Few federal laws and accompanying regulations are as pernicious as the misnamed Bank Secrecy Act. This title is a classic example of doublespeak, since the act insures that financial institutions and their clients will have no secrets whatsoever from the federal government. With regulations (31 CFR 103) written primarily in 1972, the Internal Revenue Service has been given access to the minute details of our financial activities.
The definitions section of the regulations is so broad that every type of financial institution and transaction can be included under the law's provisions. Terms like bank and financial institution are defined with such catch-all phrases as "a savings bank, industrial bank or other thrift institution; any other organization chartered under the banking laws of any state; a person who engages as a business in dealing in or exchanging foreign currency, as for example, a dealer in foreign exchange or a person engaged primarily in the cashing of checks; a licensed transmitter of funds or other person engaged in the business of transmitting funds abroad for others." The term monetary instruments encompasses every financial instrument yet created by man. The "United States" is the various states, the District of Columbia, the Commonwealth of Puerto Rico, and the territories and possessions of the United States.
What do all these organizations and people have to do to avoid conflict with the IRS? For one thing (103.22), "each financial institution shall file a report of each deposit, withdrawal, exchange of currency or other payment or transfer, by, through, or to such financial institution, which involves a transaction in currency of more than $10,000." Note that this is a requirement not merely to keep records but to report such transactions to the IRS (within 45 days). Such reports must include the detailed identity of the person involved.
Now what will the IRS do with such information? A reasonable guess is that many innocent people will be harassed by the IRS on the basis of fishing expeditions made possible by this law. All of this is going on behind the citizen's back and without any notification to him. The Wall Street Journal reported on April 15, 1977, that a New York bank was fined $222,500 for failure to file timely reports of cash transactions under this section of the regulations. The intent of the IRS seems clear in the matter of enforcement.
All transfers of funds in any form in amounts over $5,000 either out of or into the United States must be reported (103.23). This section stipulates that a person who merely "counsels" any other person to transfer such funds must file a report. This would seem to include the authors of books or newsletters who advise such transfers. Clearly, it would apply to personal consultation. In the same benign spirit, the regulations require that any ownership in a foreign account be reported on the citizen's income tax return. This regulation is detailed in 103.32 with this language: "Such records (of foreign accounts) shall contain the name in which each such account is maintained, the number or other designation of such account, the name and address of the foreign bank or other person with whom such account is maintained, the type of such account and the maximum value of each such account during the reporting period. Such records shall be retained for a period of 5 years and shall be kept at all times available for inspection as authorized by law."
What has happened to our guarantee of security in our persons, houses, papers, and effects—provided by the Fourth Amendment to the Constitution? We find similar laws regarding foreign accounts in every nation that abridges the liberty of its citizens. Many countries forbid foreign accounts, and all dictatorships greatly restrict the financial freedom of the people. It is most interesting to study the progressive measures Hitler took to confiscate the property of German citizens who attempted to escape his tyranny by using foreign accounts. And liberals maintain that there is no firm link between economic and political freedom!
Not yet satisfied, the IRS mandates each financial institution to retain "a record of each extension of credit in amount in excess of $5,000, except an extension of credit secured by an interest in real property, which record shall contain the name and address of the person to whom the extension of credit is made, the amount thereof, the nature or purpose thereof, and the date thereof" (103.33). The record of credit extension seems particularly inquisitive. It obviously allows the IRS to determine everything about a person's private financial transactions in amounts over $5,000, and such designated amounts can be lowered at any time. Because it's easier, financial institutions in fact keep records of all credit extensions in any amount. The IRS can merely review the file for the total picture of a citizen's affairs.
But the worst news is section 103.34, which goes far beyond the larger transactions discussed above and requires detailed records to be kept on virtually all transactions between financial institutions and citizens—with, of course, detailed identification of the citizen. (In a magnanimous gesture, the IRS did make an exception in not requiring a taxpayer identification number on Christmas Club savings accounts, provided the annual interest does not exceed ten dollars. Santa Claus.) Similarly detailed record keeping is required of brokers and dealers in securities. These regulations do not yet require such voluminous detail to be reported to the IRS, which means the IRS must go to the records.
The question then is how the IRS goes about the perusal of such records. One might surmise that they must show some probable cause of wrongdoing, criminal activity, or at least innocent error and convince a judge to issue a subpoena for such records. Guess again. In most cases, an IRS agent can get the bank to allow access to any records the agent wants to see. Naturally, bankers are anxious to cooperate with such awesome power. If not, the agent merely calls the US Attorney, who routinely issues the document, no questions asked—a slight inconvenience for the agent, who no doubt notes the offending banker's name. Moreover, an agent can request any financial data with an "administrative summons" that can be filled out on the spot.
What can an experienced agent determine from your financial records? Why not contemplate this while looking over a few months' bank statements. You will soon get the discomforting feeling that your behind is naked. Big Brother not only is watching but knows you in intimate detail. Most of this snooping is sanctioned on the spurious grounds that the records belong to the financial institution and not to the individual involved. Thus, no property or privacy of the citizen is being violated. This is a vicious sophism.
Not many people are fully aware of the Bank Secrecy Act and its awesome potential, and some complaining should be done about it while we still have the opportunity. But don't route your complaint through a financial institution.
Mr. McBurney has a master's in business administration, is a C.P.A., and teaches at North Carolina State University at Raleigh.