The devasting failure of the Bank Secrecy Act of 1970


The Bank Secrecy Act of 1970 (BSA) was not intended as a way to catch those engaging in menial tax evasion, but rather as a tool to help federal prosecutors fight the worst of the worst: international criminal syndicates who were daring and powerful enough to make prosecution a nightmare. Unlike targeting your average street thug, the BSA was supposed to be a big gun capable of taking out the really tough guys. Organized crime. Terrorists. Human Traffickers. Drug cartels. The kind of people whose money could influence law enforcement with bribes and/or intimidation.


Yet, for all the swagger of this law, and for all the bold claims that it was essential to bringing down the worst of the worst, the threshold for reporting requirements of foreign bank accounts and cash transactions that could trigger BSA jurisdiction was set at at the amount of $10,000.


Context is everything. Look, this was 1970, and there were a lot of bad ideas that took place during the decade. Unfortunately, unlike many of the terrible fads of the 70's that eventually died out, the BSA remained.


What the BSA did with mandatory reporting requirements was to effectively create a de facto presumption of illegal activity if a foreign bank account or cash deposit exceeded this whopping $10,000 threshold. Disagree? Well, think about this this way. In order to cure the "crime" of having a cash transaction of over $10,000, a bank needs to file a Form 8300, or else. In order to cure the "crime" of having aggregate foreign bank accounts of over $10,000, the account holder, signatory, or beneficial interest holder needs to file an FBAR Form (now Form 114), or else. It becomes your affirmative duty to explain yourself to the government even when you have absolutely no motive, no intent, no desire, not even a fleeting need to commit a crime. And that, my friends, is inexcusable.

If the BSA of 1970 were a hairstyle, most experts agree it would look like this.
Image courtesy of Retronaut


We'd like to ask a few questions about this BSA $10,000 threshold

We could try and assume that the BSA reporting requirement for foreign financial accounts and cash deposits has always been a good idea. But that just begs the question, why would anyone in their right mind set the threshold at $10,000? Consider the following:


What self-respecting international criminal syndicate could get by on $10,000? In 1970, $10,000 was barely enough to buy a fully loaded Cadillac Eldorado. So why should federal law enforcement be so concerned with $10,000? Ten grand doesn't even come close to being enough to operate a drug cartel, buy off a few judges, and smuggle some arms across ambiguous borders. Even the hapless Fredo Corleone (who was smart and knew things) probably walked around with more than $10,000 in his pocket.


Did inflation not happen? Let's assume $10,000 was a magical sum of money that should create a presumption of illegal activity. But you know, in these past 44 years, there's been quite a few happenings. Heck, one thing that happened was that I managed to break my ankle on the first day of summer vacation in 1985 (true story). Yet another thing that happened — and certainly more relevant to our topic — was a steady rise in inflation. That $10,000 of 1970 is now, as of this writing, $61,348.20 according to the government's own inflation calculator. So shouldn't the reporting requirements account for that substantial change?


Are international criminal syndicates stupid? Sure, criminals do stupid things. As a matter of fact, the stupid things they do makes for a killer news headline from time to time. But the BSA wasn't intended for the low-level, dumbest crumb-bum criminals, right? Money laundering is mostly a commodity invested in by big, nasty crime syndicates. And certainly a cash business like drug king-pinning doesn't need its cash to be deposited into any bank — foreign or domestic — to make the cash valuable. Cash is inherently valuable because it is cash! We can also note that the threat of BSA penalties hasn't stopped cocaine from being so plentiful that its street price has fallen 80% since the 70's. And it sure hasn't stopped terrorists from being financed and committing the greatest ever act of terrorism against the US.


So could it be that the BSA has simply turned into a trap for those with non-criminal intentions, the kind of people who have made a reasonable mistake but aren't criminally savvy enough to avoid the BSA? Giving some benefit of doubt to the federal government, I suppose that the BSA could be used as a tool to catch the low-level criminals uneducated or unskilled enough to get caught. But then again, wasn't the purpose of the law to catch the really mean and nasty crime bosses who may be able to hide behind and/or bribe sovereign powers?


Now let's suppose that you disagree and you are convinced that the $10,000 reporting requirement for cash transactions or foreign bank accounts (foreign life insurance and foreign retirement accounts count too!) is a worthwhile pursuit. Well, hold your horses. The feds have gone in and muddled the rules in order to make that $10,000 cash reporting threshold actually lower, to an amount no one can be quite certain of.


Recently, Derek Hunter wrote an article for the Daily Caller in reference to this piece by Shaila Dewan of the New York Times:

"Imagine being informed that the Internal Revenue Service has seized your bank account. They don’t accuse you of any crime, they simply acted because your account, used for your small business, has too much money in that was deposited in increments of less than $10,000 – the amount that requires the transaction to be reported to the IRS."

