From: [K--LI--E] at [delphi.com]
Organization: UTexas Mail-to-News Gateway
The following is excepted from Chapter 3, "The Crash of 1994
and Beyond," by J. Orlin Grabbe, International Financial Markets,
3rd Edition, Simon & Schuster, 1995.
@ June1994, J. Orlin Grabbe, 1280 Terminal Way #3, Reno, NV
89502. Internet address: [k--li--e] at [delphi.com]
Sources mentioned may be found listed in the original Text.
****************** SOCIAL INFLUENCES ON ********************
************* INTERNATIONAL FINANCIAL POLICY ************
Because money is an electronic medium, issues related to
the payments system and monetary regulation are often intertwined
with those for telecommunication. Of particular relevance are
policies having to do with cross-border money flows, a type of
international telecommunication among differing national legal
environments. If we recall that areas of international finance (such
as the eurocurrency market) originated in conflict of national laws,
we will not be surprised to observe arguments for modifying
international banking and financial regulations based on other
cross-border issues, such as the war on drugs, allegations of
money-laundering, and attempts to control the infobahn. While
these may seem side issues, they have an unfortunate tendency to
color debate on international financial policy. In the U.S., as in
other countries, the future of international banking will be
determined by the relationship among financial,
telecommunication, and privacy regulations.
THE CRISIS OF DRUG PROHIBITION
In the mid-1990s the United States and other countries were
spending a good deal of money on a "war on drugs." What the
phrase meant was unclear in a nation where 50 million people used
tobacco, over 100 million used alcohol, and virtually everyone
used aspirin or an equivalent pain-reliever. But certainly there was
a prohibition in using, or dealing in, certain drugs. Naturally these
drugs were still available on the black market despite the
prohibition. The market supplied the consumption needs not only
of the general public, but also of federal prisoners. Thus even if
the country were turned into a police state, such drugs would still
be available. Given this, what was the purpose or function of the
prohibition? The simple economic rationale was this: the war on
drugs was a source of profit both to those who dealt in prohibited
drugs, and those who conducted the war against them.
The prohibition of anything is a restriction in supply.
Supply restriction drives up the price. In 1973-4 the OPEC cartel
caused a quick four-fold increase in the price of oil by restricting
its supply. It also greatly increased the profit margin on each
barrel pumped out of the ground. In a similar way, prohibition of
drugs increases their black market price and the potential profit
margin from supplying them to the public. But legitimate
businessmen are deterred from entering the market. Hence drug
prohibition creates a bonanza*high profit margins*only for those
willing to deal in prohibited products. Just as alcohol prohibition
financed the growth of powerful mobsters like Al Capone earlier in
the century, so did prohibition of cocaine finance the growth of
powerful production and supply cartels, such as the Medellin cartel
in Columbia. The U.S. government's prohibition made it possible
for them to become rich, and then powerful.
Because trade in drugs is illegal, contracts cannot be
enforced in court. One cannot resort to common or commercial
law. Hence contracts are often enforced via the barrel of a gun.
And as there is no countervailing authority, those who enforce their
contracts with guns may use the same method to simply eliminate
competition. Territory is acquired or defended by force. Steven B.
Duke, the Law of Science and Technology Professor at Yale
University states simply: "The use of drugs--except, of course,
alcohol--causes almost no crime." But drug prohibition does
cause crime. The firearm assault and murder rates rose in the U.S.
with the start of Prohibition in 1920, and remained high during it,
but then declined for eleven consequence years after Prohibition
was repealed. In the U.S. today, perhaps one-third of murders are
related to contract enforcement and competition over dealing
territory (Duke and Gross, 1993).
Prohibition turns others into crime victims. Because
certain drugs cannot be obtained at the local neighborhood
drugstore, drug consumers visit unsafe parts of a city, and are
simply assaulted. Such victims, naturally, are not in a position to
complain to the police. Others become victims because of the lack
of quality control. Because drugs are illegal, rip-off artists who
deal in substitute or impure products know they will not be sued.
Other suppliers simply make mistakes in production, but these
mistakes are not caught right away because information flow is not
efficient in a non-public market. This results in injuries, often
caused not the use of the prohibited drugs themselves, but by the
constraint on the flow of information brought about by prohibition.
