From Nixon to Biden: How the US Turned Banks into Spy Networks
By: Mike Maharrey
“Americans do not have financial privacy, really at all. We have this illusion of financial privacy.”
Cato policy analyst Nicholas Anthony summed it up bluntly in an interview with privacy advocate Naomi Brockwell.
Beginning in 1970 the federal government passed a series of acts that turned the banking industry into a spy network for the government. And the U.S. has exported this regulatory framework to other countries, creating a worldwide surveillance dragnet. Five of the main acts are covered below.
Before that time, as Anthony noted, it was a much freer market. Banks generally decided what information they wanted to gather and keep on file. This information almost exclusively remained in the possession of the bank. There was virtually no information sharing with the federal government.
BANK SECRECY ACT
That all changed when President Richard Nixon signed the Bank Secrecy Act (BSA) on Oct. 26, 1970.
The law was ostensibly passed to prevent wealthy people from hiding money in overseas bank accounts. In other words, it was a tool to help enforce tax collection.
In effect, the BSA allowed the government to access banking records without notifying account holders.
In order to gather the financial information necessary to determine if people were hiding money, the government needed more detailed records of people’s financial transactions. BSA requires banks to collect and keep records of cash purchases of negotiable instruments such as cashier checks. It also requires banks to verify and record the identity of any person purchasing money orders and checks over $3,000.
The BSA also implemented rules requiring banks to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities.
Perhaps most significantly, the BSA mandated that banks report any transaction over $10,000 to the U.S. Treasury Department. Currency Transaction Reports (CTRs) requirements include deposits, withdrawals, and other financial activities.
Anthony called this “a fundamental shift.”
“All of a sudden, we’re forcing people working in the financial industry to report other Americans to the government, for really nothing more than using their own money.”
In effect, the act put a federal agent in the room monitoring financial transactions all the time.
The Bank Secrecy Act raised privacy concerns and even faced a court challenge on Constitutional grounds, but in California Bankers Assn. v. Shultz (1974), the Supreme Court rubber-stamped the new federal power, “We see nothing in the Act which violates the Fourth Amendment Right of any of these plaintiffs.”
The Court also opined that “recordkeeping requirements, which are a proper exercise of Congress’s power to deal with the problem of crime in interstate and foreign commerce, do not deprive the bank plaintiffs of due process of law.”
However, in practice, the Bank Secrecy Act undermined the expectation of privacy people held when doing business with their bank.
On top of it, money printing from the Federal Reserve has made this even worse.
In 1970, $10,000 was a large sum of money equaling about $83,000 today. Due to inflation over the years since the passage of the Bank Secrecy Act, transactions above the $10,000 threshold are much more common. As the dollar depreciated, the number of people and individual transactions swept up in this surveillance dragnet increased significantly.
The story doesn’t end there.
As with most things, once the government got its foot in the door, it rapidly expanded its power and control.
ANTI-MONEY LAUNDERING ACTS
On top of the inflation effect, the government went even further by outright lowering the threshold by statute.
In 1986, President Ronald Reagan signed the Money Laundering Control Act. Along with making money laundering a federal crime, this act criminalized structuring financial transactions to avoid filing CTRs. In practice, making two $5,000 deposits in a short amount of time could be construed as suspicious and lead to criminal charges.
In 1992, President George H.W. Bush signed the Annunzio-Wiley Anti-Money Laundering Act. This was a significant expansion of the Bank Secrecy Act.
Annunzio-Wiley required banks to file “Suspicious Activity Reports” (SARs). This put the onus on banks to report not only large deposits and withdrawals but also transactions that fell under the nebulous term “suspicious.”
SAR reporting can be easily triggered for several reasons.
- Federal crimes against, or involving transactions conducted through, a financial institution that the financial institution detects and that involve at least $5,000 if a suspect can be identified, or at least $25,000 regardless of whether a suspect can be identified;
- Transactions of at least $5,000 that the institution knows, suspects, or has reason to suspect involve funds from illegal activities or are structured to attempt to hide those funds;
- Transactions of at least $5,000 that the institution knows, suspects or has reason to suspect are designed to evade any regulations promulgated under the Bankruptcy Secrecy Act; or
- Transactions of at least $5,000 that the institution knows, suspects, or has reason to suspect have no business or apparent lawful purpose or are not the sort in which the particular customer would normally be expected to engage and for which the institution knows of no reasonable explanation after due investigation.
According to Anthony, the financial services industry in the U.S. has filed 26 million regulatory reports under the Bank Secrecy and subsequent acts. The number of SAR reports filed increased exponentially over the years, from 62,473 in 1996 to over 3.6 million in 2022.
Banks face heavy fines for violating the BSA and failing to report suspicious activities. As a result, most banks err on the side of caution and overreport to the feds.
“No one wants to be caught saying, ‘I missed the one report, the one needle that was in the haystack.’ So, instead, take the whole haystack and send it to the government,” Anthony said.
Under these laws, banks gather a massive pile of data and send it to the government. In effect, the feds are using the financial industry to collect bulk data without a warrant. Every day Americans are subject to this surveillance dragnet for the “crime” of using their own money.
