our eroding financial privacy.

The Austrian bank secrecy law is only one of dozens of "Austrian money secrets" I reveal in my book, Austria Money Secrets.  To learn how you can obtain your own copy of this book, click here.

Copyright © 2008 by Mark Nestmann

EU Tells Savers to Invest Outside Europe

With an average tax burden consuming more than 40% of GDP, the 27-member European Union already has some of the world’s highest taxes.

At the same time, the EU faces a fiscal crisis.  Most EU countries have huge unfunded liabilities, especially for pensions. Unless EU economies grow at a much higher rate than they have over the last 20 years, taxes will skyrocket as Europe’s baby boomers retire. 

You might think that the EU would encourage countries to take steps that can spur economic growth, such as reducing taxes.  That’s the approach EU member Ireland took in the 1980s and 1990s.  The results were dramatic.  While 20 years ago, Ireland was one of Western Europe’s poorest countries, it now has the second highest standard of living in the EU. 

But instead of encouraging other countries to emulate Ireland’s example, EU leaders accused Ireland of “harmful tax competition.”  And, starting in 2005, it began an initiative to prevent Europe’s savers from escaping the EU’s suffocating taxes. 

This initiative is called the EU Savings Tax Directive.  Under the Directive, EU members have two choices.  The choice the EU prefers is to exchange information on the offshore savings of EU residents with their home tax authorities.  That way, the home country can tax these savings. 

Alternatively, EU members may impose a 20% withholding tax (rising to 35% in 2011) on savings income generated by EU residents.  Most of this revenue goes back to the EU residents’ home countries.  This option allows EU countries with bank secrecy laws (e.g., Luxembourg and Austria) to comply with the directive without sacrificing confidentiality.  Under heavy pressure from the high-tax EU, non-EU members Switzerland and Liechtenstein agreed to impose the tax on deposits from EU residents.

However, the plan has serious flaws, and the EU now has the worst of both worlds: minimal revenues from the savings tax initiative combined with massive capital flight to countries not participating in it—primarily Hong Kong and Singapore.  In addition, since the directive only covers interest payments, it's easy for EU depositors to switch to dividend paying stocks or real estate—neither of which is covered by the directive—to preserve financial privacy. 

Under the circumstances, the smartest thing the EU could do is to ditch the plan.  But instead, it’s planning to expand the Directive.  According to the European Commission, the governing body of the EU, amendments will likely include:

• Increase the amount of data exchanged between EU members on accounts held outside a EU resident’s home country
• Increase the number of investments subject to information exchange or withholding, such as life insurance
• Restrict the use of intermediaries to avoid tax by handling interest payments on behalf of EU residents
• Tie in information exchange mechanisms to anti-money-laundering regulations to more easily identify the beneficial owner of accounts.

I predict the expansion of the EU Savings Tax Directive will result in even more spectacular capital flight from Europe.  Asia’s offshore havens will boom.  And the EU’s high-tax economies will continue to stagnate.

Copyright © 2008 by Mark Nestmann

It’s Not Just Sarah’s E-Mails at Risk—Yours are Too!

Last week, the media reported that hackers had obtained unauthorized access to vice-Presidential candidate Sarah Palin’s Yahoo! personal e-mail account.  Within hours, photos of her family and screenshots of her messages were posted on various Web sites.

You might think that such access is difficult to achieve.  It isn’t.  You also might think it’s illegal to read someone else’s stored e-mail messages.  But according to the Bush administration, it’s not.

Breaking into a Yahoo! e-mail account is simplicity itself.  You just have to take advantage of Yahoo’s “forgot-my password” feature.  If you know your target’s birthday, county of residence, and zip code, you’re almost there.  Your last hurdle is to answer a security question. If you answer it successfully, you can trick Yahoo! into giving you access to the account. 

The hacker who broke into Palin’s account claims he used Wikipoedia to retrieve Palin's birth date and zip code.  To answer the security question (“Where did you meet your spouse?”), he consulted a search engine.  Within minutes, he was reading her e-mail.

Incredibly, this type of access is perfectly legal, according to the Department of Justice.  It claims that e-mails that you open, but leave on the mail server of Yahoo! or other online e-mail service have no legal protection.  That’s despite the fact that courts in the Ninth Circuit (where both Palin and Yahoo! are) have ruled that federal law prohibits unauthorized access to both read and unread emails.  But since the DOJ disagrees with these decisions, it’s highly unlikely it will prosecute Palin’s hacker—or anyone else who accesses an account this way.