During the earlier era of alcohol Prohibition in the U.S.,
many of a city's leading citizens became criminals by the fact of
visiting the bar of a local speakeasy. There, naturally, they
associated with the proprietors, mobsters, who began to acquire
increasing political influence. Today billions of dollars in cocaine
profits leads to wide-spread corruption. (Examples are given in
Witsotsky, 1990).
About 1.2 million suspected drug offenders are arrested
each year in the U.S., most of them for simple possession or petty
sale (Powell and Hershenov, 1991). Currently in the U.S., police
spend one-half their time on drug-related crimes. The court system
is on the verge of collapse because of the proliferation of drug
cases, which-because they are criminal cases-have priority over
civil cases. Six out of ten federal inmates are in prison on drug
charges. Probably another two of the ten are there on prohibition-
related offenses. There is a crisis in prison crowding (forty states
are under court order to reduce overcrowding), with the result that
violent criminals--including child molesters, multiple rapists, and
kidnappers--are often released early. This is reinforced by
mandatory sentencing laws. Consensual drug offenses are not only
treated as the moral equivalent of murder, rape, or kidnapping:
they are given harsher punishment. Youths are sent to prison for
life for selling drugs, while murderers were eligible for early parole
for good behavior (Kopel, 1994). As one example, Florida
punishes "simple rape" by a maximum prison term of 15 years
(Statute 794.001(5)(1991)), second-degree murder with no
mandatory minimum and a maximum of life in prison (Statute
782.04(02)(1991)), first degree murder (where the death penalty is
not imposed) with a mandatory minimum penalty of 25 years, after
which one is eligible for parole (Statute 775.082(1)(1991)), but
trafficking in cocaine is punished with life imprisonment "without
the possibility of parole" (Statute 893.135(1)(b)(1991)).
The war on drugs has turned into a war on civil liberties
The reason is simple. The war is a war on people suspected of
using, or dealing in, or otherwise being involved in drugs. But the
drug industry survives because tens of millions of people engage in
voluntary transactions, which they try to keep secret. Hence law
enforcement must attempt to penetrate the private lives of millions
of suspects, which could be almost anyone. A Nobel prize-
winning economist wrote: "Every friend of freedom . . . must be as
revolted as I am by the prospect of turning the U.S. into an armed
camp, by the vision of jails filled with casual drug users and of an
army of enforcers empowered to invade the liberty of citizens on
slight evidence" (Friedman, 1989). Unfortunately, not everyone is
a friend of freedom. A mayor of New York advocated strip
searching travelers from Asia and South America. A U.S.
congressman introduced a bill to create an "American Gulag" of
Arctic prison camps for drug offenders. And so on.
The drug trade is sustained by prohibition itself. Agencies
like the Drug Enforcement Administration (DEA) grew up to
"fight" the drug war. Their budgets, prestige, and paychecks
depend on the war's continuation. These agencies have vast sums
to spend on public relations and propaganda ("education"), and a
vested interest against legalization. Since these agencies profit
from crime, they have an incentive to cultivate criminality as a
natural resource. The sheriff of Broward County, Florida,
manufactured his own crack cocaine to sell to buyers in order to
arrest them (Keller, 1989). Others employ cocaine gigolos, who
then pressure unsuspecting boyfriends/girlfriends into purchasing
drugs from undercover agents (e.g., United States v. Eugenio
Llamera, No. 84-167-Cr (S.D. Fla. 1984)). Periodically a new
"biggest ever" drug bust (such as 22 tons of cocaine in a Los
Angeles warehouse) is proudly announced, with no apparent
perception that such busts prove the agencies are failing in their
alleged goal of drug elimination. Meanwhile, some government
employees-drug warriors-themselves engage in criminal acts for
enjoyment or to supplement their income. Drug dealers, in
particular, can be killed and robbed with impunity. Forfeiture
laws, which allow the seizure of money, houses, boats, cars,
planes, and other property on the basis of a circumstantial
connection with prohibited drugs, have also been profitable. The
associate deputy attorney general in charge of the U.S. Justice
Department's forfeiture program said "we're not at all apologetic
about the fact that we do benefit (financially) from it" (Schneider
and Flaherty, 1991, p. 5).
Others are paid to extend the war internationally.
