Anti-Money Laundering Enforcement: What Happened To Due Process Of Law?

After two Manhattan Contrarian posts in the last month on the subject of anti-money laundering (AML) regulation (here from November 24 and here from December 9), the topic is suddenly in the news. On November 26, Marc Andreessen appeared on the Joe Rogan podcast, with an extensive discussion of the debanking of the crypto industry, and that appearance got some notice. The Wall Street Journal ran two op-eds on the subject of AML on Monday (December 16): “Debanking and the Return of Operation Choke Point” by Allysia Finley, and “Businesses Get a Reprieve from a Draconian Law” by Caleb Kruckenberg and Andrew Grossman. Both are worth your time if you can get behind the paywall.

It’s about time that some attention is paid to this issue. AML enforcement ranks right up there among the most egregious systematic violations by the government of the people’s civil rights. As with the First Amendment violations of the Censorship Industrial Complex revealed by the Twitter Files, the AML regime shows how quickly and how completely seemingly well-intentioned government regulators can veer completely off the rails into clearly illegal and oppressive conduct without anyone involved appearing even to realize it. In their minds, they are just innocently trying to rein in the bad guys. Thousands upon thousands of people work in the AML enforcement game for government and for banks and financial institutions, and none of them seem to see anything amiss. Or if they do, they are keeping quiet, maybe out of career ambition, or fear of retribution.

The huge problem with AML enforcement is that the enforcers have completely lost track of the people’s right to due process of law. That’s the right guaranteed by the Fifth Amendment (“No person shall be . . . deprived of life, liberty, or property without due process of law.”) with respect to the federal government (and, in the same words, by the Fourteenth Amendment as to the states). We are all familiar with what the requirement of “due process” means. If the government wants to take away a person’s life, liberty or property, it first must issue a charge and notify the accused; then there must be a trial or hearing before a neutral party (judge or jury) where the accused gets to present a defense; then it is up to the neutral party (judge or jury), not the prosecutor, to make a finding of wrongdoing after hearing; and then the punishment, if any, must be issued by the neutral party (judge).

With that in mind, let’s take another look at the Consent Order agreed to by TD Bank with the Treasury Department’s FinCEN and the OCC (undated, but apparently from approximately October 10). Here is a quote from page 13-14 of that document that I included in my December 9 post:

Demarketing Backlogs. . . . TD Bank did not have a process to apply restrictions or appropriate mitigating controls to customers that are the subject of SAR filings. Instead, the Bank left demarketing adjudication to an investigator after a certain number of SAR filings. As the Bank’s AIU began working through its large queue of potentially suspicious transactions, inevitably a portion would be found to be suspicious, and some of the related customers would be subject to the Bank’s demarketing processes. TD Bank’s lack of staffing and backlogs allowed these customers—which the Bank deemed to pose an unacceptable money laundering risk—to continue transacting without appropriate controls consistent with the Bank’s own AML program.

Let that sink in. The regulators are imposing a large penalty on a bank for failure to “demarket” customers quickly enough to satisfy the regulators. The bank had made a “queue” of customers subject to multiple SAR (suspicious activity report) filings, and then left it up to an internal bank “investigator” to “adjudicate” whether each customer would have his accounts closed. Because this process took some time, and because some of the people in the queue would inevitably prove to be “suspicious,” the regulators deem that the bank has allowed an “unacceptable money laundering risk.” Thus they impose a $3 billion penalty on the bank.

Wait a minute. Customers are being deprived of a serious piece of liberty — the ability to have bank accounts — at the demand of the government. In today’s increasingly cashless and card-dependent society, losing bank accounts can mean placing severe limitations on many life activities, from running a business to traveling to just paying ordinary expenses. And yet these customers have not been charged with anything, have not had a hearing before a neutral, and have had no ability to defend themselves. The so-called “adjudication” is not by a neutral party, but rather takes place somewhere inside a bank, without the customer even knowing about it until it is decided. There is no right to appeal to any judge or to the court system. And the punishment — debanking — is what the regulators demand, not what any judge or even hearing officer has imposed. Government imposes the punishment of loss of liberty on the errant customers, completely without due process, through the device of threatening sanctions of billions of dollars on the institutions that decline to do its bidding.

How is this remotely OK? More important, how can anybody participating in the process think it is OK? Of the thousands of lawyers, in and out of the government, involved in this process, all of them went to law school. Did every one of them miss the part about the Constitution?

I have some sympathy for the banks here. Clearly, TD here thought that the potential cost of its trying to challenge the AML regime on behalf of its customers was just too high. If it had lost, the regulators may have imposed penalties that could be a multiple of the $3 billion that it paid, not to mention business restrictions, which could even have included complete exclusion from the United States.

But the arrogance and hubris of the regulators is completely unfathomable.

If you are curious, as far as I can find, there is nothing in the relevant statutes that confers upon the regulators any explicit ability to demand that banks “debank” suspicious customers, and to impose multi-billion dollar fines to banks that refuse. Here is the text of the USA PATRIOT Act if you want to look for yourself. The closest I can find is Section 314, which requires banks and financial institutions to “cooperate” with the regulators in efforts to deter money laundering. In a non-lawless world, that would mean that the banks provide information to regulators and prosecutors, and the regulators and prosecutors use that information to charge and prosecute alleged wrongdoers in the courts as they see fit.

I certainly hope that the new administration is going to pay some attention to this situation.