Why does the DOJ take this position?  I think it’s to make it easier for federal investigators to snoop into anyone’s e-mail account at will.  That’s despite the fact that to read your stored e-mails, police ordinarily need only demonstrate that the information sought is relevant to an investigation.  There’s no warrant required.

How can you protect yourself from this kind of surveillance?  First, don’t keep copies of any e-mail you send or receive on Yahoo!, g-Mail, and similar online services.  Second, when you sign up, don’t use your real birthday, zip code, or country of residence as an identifier.  This prevents the kind of hack that Palin suffered.

Finally, practice safe e-mailing.  Encrypt your messages with a program like PGP, and never send an unencrypted message to anyone that you wouldn’t be willing to have printed on the front page of The New York Times.

Copyright © 2008 by Mark Nestmann

IRS Cracks Down on Offshore Reporting

If you’re a U.S. citizen or permanent resident, Uncle Sam wants to know if you’re investing or doing business offshore.  And if you don’t “tell all” to the IRS, you could face some very nasty penalties.

Here are a few examples (there are MANY others) of the reporting obligations U.S. persons have:

* Failure to acknowledge foreign bank accounts.  If you have an interest in or authority over foreign “bank, financial, or ‘other’ financial accounts” with an aggregate value that exceeds US$10,000, you must file Treasury Form TDF 90-22.1 annually.  You face a US$10,000 civil penalty for each year you fail to file—or if you file late.  You must file this form by June 30 of the current year for any foreign accounts you held during the previous year.

*Failure to file detailed reports on foreign trusts. If you fund a foreign trust, the IRS almost always considers you its “owner.”  And it insists that you (or the trustee) send it detailed reports about the trust.  Each year, you must file Form 3520-A, which contains financial information about the trust.  If you don’t bother filing Form 3520-A, or file it late, you face a penalty equal to 5% of its gross value.  This form is due at the same time as your personal tax return.

You (or someone to whom you delegate this responsibility) must file additional paperwork (Form 3520) when the trust makes loans, distributions, or you make additional contributions.  The penalty for failing to file—or filing late—is a whopping 35% of the loan, distribution, or contribution.  Generally, Form 3520 is also due at the same time as your personal tax return.

What if you formed and funded a foreign foundation, such as a Panamanian private interest foundation?  Most people who form foundations intend to use them as a “trust substitute.”  In that case, you’ll to file a form to tell the IRS that you want the foundation taxed as a trust.  Subsequently, you'll need to file Form 3520-A annually and Form 3520 when the foundation conducts a reportable transaction.  If you fail to make these filings, the same penalties apply.

Don’t try to prepare Form 3520 or 3520-A yourself.  You’ll probably require professional assistance, as they’re among the most complex forms the IRS publishes.

* Failure to acknowledge ownership of a foreign corporation.  If you hold or acquire more than 10% of the shares (by vote or value) of a foreign corporation, you must file Form 5471 annually.  If you’re an officer or director of the corporation, you may also have a filing obligation. And if you neglect to file this form (possibly accompanied by highly-detailed schedules), the IRS can fine you US$10,000.  This form is due at the same time as your personal tax return.

Incidentally, these penalties are only for civil violations of the reporting rules.  If the IRS believes that you “willfully” failed to file any of these forms, it has the authority to bring criminal charges against you, with even heavier penalties. 

Fortunately, the IRS often waives these penalties—or fails to impose them—if you have a reasonable explanation why they weren’t filed.  And, up to now, not knowing you have a filing obligation has often been deemed an acceptable excuse.

But that’s beginning to change.  The IRS is already imposing the 35% penalty for a late Form 3520, even if it’s only one day late.  And earlier this month, the IRS issued a notice stating that beginning on Jan. 1, 2009, it will automatically assess the US$10,000 penalty on late filings of Form 5471.  I wouldn’t be at surprised to see similar announcements in the near future for other mandatory disclosures relating to foreign investments or business relationships.

Copyright © 2008 by Mark Nestmann

When Can the FBI Grab YOUR Family Jewels?