Examples include Latin American coca crop eradication and
substitution programs. These have had almost no success, and
have created massive social problems (Tammen, 1991). Poor
farmers can make four to ten times as much growing coca as in
growing legal crops (Lee, 1989); they can grow coca and
marijuana in regions with poor soil; and they can avoid oppressive
agricultural regulations encountered with the production and sale
of crops lacking an efficient alternative to government marketing
organizations. The 200,000 peasant families (1 million people)
engaged in coca production in Peru are oblivious to campaigns
urging then to "just say no" to the source of their livelihood.
Meanwhile, the hypocrisy of the entire transborder operation is
manifested in that the U.S. national security apparatus has used, or
condoned, drug smuggling as a way of obtaining untraceable cash
to fund covert operations, or to serve other political purposes. A
recent, well-documented book argues that "Washington's covert
operations overseas [have] been a major factor in generating
changes in the overall pattern of drug flows into the United States,"
and cites "the Vietnam-generated heroin epidemic of the 1960s and
the Afghan-generated heroin epidemic of the 1980s as analogues
of . . . the explosion of cocaine trafficking through Central America
in the Reagan years, made possible by the administration's covert
operation to overthrow the Nicaraguan Sandinistas" (Scott and
Marshall, 1991). Manuel Noriega, who was recruited by the U.S.
Defense Intelligence Agency in 1959 and who went on the CIA
payroll in 1967, became head of Panamanian military intelligence
(G-2) in 1968, where he was in a strategic position to supply both
information and drugs to the U.S., and later on arms to the Contras,
in an operation based in Panama, Mexico, and Arkansas.
In the last few years, the use of, and hence the demand for,
cocaine has fallen. But there are always new ways to justify
increased drug war budgets. The U.S. Department of State notes,
without irony:
The economics of the heroin trade are also important.
While at U.S. street prices, cocaine and heroin are
competitive, at the wholesale level heroin has a strong
advantage. A kilo of cocaine wholesales for between
$10,500 and $40,000; a kilo of heroin will fetch on
average between $50,000 and $250,000. With the
likelihood that heroin will be to the 1990's what
cocaine was to the 1980's, Latin American trafficking
organizations are poised to cash in on a heroin
epidemic (U.S. Department of State, 1994).
And, naturally, so also are those who fight them.
In summary, there is no rational reason that the war on
drugs--itself an exercise in absurdity and immorality--should be
allowed to continue to play a major role in the formation of
international banking policy.
BANKING TELECOMMUNICATION AND THE
INFORMATION SUPERSPYWAY
Money is a mechanism for making payment. What we
want from a payments mechanism is fast, reliable (secure) service
at a low cost. In current technology that means that the payment
mechanism will be determined by transactions costs. Hence
money in a modern economy exists chiefly in the form of
electronic entries in computerized recordkeeping systems or data
bases. Money exists as a number (e.g. 20) beside which is attached
a currency or country label (e.g. DM or BP or U.S.$) and also an
ownership label (e.g. "Deutsche Bank" or "Microsoft" or "Jack
Parsons"). Physical goods are transported to different geographical
locations, but currencies by and large are not. This is true both
domestically and internationally. A bank in London will sell
British pounds to a bank in Frankfurt for deutschemarks by having
the Frankfurt bank's name recorded as the new owner of a pound
deposit in London, while the London bank's name is recorded as
the new owner of a deutschemark deposit in Frankfurt.
Payment between banks is made by an exchange of
electronic messages. The scope and size of transactions mandates
this type of payment mechanism. The most important
communications network for international financial market
transactions is the Society for Worldwide Interbank Financial
Telecommunication (SWIFT), a Belgian not-for-profit cooperative.
This system for transferring foreign exchange deposits and loans
began actual operation in May 1977 and by 1990 had 1,812
members, and connected 3,049 banks and securities industry
participants in eighty-four countries. It carried an average of 1.1
million messages per day. SWIFT messages are transmitted from
country to country via central, interconnected operating centers
located in Brussels, Amsterdam, and Culpeper, Virginia. These
three operating centers are in turn connected by international data-
transmission lines to regional processors in most member
countries. Banks in an individual country use the available national
communication facilities to send messages to the regional
processor. A bank in London, for example, will access SWIFT by
sending messages to a regional processing center in the north of
London. The message will be received by a bank in New York via
the SWIFT operating center in Culpeper, Virginia.
Within the U.S. the most important
communications-money-channels are Fedwire and CHIPS.
