Regulatory Malpractice

[R. A. Hettinga]

<http://www.washingtontimes.com/commentary/20040317-082622-7954r.htm>

The Washington Times

Regulatory malpractice

By Richard W. Rahn

Published March 18, 2004




In today's parlance, George Washington was a victim of medical malpractice.
When he became ill, he was bled by his doctors, which almost certainly
hastened his death. Like Washington, the financial industry and its
customers are now slowly being bled, which will be fatal for some.



The "doctors" in this case are a group of politicians, tax and law
enforcement officials, who are operating without the constraint of national
boundaries or economic sense.



People around the globe are justifiably concerned about terrorism and
ordinary criminality. A certain international political class has used this
anxiety to argue that since criminals and terrorists use money, all
monetary movements and holdings must be monitored. Yes, it is useful to be
able to trace the money trail of al Qaeda operatives. But does that mean
all citizens of every country should be subject to having all their
financial privacy destroyed? Furthermore, is it cost-effective to monitor
almost everyone, or would both public and private law enforcement dollars
be more wisely spent monitoring the activities of those individuals or
groups known or strongly suspected of engaging in terrorist or criminal
activities?



The problem is there are now literally dozens of organizations issuing
rules and regulations that apply not only to financial institutions but to
all "money service providers," including such activities as pawn shops,
used car dealers and real estate agents. The agencies within the U.S.
government issuing the new financial rules and regulations include the
Internal Revenue Service, the FBI, the Justice Department, the Financial
Crimes Enforcement Network (FinCen) and the Federal Reserve.



In addition, U.S. financial institutions and other businesses engaged in
operations outside the U.S. or those involved in international transactions
are also faced with a barrage of new rules and regulations from many
foreign governments, plus the European Union, and from international
institutions such as the Organization for Economic Cooperation and
Development (OECD), the Financial Action Task Force (FATF) and the U.N.



Millions of businesses are subject to at least some of these rules and
regulations, and it is close to impossible to inform them of their
obligations. Even the largest international banks, with huge staffs of
lawyers and anticrime enforcement personnel, are unable to fully work
through this ever-expanding morass of regulation.



Smaller banks and businesses are at a competitive disadvantage because of
the disproportionate effect of these regulatory costs. Some of the
regulators are aiming at terrorists, others at ordinary criminals, and some
at tax avoiders or evaders. Most of the regulations are directed at "money
launderers," even though the term has a very elastic definition.



Many of these new rules and regulations are overlapping, some are
contradictory, some violate basic civil liberties and many are costly to
administer and do not meet reasonable cost-benefit tests. Yet the Bush
administration just announced a doubling in the budget for FinCen, as well
as budget increases for many of the other financial rulemaking bodies.



The reason we should care is that all of these extra, and in many cases
totally unnecessary, costs are passed along to consumers of financial
services as higher fees and more expensive and fewer choices in financial
products. This directly translates into job losses not only in financial
industries but in all businesses that rely on some outside financing.



In addition, it will make it more difficult for low-income people, the
young and recent immigrants to open bank accounts. We are now seeing, for
the first time in our nation's history, a rise in the portion of our
citizens without banking relationships. Costly regulations that force more
people into the cash economy not only make life more dangerous for those
who cannot open bank accounts, but also have the perverse effect of making
it more difficult for law enforcement to trace funds of criminals.



There is little evidence all the new rules and paperwork are having any
appreciable effect on crime or terrorism, because there is an almost
infinite number of ways to "launder" money, and organized terrorists and
criminals can almost always find ways around the regulations. On the other
hand, there is considerable evidence of damage to our pocketbooks and civil
liberties from these regulations.



The U.S. government should expand the jurisdiction of the "Office of
Information and Regulatory Affairs" (OIRA) to include the IRS and the other
financial and law enforcement agencies that issue financial regulations,
and insist financial regulations meet strict cost-benefit and civil
liberties' tests.



In addition, an international organization is needed to apply the same
strict cost-benefit and civil liberties' tests to all proposed regulations
emanating from international bodies like the OECD, FATF, and the U.N., as
well as those from governments that affect nonresident institutions.



If financial institutions and their customers are weakened or bled to death
by regulatory malpractice, the war against real criminals and terrorists
will only be made more difficult.



Richard W. Rahn is a senior fellow of the Discovery Institute and an
adjunct scholar of the Cato Institute.

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R. A. Hettinga <mailto: rah at ibuc.com>
The Internet Bearer Underwriting Corporation <http://www.ibuc.com/>
44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'