I’m not much of a show biz buff.  Until very recently, I actually associated the name Anne Hathaway with that of William Shakespeare, who she married in 1582.

Yes, I’m entertainment-challenged.  But Anne Hathaway’s name came up once again in recent weeks.  This Anne Hathaway, of course, is an actress and the star of the current-hit-movie Get Smart!  And, she’s also the newest poster child for civil asset forfeiture.

The modern Anne Hathaway had the misfortune of becoming romantically involved with an Italian real estate developer (and now convicted felon) named Raffaello Follieri.  During their relationship, Follieri provided lavishly for Hathaway.  He put her up in his US$37,500/mo. apartment in New York’s Trump Tower, bought her expensive jewelry, and helped finance a luxurious lifestyle of international travel and shopping.

Unfortunately for Hathaway, much of the money Follieri spent on her didn’t really belong to him.  Earlier this year, the FBI arrested Follieri on fraud charges.  And two weeks ago, Follieri pleaded guilty to wire fraud, money laundering and conspiracy.  Follieri acknowledged stealing at least $2.4 million from investors and diverting it to his own use.

According to court documents, Follieri posed as a Vatican insider to raise money, supposedly to purchase properties owned by the Catholic Church for renovation or redevelopment.  However, the money actually went to support his opulent lifestyle.

The FBI never alleged that Hathaway knew anything about her boyfriend’s fraud.  But last week, she gave the FBI much of the jewelry Follieri purchased for her, including two Rolex watches.  The proceeds from their eventual sale will go to help reimburse the defrauded investors.

Hathaway “voluntarily” delivered the jewelry.  But if she didn’t agree to do so, the FBI could have seized it in a “civil forfeiture.”  In this type of forfeiture, you don’t need to be accused of a crime, much less convicted of one, to lose your property. 

As I’ve written previously, civil forfeiture often leads to unjust results—although it didn’t in this case.  For instance, if Follieri had borrowed Hathaway’s car to carry out his fraud, the FBI could have seized it.  In 1996, the U.S. Supreme Court ruled that police could use civil forfeiture laws to confiscate a vehicle from an owner who was unaware of its illegal use by someone else.  A civil forfeiture reform law enacted in 2000 gives innocent owners more protection if federal civil forfeiture cases, but local, state, and federal authorities still seize billions of dollars each year through civil forfeiture. 

Can the FBI seize YOUR family jewels? If you can’t prove that you purchased them with your own legally earned, tax-paid funds, they could be vulnerable.  Just ask Anne Hathaway.

Copyright © 2008 by Mark Nestmann

Protect Your Encryption Key

Over the weekend, a personal computer I own was stolen. Fortunately, it contains no personal, financial, or customer data.  However, it has a copy of the private key I use to sign PGP-encrypted messages.

What that means is that the person or persons who stole the PC, or anyone else who gains access to it,, can create encrypted messages that appear to come from me.  However, the thieves don’t have my pass phrase.  This means they can’t decrypt messages from others encrypted with my public key.

To avoid the possibility that someone might impersonate me with the stolen PGP private key, I’ve created a new PGP public/private key pair.  I’ve also revoked the stolen public keys so that others can't encrypt data to these keys.

I've attached my new public key to this message. Download mark_nestmannnew.asc

Please use this key for all future encrypted correspondence with me. It's also on the PGP key server at https://keyserver.pgp.com.

Incidentally, changing your encryption keys periodically is a good security precaution. The more you use an encryption key, the more attempts a hacker has to attack it by brute force.  And, if your PC is ever lost or stolen, you should definitely generate a new key pair.

For those of you who communicate with me via encrypted e-mail, I apologize for the inconvenience.

Copyright © 2008  by Mark Nestmann

P.S. If you want to send me an encrypted message, please use the attached public key.

The Terrorist Excuse for Global Financial Surveillance [Part IV]

In the first three segments of this series, I demonstrated how the global surveillance network of inter-connected “financial intelligence units” (FIUs) have utterly failed to meet their objectives of unearthing terrorist financing and other financial crimes. I also showed that the real purpose of this network is much more likely to facilitate asset forfeiture and politically motivated surveillance.  It has very little to do with uncovering criminal activity, although it may occasionally do so.