Eleven thousand depository institutions have access to Fedwire, the
electronic network system of the Federal Reserve System. (About
a thousand of these access the system through the New York Fed.)
In 1991 an average of $766 billion daily went through the net, of
which $435 billion involved the New York Fed. The average size
of a funds transfer was $3 million. There were 258,000 average
daily transfers.
The New York Clearing House Association (twelve private
commercial banks) operate the Clearing House Interbank Payments
System (CHIPS) to settle foreign exchange and eurodollar
transactions. CHIPS connected 122 participants in 1991. On an
average day $866 billion went through the CHIPS network, with
150,000 average daily transfers (or an average transfer size of
about $5.7 million). Sometimes there are large fluctuations in the
level of payments. On January 21, 1992, $1.5977 trillion went
through the CHIPS system. That is, the U.S. M1 money stock
turned over several times in a single day. The CHIPS system
maintains an account at the New York Fed. Much of the nation's
money flows through what is literally an underground economy:
the computer banks located beneath 55 Water Street in Manhattan.
These systems, even the Fedwire system, did not arise by
centralized government planning. ". . . it is historically accurate
that the Fedwire system evolved in almost a 'natural' manner; no
one at the Board or at a Reserve bank ever sat down and said 'let
there be a wire transfer system.' Thus, Fedwire can be regarded as
an example of a market tendency to evolve, over time, in an
efficient manner" (Patrikis, et. al., 1993).
In Europe, banks have available CEBAMAIL, a shared
voice and data network established by European central banks and
later expanded to other users. European banks also use IBM's
International Network and DIAL service to communicate with the
Bank for International Settlements in Basle, Switzerland, and with
each other.
Money, then, is part of the worldwide information
superhighway (or infobahn). The infobahn has been the subject of
recent policy attention. The Clinton administration's proposal for a
"National Information Infrastructure" (NII) was announced in
1994: "All Americans have a stake in the construction of an
advanced National Information Infrastructure (NII), a seamless
web of communications networks, computers, databases, and
consumer electronics that will put vast amounts of information at
users' fingertips. Development of the NII can help unleash an
information revolution that will change forever the way people
live, work, and interact with each other" (The National Information
Infrastructure: Agenda for Action). The information revolution
was already well underway, and had been so for years. The real
agenda for government involvement was stated in the White House
Press release, April 16, 1993: "Sophisticated encryption
technology has been used for years to protect electronic funds
transfer. . . .While encryption technology can help Americans
protect business secrets and the unauthorized release of personal
information, it also can be used by terrorists, drug dealers, and
other criminals."
The information superhighway was to be based on a new
government digital signature standard (DSS); that is, on a method
of "signing" electronic messages, comparable to the way legal
documents are signed by hand. The previous standard, the Data
Encryption Standard (DES), had been set by a civilian agency, the
National Bureau of Standards (now NIST) in 1977. This changed
in 1984, when National Security Decision Directive 145 shifted the
responsibility for certifying DES-based products to the National
Security Agency (NSA). NSA is the U.S. intelligence agency
located in Ft. Mead, Maryland, which is responsible for collecting
electronic and signals intelligence. Activities include monitoring
the communications of foreign leaders, monitoring international
communications (including financial transactions), breaking codes,
and setting the cryptological standards for U.S. military and
security agencies. (The activities of the NSA were first
comprehensively surveyed in Bamford, 1982.) In 1986 NSA
announced it would supply its own cryptographic designs for use
by U.S. companies and civilian government agencies. Subsequent
policy discussions which laid out the new DSS standard were
dominated by the NSA, which wanted a mandatory encryption
scheme which NSA computers could penetrate.
The Computer Security Act of 1987 authorized a U.S.
government project, called Capstone, to develop standards for
publicly-available cryptography. All private companies doing
business with the government will be required to use Capstone.
The Clinton administration's Clipper Chip proposal of April
1993-an aspect of its proposal for an NII-embodied Capstone's
four principle elements. A description of each of these follows.