That may sound absurd, but it’s happening across the country.


IRS Seizure of Assets Under the BSA for amounts less than $10,000

Robert Everett Johnson, Esq. of the Institute for Justice, a non-profit public-interest law firm, represents business owners Carole Hinders and the Hirsch brothers, both of whom the IRS has seized money from. He gives an epic takedown of this thuggery at one of my favorite tax blogs, procedurallytaxing.com.


There is no federal law that prohibits depositing cash in an amount under $10,000; the governing federal statutes are more nuanced. Banks are required to report all currency transactions over $10,000. 31 U.S.C. § 5313(a). The anti-structuring law makes it a crime for an individual to deposit less than $10,000 with the “purpose of evading the reporting requirements” imposed on the bank. Id. at § 5324(a). Under the anti-structuring laws, liability cannot be premised on the mere observation that someone has consistently deposited less than $10,000 cash. The “purpose” behind that pattern of deposits must be to evade bank reporting requirements.


There are many reasons why individuals might choose to keep their deposits under $10,000, quite apart from a desire to evade bank reporting laws. For instance, many banks charge a fee for cash deposits over $10,000 —presumably to cover the cost of preparing the reports required by federal law. Individuals may keep their deposits under $10,000 to avoid paying a fee, even if they are indifferent to whether the federal government receives a report. Other people are simply advised by bank tellers or other bank employees that it would be easier for the bank if they were to keep their deposits under $10,000, and agree to break up their deposits to make life easier for bank employees. Or, in another common scenario, businesses may have insurance policies that protect cash from theft or other loss only in amounts up to $10,000. These businesses may consistently deposit cash in amounts under $10,000 because they wish to avoid exposure under their insurance policies. None of these reasons for “structuring” cash deposits would give rise to liability under the federal anti-structuring law.


Yet, even though liability cannot be premised on mere observations of deposits totaling less than $10,000, that has not stopped the IRS from seizing money when there is no evidence of any illegal purpose.


IRS assessment of FBAR penalties under the BSA against persons with no ownership or authority of accounts

We've dedicated a significant portion of this website to detailing the FBAR nightmares that many US account holders are finding themselves in. Foreign bank accounts, foreign retirement accounts, and foreign life insurance polices are all subject to incredibly draconian policies. Honestly, they're so bad that they would make Draco, that Athenian terror who doled out some truly shocking punishments, say that the BSA is cruel and unusual.


One case in particular stands out – the case of Jon McBride. Here is the link to our interview. Jon McBride did not attempt to evade taxes and he was never charged of any crime. Rather, he was actually the victim of a crime — his money, being held in trust for him in foreign accounts, was all taken. He lost $500,000. He never had signatory authority on any account, and he wasn't sure how — if at all — he could access the funds. Yet, the court held that this counted as “tacit” control. And that somehow made it o.k. for the government to assess FBAR penalties of over a million dollars against him. Can you remind me again how the BSA helps fight international crime syndicates?


Is there any evidence to indicate the BSA of 1970 is not an obnoxious failure?

The BSA has failed to keep us safe, has failed to deter the worst of the worst, and has continued to swamp law enforcement with an excess of data. If every cash transaction and foreign holding needs to be reported, how can anyone prioritize what data is important? If everything is a priority, then nothing is a priority.


With these two examples, the Hinders/Hirsch seizures and the McBride FBAR case, we see the government blatantly ignoring the BSA language (a.k.a., the law) when it finds those parameters too constricting. You better hope that you have the means and appetite to fight the government or it's tough luck all around. My position is simple – if the government can not properly administer a law according to the legislative intent of the BSA, I would say that the BSA needs the old heave-ho into a bottomless pit (and for good measure, bury that bottomless pit under a second bottomless pit).


Why is the IRS administering the Bank Secrecy Act?

You might have asked yourself along the way, why is the IRS, an internal revenue agency, overseeing a banking law. Just because a person has a bank account does not mean that they have any revenue to pay the IRS. In fact, many people who bank lose money.


The reason the IRS is involved is because the law allows it. With recent complaints by our current Commissioner of Revenue about the limited resources of the IRS, and the nightmare he forecasts the 2015 tax filing season to be, maybe it would be a good idea if the IRS sticks to — dare I say it — issues involving taxes and revenue? Maybe the IRS could worry a little bit less about cash deposits and foreign bank account reporting and worry more about their ability to quickly and accurately process tax returns.


And the ironic completely predictable outcome?

Organized crime — the actual target of the BSA — has been exploiting the limited resources of the IRS by filing fraudulent returns year after year. These are the same fraudulent returns that are part of the nearly $200 billion stolen from US taxpayers over the past ten years. Here's a screen shot to prove it:

Full story here


The Bank Secrecy Act of 1970 needs to go.