Financial intelligence agencies such as the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) place many persons at risk merely through the routine exercise of their business or profession.  If you or your business conducts foreign transactions, you face a higher likelihood of investigation, asset confiscation, etc.  That’s because foreign financial flows are of greatest interest to global FIUs.

If you conduct business with designated political enemies (e.g., persons or entities on "terrorist" or other watch lists), you face the highest risk of all.  Even if the transactions are perfectly legal, should you conduct them with political enemies of the United States or other powerful governments, you face draconian sanctions.

The United States has by far the world’s most sophisticated system of financial surveillance.  To avoid pervasive U.S. financial surveillance, I highly recommend offshore investments and relationships:

• Place a portion of your assets outside the United States.  The most private—but also the riskiest—investments are contracts with unregulated persons, not with financial institutions or trustees.  An example would be an agreement with a private individual in another country to manage an investment for you, in that person’s name.  While such relationships may be reportable and taxable, they’re the least likely to show up on the financial "radar screen."  You can also purchase some regulated contracts, such as insurance policies, in relative privacy. If you open a bank account, settle a trust, or form a company in your own name, you’ll be subject to greater surveillance.
• Transfer funds outside the U.S. dollar. It’s still possible to legally transfer funds from the United States, into alternative currencies.  Now may be an excellent time to do so as the dollar has appreciated sharply in recent months.   
• Use attorney-client privilege. Many countries (including EU members) now require attorneys to report "suspicious transactions" to their domestic FIU.  Keeping this requirement in mind, you can achieve considerable privacy by conducting business and financial transactions through an attorney. However, in virtually all jurisdictions, attorneys can’t provide advice that would result in or encourage the commission of a crime.
• Evaluate non-reportable offshore investments. Depending on where you live, certain offshore relationships or assets may not be legally reportable.  U.S. persons need not report assets held in a non-U.S. safety deposit box, where no foreign financial institution has legal custody of those assets. Other non-reportable offshore investments for U.S. persons include real estate, yachts, vehicles and other assets not considered a "foreign bank, investment or other financial account."
• Use cash. Despite the global crackdown on cash, you can still achieve significant privacy by using cash instead of debit/credit cards or checks. This is particularly true outside the United States. However, cash transactions (over US$10,000) are subject to substantial surveillance.  An increasing number of countries also require that you declare substantial sums of cash when crossing domestic frontiers.  Finally, most countries now require banks and other financial institutions to report suspicious cash transactions to the domestic FIU.

Copyright © 2008 by Mark Nestmann

The Terrorist Excuse for Global Financial Surveillance [Part III]

In my two most recent blog entries, I described how the United States and other governments have quietly erected a network of technology and law to eliminate financial privacy worldwide.  The most visible manifestation of this network are “financial intelligence units” (FIUs) such as the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN), now linked to more than 100 similar FIUs worldwide.

I also described how this surveillance system has utterly failed at accomplishing its stated objective: to unearth terrorist financing and other financial crimes.

If FinCEN and other FIUs are useless to meet their stated objectives, what's their actual purpose?  I believe that purpose has nothing to do with unearthing illegal activity, although it may sometimes do so.  Instead, one unacknowledged objective of this network is to permit governments worldwide to conduct politically motivated surveillance.  Another is to identify assets for confiscation, thus creating a self-funding network of global surveillance.

Consider, for instance, how FinCEN could retaliate against an uncooperative congressional leader.  Has that individual ever made a financial transaction that exposed an embarrassing preference or illegal activity?  FinCEN and the global FIU network provides an ideal mechanism for blackmailing politically exposed persons—and anyone else.

There’s also no doubt that a global network of FIUs funded with forfeited assets creates the same conflict of interest that plagues U.S. civil forfeiture laws: the development of a worldwide bounty-hunter mentality. 

Seizures of narcotics, gambling equipment, nuclear materials, child pornography and other illegal commodities generate no revenues for law enforcement.  But seizing agencies keep up to 100% of the seized proceeds of the sale of such items, along with all property "involved in" such transactions.  Some of this bounty is now shared with FIUs.  Strong incentives thus exist for police to maximize property seizures by delaying arrests of persons engaged in illicit sales of narcotics or other illegal merchandise until they have sold all or most of their supply. 