1) A bulk data encryption algorithm called Skipjack,
would be contained on a tamper-resistant chip, called
the Clipper Chip. The chip would be programmed by
Mykotronx at a facility in Torrance, California, and
would contain a trapdoor that would allow the
government, using a two-part key, to decode any
communications sent through the chip. When two
devices using the Clipper Chip communicate, they
have to agree on a session encryption key "K." You
would send a message using this session key. The key
K is not escrowed, and can change as frequently as you
like. But built into the chip is another government key
"U". Two different government agencies would each
keep a record of one-half of the U key in escrow. Put
together, the two halves of the U key, along with the
technology of the chip, would allow the government to
discover the session key K being used to encode
communications. The session key K could be then be
used to decode your message. (More exact details are
given in Denning, 1993.) Industry was urged to
voluntarily build the Clipper Chip standard into every
type of communication device: computer modem,
telephone, fax, and set-top TV converters.
The details of the Skipjack algorithm are classified.
However, it uses 80-bit keys and scrambles the data for
32 steps or rounds. The earlier standard, DES, uses
56-bit keys and scrambles the data for only 16 rounds.
But the secrecy of Skipjack removes its credibility. It
may not be secure. (Some design bugs found by a
researcher at ATT Bell Labs became public in June
1994.) Skipjack may also contain an additional
trapdoor known only to NSA. By contrast, people are
confident in the security of DES, because its details are
public. Hence people have probed it over the years and
failed to find any weaknesses. Finally, the fact that
Skipjack is classified means it can't be used in
software, but only in government-approved hardware.
Even those who don't mind the government having
access to their communications would prefer
something similar that could be implemented entirely
in software (Micali, 1993).
2) The DSS uses a digital signature algorithm (DSA)
to authenticate the source and validity of messages.
Digital signatures are the equivalent of handwritten
signatures on legal documents. How do you know if
the party at the other end of a computer modem has
signed a contract? How do you know you are not
dealing with an imposter? The answer is: by the
digital signature. While there is yet no body of case
law dealing with the subject, documents signed with
proper digital signatures will almost certainly be
legally binding, both for commercial use as defined in
the Uniform Commercial Code (UCC), and will
probably also have the same legal standard as
handwritten signatures. Details of DSS may be found
in National Institute of Standards and Technology
(NIST), 1992.
The computer industry had generally wanted the U.S.
government to choose another, existing standard, the
RSA algorithm, currently the most widely used
authentication algorithm. The DSS approach has been
criticized as too recent for its security and possible
flaws to be properly evaluated. The banking and
financial services industry use both the RSA algorithm
and a modified form of the DSA algorithm (American
National Standards Institute, 1993).
3) The key exchange protocol part of Capstone had
not as yet been determined by June 1994.
4) Capstone specifies a hash function, called SHS. A
hash function is a computer function which takes a
variable-size input and returns a condensed, smaller
fixed-size string, called the hash value. Hash values
securely represent a larger string. Being smaller, they
are easier to manipulate. For this to work properly,
two different messages can't hash to the same value
(for in that case, which of the original messages was
yours?).
The Secure Hash Standard (SHS) is the hash function
emerging from the U.S. government's Capstone
project. SHS produces a 160-bit hash value from a
variable-size input. SHS has already been adopted as a
government standard. Details may be found in NIST,
1993.
The future of the DSS is uncertain. Its adoption may
depend on the coercive purchasing power of the U.S. government.
A memorandum prepared for the Acting Assistant Secretary of
Defense had noted a number of U.S. computer industries
objections to a trapdoor chip, such as a Clipper Chip:
The industry argues persuasively that overseas markets
(much less drug lords or spies) will not look with favor on
U.S. products which have known trapdoors when
offshore products which do not have them are available.
In support of their argument, they note that powerful
public-key cryptography developed and patented by RSA
using U.S. tax dollars is free to developers in Europe,
subject to royalties in the United States, and cannot be
exported without expensive and time-late export licenses.
These charges are true. . . .
Despite these concerns, the President has directed that the
Attorney General request that manufacturers of
communications hardware use the trapdoor chip, and at
least AT&T has been reported willing to do so (having
been suitably incentivised by promises of government
purchases). [Ray Pollari, Memorandum for the Acting
Assistant Secretary of Defense (C31), April 30, 1993.]
A similar proposal from the FBI a year earlier (the Digital
Telephony proposal, code-named in FBI documents "Operation
Root Canal") had been severely criticized by the GSA (General
Services Administration), which is the largest purchaser of
telecommunications equipment for the U.S. government. The
March 1992 FBI proposal would have similarly required
telecommunications manufacturers to design telephone, fax, and
computer communication equipment in such a way as to facilitate
wire surveillance, and in addition would have also given the U.S.
