Former Fed Governor: Law Meant To Detect Dirty Money Ineffective

Anti-money-laundering laws are ineffective, former Federal Reserve Board Governor Lawrence B. Lindsey said Friday.

"We are asking for a lot of compliance to catch a few people," Mr. Lindsey said at a Cato Institute forum here.

To underscore his point, Mr. Lindsey said that prosecutors had brought charges against just 3,000 suspects from 1987 to 1995, while 77 million currency transaction reports - 62 tons of paper - were filed by financial institutions. Just 580 of those suspects were convicted, according to the former central bank official.

Mr. Lindsey, now a resident scholar at the American Enterprise Institute, cautioned that invading the privacy of law-abiding citizens and heaping reporting costs on legitimate businesses are as much a threat to society as drug traffickers and money launderers.

"We have overstepped the bounds of balance and reason today," he said, "and we as citizens should start reining our government back before their powers increase even further."

Richard W. Rahn, president of the diversified company Novecon Corp. and former chief economist of the U.S. Chamber of Commerce, agreed that the cost of complying with rules against money laundering far outweighs any benefit.

Disparaging law enforcement authorities as "Gestapo," Mr. Rahn said efforts such as a Treasury Department proposal requiring money transmitters to report overseas money wires exceeding $750 were pointless and unconstitutional.

Treasury official Stephen Kroll said the government is sensitive to privacy issues and has taken several steps to slash needless paperwork.

However, "the proposition that money laundering should be anything but a crime is startling," said Mr. Kroll, legal counsel in the Financial Crimes Enforcement Network, the Treasury unit that collects currency and suspect activity reports from banks.

It is not outrageous for the government to scrutinize people who carry more than $10,000 across the border or conduct large cash transactions that are clearly "out of the ordinary," he said. These practices deter criminals by adding to the cost of illegal activities, he said.

The critics, however, were not deterred. They said forcing banks to report on their customers puts institutions in a difficult bind.

"Business people ought not to be policemen," Mr. Rahn said. "But under the money laundering laws, every banker is now a policeman. They are supposed to watch you."

Mr. Lindsey added that these laws have a "disproportionate impact" on low- and moderate-income people who have no banking services in their neighborhoods and who mostly conduct transactions in cash.

He told the story of a woman from a poor neighborhood who had saved money for years for a down payment on a house. She complained that bankers did not believe she had obtained the cash legally.

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