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