When Nixon signed the Bank Secrecy Act, it included provisions requiring the government to notify individuals if their financial activity was being examined. The Annunzio-Wiley Anti-Money Laundering Act repealed those provisions and put a veil of secrecy over financial surveillance.
In effect, banks went from being responsible for the privacy of their customers to being responsible for the privacy of the government.
Anthony said people don’t realize what’s been happening, nor do they understand the scope of financial surveillance.
“That’s partly by design by having it a confidential process, because then they don’t have to worry about people being upset about it.”
All of this is sold as a way to catch dangerous criminals and terrorists, but according to Anthony, the information rarely serves that purpose.
As Anthony noted, the most common reason for a SAR is “suspicion concerning the source of funds.” In other words, the bank doesn’t know where you got the funds. The second is because the transaction was close to but not quite at the threshold for a Currency Transaction Report.
P.A.T.R.I.O.T. ACT
Signed by President George W. Bush in 2001, the Patriot Act dramatically expanded the spy state and ushered in another major expansion in bank surveillance.
One provision of the act imposed “Know Your Customer” (KYC) requirements on banks. Under the law, the Secretary of the Treasury was empowered to set minimum standards for customer identification, to keep records of the information used to verify their IDs, and to compare their customers with lists of “known or suspected terrorists.”
It also requires banks and financial institutions to assess a customer’s “riskiness” and the likelihood they will commit financial crimes.
KYC includes requirements for “Customer Due Diligence” (CDD). As described by Dow Jones, “Due diligence is the process of classifying all the information collected during the Customer Identification Program.”
This includes evaluating the “nature and beneficiaries of existing relationships to ensure all activity is consistent with historical customer information.”
AMERICAN RESCUE PLAN
President Joe Biden ushered in another major expansion of financial surveillance when he signed the American Rescue Plan in 2021. The act was intended to direct relief to Americans in the wake of the COVID-19 pandemic, but it included a new rule which substantially lowered the filing threshold for issuing Form 1099-K from a total amount exceeding $20,000 from over 200 transactions to gross payments exceeding $600 with no minimum transaction requirement
When the rule became public, it generated significant pushback. The IRS responded by saying it “already has information on wage and salary income and the federal benefits [people] receive.”
In other words, “Don’t freak out. We’re already collecting a bunch of info on you!”
As Anthony put it, the government said the quiet part out loud.
“They kind of broke the veil and said, ‘You know that privacy you think you have? You don’t have it. And in fact, it’s been so long since you’ve had it, you actually shouldn’t be upset about this. You shouldn’t have a problem with us surveilling you because we already surveil you.’”
Due to the pushback, the Biden administration delayed implementation of the rule. Instead of applying to every bank account, the law currently requires payment services such as Venmo, PayPal, and Cash App to report business transactions amounting to $600 or more. But the IRS has said this is only temporary, and it will “phase in implementation” of the rule over time.
MORE ON THE WAY?
Don’t think for a minute they’re done. The government wants to expand financial surveillance even further.
In 2022, Rep. Jim Himes (CT) introduced the “Special Measures to Fight Modern Threats Act.” A provision in this bill would repeal a law that requires the Treasury Department to publicly disclose when it uses its broad power to prohibit or place conditions on the transmission of funds to or from any domestic financial institution.
In effect, this would allow the Treasury Department to interfere with financial transactions without any oversight or transparency.
To date, this bill hasn’t passed, but these provisions won’t go away. It was introduced as an amendment to the National Defense Authorization Act, an amendment to the American Competes Act, and then introduced as a stand-alone bill (S.3876) by Sen. Mark Warner (VA).
WHAT’S NEXT?
Anthony said the growth of the financial surveillance state is relentless.
“We’re constantly seeing this growing expansion of surveillance, and it seems like we’re really not able to turn the tide because no one really knows that that’s what’s happening.”
In March 2024, the House Judiciary Committee and its Select Subcommittee on the Weaponization of the Federal Government released a report revealing just the sweeping impact of this financial surveillance.
The report highlighted “alarming evidence” of federal law enforcement agencies engaging “in broad financial surveillance and prying into the private transactions of American consumers.”
“This surveillance, not predicated on specific evidence of criminal conduct, targeted terms and transactions related to core political and religious expressions protected by the Constitution.”
According to the report, agencies including the FBI and the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) facilitated multiple backchannel discussions with financial institutions to gather Americans’ private financial information.
“Tactics included keyword filtering of transactions, targeting terms like “MAGA” and “TRUMP,” as well as purchases of books, religious texts, firearms-related items, and recreational stores, like Cabela’s, Bass Pro Shop, and Dick’s Sporting Goods. This surveillance extended beyond criminal suspicion, likely encompassing millions of Americans with conservative viewpoints or Second Amendment interests.”
This is part of the broader surveillance state that grows more sweeping and intrusive by the minute, and it undercuts the notion that financial surveillance is just to stop money laundering and “dangerous criminals.” In effect, the federal government has weaponized the financial system by creating tools to track anybody it chooses.
