Legal Commentary

As part of the ?know your customer? requirements, banks must assess their clients? financial patterns and set guidelines to ensure that an alarm is sounded if there are unusual transactions, said Bob Serino, a former deputy chief counsel at the Office of the Comptroller of the Currency who now advises banks and individuals on anti-money laundering regulations. . . .

In addition, banks must exercise an extra level of due diligence for a ?politically exposed person.? While the law defines such people as ?current or former foreign political figures, their immediate family and their close associates,? several banking officials at major institutions said that as a matter of practice, they extend extra scrutiny to American political figures. . . .

Once a bank determines that a transaction is suspicious, it is obligated to file a Suspicious Activity Report with FinCEN, the Financial Crimes Enforcement Network, a division of the Treasury Department. The standard for filing such reports has diminished since 9/11, with banks erring on the side of caution out of fear that the government will later second-guess its decisions, experts said.

The Suspicious Activity Report filed by Mr. Spitzer?s bank was one of hundreds of thousands filed annually, and three people with knowledge of the investigation said it did not immediately attract the attention of federal investigators. But when HSBC filed its report on the shell companies, the I.R.S. began an inquiry.

A former director of FinCEN, who now works in the industry at a company whose policies prohibit speaking on the record, said that since 9/11, suspicious activity reports had increasingly been used as a source of tips for law enforcement.

?What 9/11 taught us is the value of financial information,? the former director said. ?Money doesn?t lie. Money leaves a footprint. And that?s exactly what happened with Spitzer.?

If computing power increases enough, there is no reason why governments might not lower the threshold for reporting of suspicious transactions, or, indeed, require that every transaction over 100 dollars be reported. All this information could later be sifted through by data mining programs, in order to spot patterns of suspicious activity. The only limit is the technology and the manpower that law enforcement is willing to devote to analysis of financial transactions.

The Spitzer story shows both the promise and the threat of these developments. On the one hand, reporting financial transactions makes the job of law enforcement easier, and it uncovers crimes (and terrorist plots) that might never be discovered otherwise. Mandatory disclosure (or in this case, voluntary disclosure by banks) of private individual's financial transactions, and sharing of data between intelligence services, federal, state and local law enforcement helps the state identify patterns of criminal activity, prevent crimes before they occur, and punish them after the fact. These techniques and technologies allow governments to do the jobs entrusted to them more powerfully and more efficiently than ever before.

On the other hand, these developments carry all of the potential risks of a powerful National Surveillance State: Governments can make mistakes in assessing levels of criminality and dangerousness; and their data mining models may characterize innocent activity as suspicious. Without sufficient oversight and checking functions, government actors may misuse the additional knowledge they gain, for example, by instigating abusive prosecutions, or creating discriminatory systems for access to public and private services (like banks, airports, government entitlements and so on). And the more powerful government becomes in knowing what its citizens are doing, the easier it becomes for government to control people's behavior.

These issues arise in the case of money transactions for prostitution, but they could easily have arisen in a wide range of other circumstances. The practices of financial disclosure and the technologies of surveillance can be adapted to many different ends, some noble, others less so.

Whether you like or fear the National Surveillance state, it is not a utopia or dystopia of the future; it is already here. It is the way we will govern and be governed in the years ahead. Spitzer's crime is his own; the techniques of surveillance, collation and analysis that caught him are ours and they will be applied to all of us.

Full post as published by Balkinization on March 13, 2008 (boomark / email).