It’s inconceivable that a global network of FIUs operating under these incentives will not be misused for political purposes or private gain.  Far from ending money laundering, the network will facilitate it.

This is already occurring in other "secure" government databases.  Columbian drug cartels have penetrated databases operated by the U.S. Drug Enforcement Administration.  The U.S. wiretapping system has been similarly compromised. 

Why should anyone expect FinCEN and its affiliate FIUs to be different?  Certainly, terrorists and drug kingpins would pay dearly for access to FIU databases.  Knowing what information FIUs have on their assets and laundering techniques, not to mention those of their competitors, would be extremely valuable.

These concerns aren't merely theoretical.  In 2002, the Chief Justice of the Cayman Islands accused the head of the island's FIU of wiretapping his telephone and destroying evidence that may have proven the innocence of a bank accused of money laundering.  Since FIUs are expected to generate revenues beyond their operating costs, corruption in the Cayman FIU may be only the first of many similar scandals to come.  The only reason why we haven’t learned of similar scandals in other countries is that FIUs are considered “intelligence agencies” with all operations shrouded in secrecy.

Even if you’re not a criminal, muckraking politician, or other person of interest to the global network of FIUs, worldwide surveillance of virtually all financial transactions may place you at risk merely through the routine exercise of your business or profession.  In my final installment of this series, I’ll outline some of the ways you can protect yourself from what can only be described as “global surveillance run amok.”

Copyright © 2008 by Mark Nestmann

The Terrorist Excuse for Global Financial Surveillance [Part II]

In my most recent blog entry, I described how the United States and other governments have quietly erected a network of technology and law to purportedly combat financial crime and terrorism. 

However, this surveillance system has utterly failed at accomplishing its stated objective.  What it has accomplished is to convert millions of innocent people into terrorist suspects.

In the United States—the country with the world's most advanced system of financial surveillance—when the FBI tried to design a profile of how terrorists might use bank accounts, it only came up with one main characteristic.  That was large deposits with withdrawals of cash in a series of small amounts.  Unfortunately for those FBI agents searching for terrorist needles in financial haystacks, this profile matches more than 25% of the customers of U.S. banks.

Nonetheless, U.S. financial institutions must file a "Suspicious Activities Report" (SAR) with the U.S. Treasury's financial intelligence unit, FinCEN, if you conduct a transaction that might be potentially linked to terrorism, or any other crime or regulatory violation.  Financial institutions," incidentally, include not just banks, but securities brokers, insurance companies, futures and commodities brokers, money services, businesses, casinos, travel agencies, car dealers, and real estate brokers.  Even the U.S. Postal Service is a "financial institution."

You might wonder how these businesses are supposed to determine what's suspicious.  The law is amazingly vague.  A suspicious transaction is one that exceeds US$5,000 and "has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage, and the bank knows of no reasonable explanation for the transaction after examining the available facts."  For some "financial institutions," the threshholds are even lower.

For instance, say that you have an average balance in your bank account of US$2,500.  One day, you sell your vehicle for US$7,500 in cash and deposit the proceeds in your bank account.  Is the transaction suspicious?  It could be, according to the regulations: the transaction exceeds US$5,000 and it's "not the sort in which the particular customer would be expected to engage."

You'll be happy to learn that it's illegal for the company that files the SAR to inform you that it's done so.  And, once filed, every U.S. Attorney's Office and dozens of law enforcement agencies can review it.  They don't need a court order, warrant, subpoena, or even a written request to do so.  Indeed, law enforcement agencies can, and do, "troll" through suspicious activities reports whenever they want.

As of December 31, 2007, FinCEN had received over 5.4 million SARs.  Businesses throughout the United States add approximately 100,000 SARS each month to this total.  And it's no wonder.  The penalties for failing to file a SAR, when FinCEN determines, after the fact, that the transaction should have aroused suspicion are draconian.  You can be fined up to US$250,000 or imprisoned up to five years for failure to file a SAR.

You might wonder how many terrorists or other criminals this intrepid system of pervasive surveillance has uncovered.  It's not easy to find this information.  None of the self-congratulatory publications from the Treasury's FInancial Crimes Enforcement Network (FinCEN) seem to think this statistic has any relevance.  Indeed, the most recent data I could uncover dates from 2004, when FinCEN received "only" 700,000 SARs.  Of those 700,000 forms, FinCEN passed on fewer than 900 of them to a law enforcement agency for follow-up.  Another way of looking at this is that nearly 99.9% of SARs filed identified apparently innocent activity and never led to a criminal investigation.