Attorney General the unilateral and exclusive authority to enforce,
grant exceptions, or waive provisions of the law, or enforce it in
Federal Court. "The proposed bill would have to have the FCC or
another agency approve or reject new telephone equipment mainly
on the basis of whether the FBI has the capability to wiretap it," the
GSA noted. Furthermore:
The proposed legislation would assist eavesdropping by
law enforcement, but it would also apply to users who
acquire the technology [sic] capability and make it easier
for criminals, terrorists, foreign intelligence (spies) and
computer hackers to electronically penetrate the public
network and pry into areas previously not open to
snooping. This situation of easier access due to new
technology changes could therefore affect national
security. [Attachment to memo from Wm. R. Loy 5/5/92,
(O/F)-9C1h(2)(a)-File (#4A).]
It is clear, then, that a motivating force of U.S. government
involvement in the infobahn was mandated by a desire to set
cryptological standards so that messages could be monitored
whenever the government felt it was appropriate to do so. It would
also give the government unprecedented access to banking and
other financial transaction details. The "war on drugs" once again
provided the backdrop and alleged justification: "Almost two
thirds of all court orders for electronic surveillance are used to
fight the war on drugs, and electronic surveillance has been critical
in identifying and then dismantling major drug trafficking
organizations" (Denning, 1994).
MONEY LAUNDERING
Now we come to the connection between drugs, computers,
and the money supply. The House of Representatives report on the
banking legislation leading up to the U.S. Banking Secrecy Act of
1970 noted that "secret foreign bank accounts and secret foreign
financial institutions" had been used, among other things, to
"purchase gold," and to serve "as the ultimate depository of black
market proceeds from Vietnam" (House of Representatives, 1970).
The report does not explain why the purchase of gold was a
menace to society, nor elaborate on the role of the House in
creating a black market in Vietnam. Within a few years gold was
legalized, and the absence of U.S. military forces in Vietnam
eliminated the black market. The report also noted: "Unwarranted
and unwanted credit is being pumped into our markets." This was
also attributed to foreign banks with secrecy laws, although the
Federal Reserve*the real source of excess credit in the years
leading up to the breakdown of Bretton Woods*is not foreign. In
short, the House report was a broad-based attack with little rhyme
or reason, setting the tone for similar future studies.
As is usual in political double-speak, the Banking Secrecy
Act was an act of legislation intended to prevent, not preserve,
banking secrecy. It created four requirements that were supposed
to address the issue of money laundering: 1) A paper trail of bank
records had to be maintained for five years. 2) A Currency
Transaction Report (CTR) had to be filed by banks and other
financial institutions for currency transactions greater than
$10,000. CTRs were filed with the IRS. 3) A Currency or
Monetary Instrument Report (CMIR) had to be filed when
currency or monetary instruments greater than $5,000 were taken
out of the U.S. CMIRs were filed with the Customs Service. 4) A
Foreign Bank Account Report (FBAR) had to filed whenever a
person had an account in a foreign bank greater than $5,000 in
value. [The latter two requirements have been increased to
$10,000.]
These reports mostly collected unread during the 1970s.
But that was to change with the growth in computerized
recordkeeping and artificial intelligence processing, and with the
escalation of the "war on drugs." In the early 1980s, a Senate staff
study noted in alarm "what appears to be otherwise ordinary
Americans engaged in using offshore facilities to facilitate tax
fraud. These cases signify that the illegal use of offshore facilities
has enveloped 'the man next door'--a trend which forecasts severe
consequences for the country" (U.S. Senate Permanent
Subcommittee on Investigations, 1983).
The same report made a concerted effort to draw
connections between the eurodollar market and criminal activity,
noting "few banking authorities address the issue of primary
concern to us here: criminal uses of Eurobanking." The focus was
not banking fraud or theft: "The most visible and notorious aspect
of offshore criminality involves drug traffic." One of the report's
many recommendations was that the Treasury Department should
work with the "Federal Reserve Board to develop a better
understanding of the financial significance and use of currency
repatriation data as well as information about foreign depositors'
currency deposits." Subsequently, Panama was identified as the
major banking center for the cocaine trade, and Hong Kong as the
major center for the heroin trade, based largely on the amount of
U.S. dollars, including cash, being return to the Federal Reserve
by, respectively, the Banco National de Panama and by Hong
Kong-based banks (President's Commission on Organized Crime,
1984).
