The "Secret" History of the Bank Secrecy Act

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Fifty years after its birth, the Bank Secrecy Act — along with the long-forgotten role it played in breaking open the Watergate scandal — continues to have an increasing influence on the financial system.

On June 17, 1972, five men were arrested while burglarizing the office of the Democratic National Committee headquarters at the Watergate office building in Washington, D.C. The story of the ensuing Watergate scandal is well known. Careers were made. Careers were broken. Countless books and movies document its enormous impact on our political landscape.

What’s lost to time, however, and perhaps realized by only a select few within the financial sector, is that the Watergate scandal marked a public debut of sorts of the laws commonly known as the Bank Secrecy Act (BSA). And with that debut, the term “money laundering” came into common parlance.

Enacted in October 1970, the BSA’s earliest application belies the power it would gain in the succeeding decades. As most everyone who works in the financial services industry knows, the BSA today holds enormous importance for financial institutions, fintech companies, regulators and law enforcement. How did the BSA catapult to prominence out of the dark shadows of Watergate? And why does it matter?

Let’s follow the money.

The Miami Connection

In addition to confiscating burglary tools and wiretapping gear, the arresting officers at the Watergate seized $6,500 in new $100 bills, most of which had sequentially ordered serial numbers.1 The FBI traced the bills to the Republic National Bank of Miami, where one of the burglars, a former CIA agent named Bernard Barker, maintained an account.2, 3

The Miami connection caught the attention of a Florida state investigator named Martin Dardis, who then launched his own probe.4, 5 Dardis obtained bank records showing that Barker had deposited $114,000 in the form of five checks. Four of Barker’s checks, totaling $89,000, were drawn on a Mexican bank, and a fifth check, for $25,000, was drawn on a U.S. bank payable to a certain Kenneth Dahlberg.

Dahlberg was a Minnesota businessman. He was also Midwest campaign finance chairman for none other than President Richard Nixon, then in the throes of running for reelection.6, 7

A few short days after depositing the checks, Barker withdrew the same $114,000 amount in cash — a classic example of what we know today as the “pass-through” money-laundering technique.8, 9

Dardis later showed his findings to The Washington Post's Carl Bernstein, who shared the information with his colleague Bob Woodward.10 When contacted by Woodward, Dahlberg confirmed that the $25,000 check had been intended as a Nixon campaign contribution but denied knowledge of how it could have ended up in Barker’s account.11

Despite the denial, Barker’s deposits provided an irrefutable financial tie between the burglars and the Nixon campaign.12

That’s how the act of money laundering became a focal point of the Pulitzer Prize-winning articles by Woodward and Bernstein. Their series exposed an array of illegal activity emanating from the White House. Media sources covering Watergate soon embraced the term “money laundering,” thereby cementing its place in our modern lexicon.

The BSA’s Architect Comes Calling

Our money-chasing tale might naturally conclude there. But as so often happens in retrospect of a political scandal, the backstory of the BSA’s emergence is infused with a large dollop of irony.

Inside Congress, the Post articles caught the eye of Representative Wright Patman, a powerful Texas Democrat who chaired the House Banking and Currency Committee.13 It was Patman and Senate colleague William Proxmire who had crafted legislation designed to prevent the very sort of nefarious financial activity engaged in by Barker, the Bank Secrecy Act.

Blockquote

Who signed the Bank Secrecy Act into law two years earlier? None other than Richard Nixon himself.14

It was not surprising then, that Patman, a bulldog with a history of taking on suspected financial malfeasance (see sidebar, “Advocate for Transparency”) quickly opened an investigation into the financial ties between Barker and the Nixon campaign. Initial results were presented in a September 12, 1972, report to members of the House Banking and Currency Committee.17 This report was likely the first invocation of the BSA after it became law.