But the collateral damage is huge.  In one case, a mistaken report caused the accounts of 1,100 innocent depositors to be frozen.  Allegations have also surfaced that SARs are being made available (illegally) to private investigators and others.  In the meantime, FinCEN's budget continues to grow, and more than 100 other FIUs now exist around the world with a similar mandate. 

If FinCEN and similar FIUs are useless for combating terrorism or financial crime, what's their actual purpose?  I'll answer that question in my next blog entry.  I'll also make some recommendations to protect yourself, and your assets, in this age of all-encompassing financial surveillance.

Copyright © 2008 by Mark Nestmann

The Terrorist Excuse for Global Financial Surveillance [Part I]

Quietly and with little fanfare, governments throughout the world have constructed a pervasive network of technology and law to eliminate financial privacy worldwide.

There are many facets to this network:

• Money laundering laws that criminalize financial transactions based on the perceived motives of the individuals who conduct them;
• Civil forfeiture laws that permit the confiscation of laundered money without a criminal conviction;
• Tattletale laws that require citizens to report suspicious financial transactions to authorities;
• Government-funded organizations (such as the Financial Action Task Force) that set "minimum standards" for anti-laundering and asset forfeiture laws globally, and impose sanctions against non-compliant countries;
• A network of interconnected "financial intelligence units" (FIUs) in more than 100 countries (such as the U.S. Financial Crimes Enforcement Network), often funded with the proceeds of confiscated assets.  These FIUs are largely unaccountable to any political process, because they are deemed to be conducting "intelligence" operations.

Originally justified to fight the "War on Drugs," this network took on a new purpose after the events of Sept. 11, 2001.  Governments have successfully convinced their citizens that they must give up their privacy in order to achieve security. 

Nor are governments merely concerned with tracking the movement of "dirty money."  They now seek to insure that legitimate funds aren't used for illegitimate purposes.  Naturally, governments define what "illegitimate" and "legitimate" means.  And since hiding your lawfully earned, after-tax funds from the government is now a crime in most countries, this effort doesn't just affect terrorists.  It affects all of us.

You've no doubt noticed that you must reveal much more information than you once did to carry out even the simplest financial transactions.  Take opening a bank account, for instance.  I opened my first bank account at age nine, in 1964.  I walked into a bank near my home and told the teller I wanted to open an account.  After completing a simple one-page form, I deposited the proceeds of my piggy bank—about $20—into my newly created account.  The teller told me that one of my parents would need to sign off on another simple form before I could add to or draw on the account.  And that was all.

If you've opened a bank or securities account recently, the process is far more difficult today.  The bank must first verify your identity through a government-issued photo ID.  It must also verify your residential address.  In the United States, it must also make certain your name doesn't appear on a list of U.S. political enemies compiled by an obscure Treasury bureaucracy called the Office of Foreign Assets Control (OFAC). 

Once you've opened the account, the bank must continuously monitor it for "suspicious transactions."  Should you conduct a suspicious transaction--essentially, anything out of the ordinary--the bank will likely freeze the account, pending an investigation and perhaps placing your name on a list of suspected terrorists.

Even if this all-encompassing system actually helped to catch terrorists or other criminals, I'd still oppose it on civil liberties grounds.  After all, the U.S. Bill of Rights—and comparable law in other countries—forbids searches and seizures without "probable cause" of wrongdoing.  Unless we assume everyone carrying out any type of financial transaction is a criminal, this type of pervasive financial surveillance is a prima facie violation of our rights.

However, it turns out that this system isn't at all effective in catching terrorists or anyone else engaged in wrongdoing.  Indeed, the main thing it accomplishes is inconveniencing legitimate account-owners who happen to do something unusual in their account, and flagging them as suspected terrorists.

In my next blog entry, I'll explain how this surveillance system has utterly failed at accomplishing its stated objective.  I'll also explain what it has accomplished—and what I believe to be its actual objective: a global system of financial surveillance to be used against the political enemies of the governments that operate it. 

Copyright © 2008 by Mark Nestmann