But, at the same time, a curious double standard was in
operation. To some agencies of the U.S. government, money
laundering and the use of off-shore facilities was alarming only
when done by private citizens. General Noriega and BCCI
provides a case in point. The collapsed BCCI was informally
known as the "Bank of Criminals and Covert agents International."
The convenience of the drug trade for intelligence activities comes
from the fact that it is a source of untraceable finance, on the one
hand. One the other hand, if those who participate in operations
get out of hand, they can be accused of drug trafficking and money
laundering. General Noriega, the Panamanian leader, received
money from the U.S. Central Intelligence Agency (CIA) and the
U.S. Army in payment for information. The money was paid
through the Panamanian branch of BCCI. The CIA and U.S.
Army only acknowledge paying Noriega $322,226 between 1955
and 1986 (New York Times, January 19, 1991). Be that as it may,
Noriega deposited $33 million in his account at the Panamanian
branch of BCCI. The head of this branch was the son of a former
director of intelligence in Pakistan. It is probably not coincidence
that the CIA also used BCCI branches in Pakistan to launder
payments to the Afghan rebels, and Pakistani officials used the
same bank to launder heroin profits. (The finance minister of
Pakistan, Sarti Asis, confirms that the bank did launder CIA
contributions to the Afghan rebels, but claims it was "not even
handling 1 percent of total drug money" (Financial Times, July 25,
1991).) Other evidence of close CIA involvement with the bank is
noted in a U.S. Senate report: "After the CIA knew that BCCI was
as an institution a fundamentally corrupt criminal enterprise, it
continued to use both BCCI and First American, BCCI's secretly
held U.S. subsidiary, for CIA operations" (Kerry and Brown,
1992). In fact the intrusion of BCCI into the U.S. had come about
through the efforts of a CIA asset: "Kamal Adham, who was the
CIA's principal liaison for the entire Middle East from the mid-
1960s through 1979, was the lead frontman for BCCI in its
takeover of First American, was an important nominee shareholder
in BCCI, and remains one of the key players in the entire BCCI
affair."
Meanwhile, efforts were extended internationally to trace
cash movements. The Bank for International Settlements Code of
Conduct (1984) recommended a global CRT (currency transaction
report). Information from the global CRT was to be processed by
the OECD and shared with tax authorities in all industrialized
countries. The G-7 countries in 1989 agreed to form the Financial
Action Task Force (FATF), with staffing and support to be
provided by the OECD. FATF now includes 26 governments. In
May 1990, FATF adopted forty recommendations on money
laundering countermeasures. These included provisions that a
global currency tracking system (the global CRT proposed earlier
by the BIS) be created, that financial institutions be required to
report "suspicious transactions" to law enforcement authorities,
that global sting operations be used against launderers, and that
electronic money movements, especially international wire
transfers, be monitored.
That NSA had in some circumstances already monitored
international banking transactions since at least the early 1980s
seems evident from the inclusion of detailed banking transactions
between the Panamanian branch of the Discount Bank and Trust of
Switzerland and a Cayman Islands bank in a classified report to the
Secretary of State during the Reagan administration. The
information in the report seemingly could only have come from
electronic access to the bank's computerized records. Some
observers have speculated that a bugged computer program,
Inslaw's PROMIS, was involved. This program, allegedly stolen
from Inslaw by the U.S. Department of Justice, was sold to dozens
of banks. (A federal bankruptcy judge found that the Justice
Department had purposefully propelled Inslaw into bankruptcy in
an effort to steal the PROMIS software through "trickery, deceit
and fraud." See Mahar, 1988.) The program was said to have been
altered in such a way to allow government agencies trapdoor
access into a bank's transaction records (Thompson's, 1994).