The report repeatedly cited the BSA to establish the committee’s jurisdiction. It even hinted at future expansion of the law, noting that the “complex transfer of [campaign funds] in U.S. and foreign banks raises obvious questions as to whether the [Bank Secrecy Act] and the regulations promulgated under this Act and other reporting requirements are sufficient to monitor the international movement of large sums destined for possible illegal purposes. These questions obviously fall within the Committee’s jurisdiction.”18

With the committee’s jurisdiction supported by the BSA and the November 7 Election Day rapidly approaching, Patman moved to subpoena dozens of people associated with the Nixon campaign. However, in a controversial move following substantial pressure from the White House, the committee voted 20-15 against a resolution to do so.19, 20 With further details of the money laundering suppressed for the moment, Election Day came and went. Nixon won in a landslide.

BSA Since Watergate

The BSA’s role in the Watergate scandal is now largely forgotten. It was quickly overshadowed by astonishing revelations of secret recordings, lies and cover-ups that ultimately led to Nixon’s resignation in August 1974. However, Patman’s investigation under the auspices of the BSA was pivotal in blowing Watergate open. As the late historian Stanley Kutler put it, “Patman’s pressure required that the cover-up be intensified and expanded, thus widening the chances for error and eventual exposure.”22

Watergate resulted in numerous prosecutions for illegal campaign contributions, obstruction of justice and other charges. But in keeping with backstory irony, not a single prosecution under the BSA followed.23 In fact, enforcement of the BSA did not begin until around 1977.24

Given its active and frequent enforcement today, the BSA’s relatively toothless start is remarkable — shocking even.

35.2 billions

Source: Complianceweek.com

 

U.S. financial services firms spent $35.2 billion on financial crime compliance in 2020. Authorities routinely secure hundreds of millions of dollars in fines for violations of the BSA.

Perhaps even more remarkable is the BSA’s reach beyond banks. The gaming and real estate industries are now subject to BSA requirements.26, 27 Large tech companies are within its reach. Amazon, Apple, Google, Facebook and Microsoft all operate money-service businesses (MSBs) that require BSA compliance.28 This range and influence would have been hard to imagine at the time of the law’s fledgling appearance during Watergate.

The BSA is now so far-reaching that it’s often criticized as overly burdensome, and many have called for its overhaul. However, it’s unlikely that the BSA’s influence will diminish anytime soon. To the contrary, its power was significantly enhanced through the passage of the Anti-Money Laundering Act of 2020, which increases penalties on violators of the BSA and enhances whistleblower protections.29

FinCEN, the federal bureau responsible for overseeing BSA requirements, is also considering a new BSA requirement for banks and cryptocurrency exchanges to record and report certain transactions involving “unhosted” virtual currency wallets above specified value thresholds.30

Regardless of one’s opinion about the BSA, there’s no denying that its incredible rise and resilience since its passage in 1970, as well as its forgotten role in the Watergate affair, is a story worth knowing. Fifty years on, a recognition of its history and resilience is prudent for the long-term planning of those within its reach.

 

Footnotes:

1: Report No. 93-981, “Final Report of the Select Committee on Presidential Campaign Activities,” United States Senate, June 1974.

2: “Nixon Ordered That the F.B.I. Be Told: ‘Don't Go Any Further Into This Case’,” The New York Times, August 6, 1974. The article cites Nixon’s secret White House recordings where he’s told by his Chief of Staff, H. R. Haldeman, that FBI agents had traced the money back to Barker’s account at Republic National Bank of Miami.

3: An internal FBI memorandum dated July 18, 1972 also notes that the bureau had traced the bills back to Barker. https://vault.fbi.gov/watergate/watergate-part-11-12-of-1

4: Obituaries for Dardis note that he was tipped off about the connection between the burglary and Republic National Bank of Miami. Former Washington Post editor Barry Sussman suggested that Dardis began investigating because four of the five burglars had Miami addresses: http://www.niemanwatchdog.org/index.cfm?fuseaction=showcase.view&showcaseid=00161

5: Former Post editor Barry Sussman notes that Dardis’s concurrent investigation was critical to the Post’s own reporting. http://www.niemanwatchdog.org/index.cfm?fuseaction=showcase.view&showcaseid=00161

6: Dardis’s investigation is described in “G.O.P. Aide Queried on Check In Study of Raid on Democrats,” The New York Times, August 24, 1972.

