Update on the Patriot Act Jude Wanniski and Wayne Jett January 8, 2004

As we continue to watch the dollar slide against the euro, less so against the yen, we come back to the problem in the Patriot Act new regulations on financial transactions designed to track down terrorists. We now come across a dispatch in the Washington Times by Arnaud de Borchgrave that practically draws that conclusion in connection with the anxieties of the Saudi royal family: "Swiss banking contacts have told this writer in the past two weeks that tens of billions of dollars have moved into Swiss accounts from the Gulf, mostly Saudi money no longer thought safe at home. Nor does it seem secure in the U.S. That may account, at least in part, for the dollar`s spectacular fall vis-à-vis the euro."

The anecdote would be more persuasive if we knew the Saudis concerned about the possible overthrow of the House of Saud by insurgents angered over its support of the U.S. have been exchanging their dollar balances for euros, which de Borchgrave only infers. It really is impossible for us to tell how significant the Patriot Acts have been in weakening the dollar relative to gold and the other major currencies, but if tens of billions of Saudi dollars are going into euro accounts and not dollar or yen accounts, it would help explain why the euro/gold price has been firmer than the yen/gold price – and the greater strength of the euro in the forex market.

There is no question in our minds that Patriot Acts I and II have reduced the attractiveness of the dollar as a transactions medium, if only because the way they are being enforced has been extending in more intrusive ways. If financial institutions have to look deeper into all transactions for signs of terrorist money, they per force must examine innocent dealings in ways that upset the transactors – including the length of time it takes to conclude a deal.

The first Patriot Act became law in the wake of 9/11. But the statutory “tools” rushed through Congress to fight terrorism were envied by other federal agencies, so Senator Paul S. Sarbanes (D-MD) added provisions allowing these tools to combat "money laundering" through any "financial institution." Under section 314a of the Patriot Act, the U.S. Treasury Department created the Financial Crimes Enforcement Network ("FinCEN"). A law enforcement agency tells FinCEN the name of any "suspect," and FinCEN instantly informs the agency of every financial institution with which that person has any business relationship. For FinCEN to work, financial institutions must constantly gather and report data to FinCEN, including "suspicious activity reports" ("SARs") on their customers or third parties.

It then got worse. On December 13, 2003, the same day Saddam Hussein was captured, President Bush signed into law a catch-all Intelligence Authorization Act for 2004 ("Patriot Act II") containing a significant expansion of the Patriot Act. With no public scrutiny or debate, "financial institution" was redefined to include stockbrokers, car dealerships, casinos, credit card companies, insurance agencies, jewelers, airlines, the U.S. Post Office, and any other business "whose cash transactions have a high degree of usefulness in criminal, tax, or regulatory matters." With severe criminal sanctions worrying such ordinary businesses as travel agents, SARs reports will be filed on mundane, private activities like air flights to music festivals in Lubbock. Celent Communications, a financial-services research firm, estimates that compliance costs will be $10.9 billion by the end of 2005 for banks, securities dealers and insurance companies alone.

Banks have required run-of-the-mill account holders to divulge only name, social security number and driver’s license number. Even then, some ordinary Americans have refused to comply, regarding such inquiries as invasions of privacy. Detecting terrorist or money laundering activity requires more details, including substance of business deals and reasons for money transfers. This often involves proprietary knowledge, more often violates privacy, and always takes precious time to disclose. In some deals, time is of the essence, and lost time means no deal. Americans must abide by the law. So must anyone doing business with or through any U.S. financial institution.

Indeed, that is the rub. Non-Americans may avoid FinCEN by doing no business with Americans or through any U.S. financial institution. Anecdotal evidence indicates European, Asian, African and other parties to international commercial transactions want no part of FinCEN or the Patriot Act. This disqualifies U. S. businesses from some lucrative deals, with a correspondingly negative impact on the U. S. current account balance. Not good, but probably a minor matter compared to damage being done to the weakening dollar. Foreign parties wishing no FinCEN surveillance of their business transactions specify a currency other than the dollar, such as the euro or the yen, for payment of prices. Harm to the dollar by the “FinCen effect” is hard to measure, but it clearly works to diminish demand for dollars, explicitly reducing the “moneyness” of the dollar as money relative to the euro and yen.