The Federal Deposit Insurance Corporation (FDIC) is the
government corporation that insures deposits at U.S. member
banks. The FDIC Improvement Act of 1991 required the FDIC to
study the costs and feasibility of tracking every bank deposit in the
U.S. The notion was it was necessary to compute bank deposit
insurance requirements in real time. Not everyone thought this
was a good idea. The American Banker's Association noted it was
inconceivable that such data would "be used only by the FDIC in
deposit insurance coverage functions." And even though the FDIC
itself argued against the proposal in its draft report to Congress in
June 1993, another agency, the Financial Crimes Enforcement
Network (FinCEN) located in Vienna, Virginia, used the occasion
to propose a "Deposit Tracking System" (DTS) that would also
track deposits to, or withdrawals from, U.S. banks accounts in real
time. FinCEN itself was set up in April 1990 to track money
laundering, and given computerized access to data from the IRS,
FBI, DEA, Secret Service, Customs Service, Postal Service, CIA,
NSA, Defense Intelligence Agency, National Security Council, and
the State Department's Bureau of Intelligence and Research.
FinCEN, which already had a $2.4 million contract with Los
Alamos National Laboratory to develop artificial intelligence
programs to look for unexplained money flows (Kimery, 1993),
said it needed the DTS to track the financial activities of terrorists
as these transactions took place. Others were certain that political
enemies, not terrorists, would inevitable prove to be the primary
focus of attention.
Also in 1993, SWIFT asked users of its messaging system
to include a purpose of payment in all messages, as well as payers,
payees, and intermediaries. This type of arrangement would allow
NSA computers to scan for any names in which they were
interested. In addition, proposals resurfaced for a two-tier U.S.
currency. When such a proposal was rumored around 1970 during
the slow breakdown of the Bretton Woods agreement, the rumor
was dismissed as a paranoid fantasy. Recently the proposal itself
has been discussed on the Federal Page of the Washington Post,
which gives support to the plan of "an expert on terrorism" to have
two separate U.S. currencies, "new greenbacks for domestic use
and new 'redbacks' for overseas use." The International
Counterfeit Deterrence Strike Force (an inter-agency working
group informally called the "Super-Bill Committee") supports a
revived 1989 DEA plan for the forced conversion of "domestic"
dollars into "international" dollars by U.S. travelers at the border,
which would be re-exchanged on their return (Washington Post,
1994).
In the late 1960s, taxes, quotas, and interest rate controls
lead to disintermediation of funds out of the regulated banking
system and into non-regulated channels. The same is occurring in
the 1990s because of increased politicization of the banking
system: "During the past two years, analysts saw an increasing use
of non-bank financial institutions, especially exchange houses,
check cashing services, credit unions, and instruments like postal
money orders, cashiers checks, and certificates of deposit
(particularly in "bearer" form), with transactions occurring in an
every longer list of countries and territories. Equally significant,
[drug] traffickers were employing professional money managers"
(U.S. Department of State, 1994).
Such trends will undoubtedly accelerate, spurred along by
government policies which impact on, and potentially harass,
everyone. The U.S. Department of State source just quoted
proposes a sort of international spree of government theft targeted
at banks and other entities: "We must effect greater asset seizures,
not just of bank accounts, but also corporate assets and even
corporate entities . . . We must be ready to impose appropriate
sanctions against banking institutions, as well as bankers . . . The
FATF [Financial Task Force] countries, the 12 EU nations, the
EFTA countries, and the majority of the 95 states party to the 1988
UN Convention are adopting (if not yet fully implementing)
legislation that will ultimately improve individual and collective
capabilities" (U.S. Department of State, 1994).
F.A. Hayek argued for the denationalization of money, an
abolition of the government monopoly over the money supply, and
the institution of a regime of competitive private issuers of
currency (Hayek, 1976). One reason was to stop the recurring
bouts of acute inflation and deflation that have become accentuated
over this century. Another reason was to make it increasingly
impossible for governments to restrict the international movement
of individuals, money and capital, and thereby to safeguard the
ability of dissidents to escape oppression. He said that "attempts
by governments to control the international movements of currency
and capital" is at present "the most serious threat not only to a
working international economy but also to personal freedom; and it
will remain a threat so long as governments have the physical
power to enforce such controls." Two decades ago, Hayek's
proposal seemed to have scant probability of ever coming about.
No longer. Continued government attempts to turn the monetary
system into a generalized reporting and surveillance system will
undoubtedly hasten the technological development of means-of-
payment alternatives less warped by monopoly and less corrupted
by tyranny.
J. Orlin Grabbe International Financial Markets
June1994, J. Orlin Grabbe, 1280 Terminal Way #3, Reno, NV 89502