7: Dardis’s information provided much of the detail contained in “Bug Suspect Got Campaign Funds,” August 1, 1972, the first in a series of Woodward and Bernstein articles on Watergate. These are available here: https://www.pulitzer.org/winners/washington-post

8: “Bug Suspect Got Campaign Funds,” The Washington Post, August 1, 1972.

9: This is also described in Report No. 93-981, “Final Report of the Select Committee on Presidential Campaign Activities,” United States Senate, June 1974. The report notes that after he cashed the checks, Barker “returned the proceeds to [G. Gordon Liddy] some ·weeks later. Liddy then placed the funds, less $2,500 for ‘processing,’ in a safe in [Maurice Stans’s] office where they were commingled with other cash funds.”

10: As described by Post editor Barry Sussman. http://www.niemanwatchdog.org/index.cfm?fuseaction=showcase.view&showcaseid=00161

11: “Bug Suspect Got Campaign Funds,” The Washington Post, August 1, 1972.

12: Woodward told the Miami Herald that the Dahlberg check was the “connective tissue” linking the Watergate burglars to the Nixon campaign. See: “Investigator Tries to Reclaim His Role In Case,” Miami Herald, June 5, 2005.

13: As suggested by the timing of events and by Post editor Barry Sussman. http://www.niemanwatchdog.org/index.cfm?fuseaction=showcase.view&showcaseid=00161

14: Several sources note that Patman introduced the legislation as H.R.15073 (91st Congress, 1st session) while Proxmire introduced S.3678 (91st Congress, 1st session).

15: As described in Patman’s March 8, 1976 New York Times obituary.

16: Patman’s stance and actions on Mellon have been covered by several sources, including Matt Stoller’s Goliath (Simon & Schuster, 2019).

17: Memorandum (Staff Report) from Patman to members of the House Banking and Currency Committee, September 12, 1972. https://archive.org/details/363194-report-of-the-house-banking-and-currency

18: Ibid.

19: “House Panel Bars Pre-Nov. 7 Inquiry Into Bugging Case,” The New York Times, October 4, 1972.

20: Pressure on the committee is described in the section entitled “The Patman Hearings” in Report No. 93-981, “Final Report of the Select Committee on Presidential Campaign Activities,” United States Senate, June 1974.

22: Kutler, Stanley. The Wars of Watergate: The Last Crisis of Richard Nixon, Knopf, August 28, 2013. https://www.penguinrandomhouse.com/books/96420/the-wars-of-watergate-by-stanley-i-kutler/9780307834058

23: The author found no evidence of any BSA enforcement in either the Senate’s June 1974 “Final Report” or the Watergate Special Prosecution Force’s report published in October 1975.

24: The first enforcement identified by the author was the prosecution of Chemical Bank in February 1977. This is described in “Chemical Bank Accused of Not Reporting Deals,” The Washington Post, February 25, 1977.

26: FinCEN guidance (FIN-2010-G003) published on June 20, 2010 states that “the BSA requires casinos and card clubs to develop and implement compliance programs tailored to their business activities and risk profiles.”

27: Under the BSA, FinCEN uses Geographic Targeting Orders in certain cities that require title insurance companies to identify the parties behind shell companies that purchase real estate in all-cash deals. See: https://www.fincen.gov/news/news-releases/fincen-reissues-real-estate-geographic-targeting-orders-12-metropolitan-areas-1

28: FinCEN records as of September 22, 2020. https://www.fincen.gov/msb-registrant-search

29: https://www.fincen.gov/national-defense-authorization-act

30: “Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets,” U.S. Department Of The Treasury, Financial Crimes Enforcement Network, Notice of Proposed Rulemaking, Docket Number FINCEN-2020-0020, RIN 1506-AB47, filed December 18, 2020; https://public-inspection.federalregister.gov/2020-28437.pdf

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