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Thwart Government Attempts to
Spy on Your Finances
By Mark Nestmann |
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| Although most people don’t know
it, the first allegiance of all U.S. businesses is no longer to their customers. |
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| They are first and foremost undercover
agents for the U.S. government. The duty of discretion and care for customers
has been supplanted by an overriding duty to conduct surveillance and notify
the government of “suspicious” behavior by their customers and of large
cash transactions. |
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| This surveillance is threatening
enough by itself. However, to facilitate “information exchange,” the information
is made available electronically to dozens of law enforcement agencies,
including state and local police. An agency does not have to suspect any
crime before it accesses a report, and no court order, warrant, subpoena,
or even written request is needed. |
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| Law enforcement agencies can “troll”
through this information whenever they want. This has resulted in substantial
“leakage” of the data supposedly maintained “securely” by the government.
There are dozens of examples where confidential information has been disclosed
to third parties, including organized crime figures, private investigators
and even the suspect under investigation.16 |
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| Under these circumstances,
you don’t have to be trying to “hide” something to be concerned. You just
have to be worried about crimes such as identity theft, the world’s fastest
growing crime, which are facilitated by the proliferation of data in government
databases. In just the last year, 3.3 million Americans fell victim to
this crime.17 |
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| In this column, I’ll
show you what types of surveillance businesses are legally obligated to
perform, and teach you the steps you can take to legally bypass it. I’ll
also show you how you can use these same techniques to reduce the threat
of identity theft. Know the Rules for “Suspicious. |
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| Transactions” and
Cash |
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| At the heart of the
surveillance infrastructure are laws that require banks, brokerages, casinos,
and even the U.S. Postal Service to file a “Suspicious Activity Report”
(SAR) if they believe a customer might be violating any law or regulation.18
The transaction threshold for mandatory SAR filing is US$5,000, reduced
to US$2,000 for money transmitters (non-banking companies such as Western
Union that send or receive money on behalf of their customers).19 Don’t
expect these businesses to tell you that they’ve notified the government
that they think you’re suspicious—doing so is a criminal offense. |
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| The best way to avoid
triggering a SAR filing is to avoid the behaviors that the Treasury Department
says are suspicious. These include: |
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Unusual payment methods, such
as large amounts of cash, multiple or sequentially numbered money orders,
traveler’s checks, cashier’s checks or payment from third parties.
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Unwillingness by a customer to provide
complete or accurate contact information, financial references, or business
affiliations.
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Attempts by a customer to maintain a
high degree of secrecy with respect to the transaction, such as a request
that normal business records not be kept.
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Purchases or sales that are unusual
for the particular customer, or type of customer.
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Purchases or sales that are not in conformity
with standard industry practice.20
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| The requirements for individuals
and businesses to track and report cash transactions are even wider than
those for filing SARs: |
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If you transport more than US$10,000
in currency, negotiable securities or certain monetary instruments across
a U.S. border, you must file Customs Form 4790.21
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If you make any cash transaction with
a U.S. financial institution that exceeds US$10,000, it must file a report
with the Treasury Department.22 “Financial institutions” include banks,
credit unions, securities brokers, money transmitters, currency exchangers,
check cashiers and issuers and sellers of traveler’s checks.
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If you make a “designated reporting
transaction” with any U.S. trade or business that exceeds US$10,000, the
business must file a report with the Treasury Department.23 A “designated
reporting transaction” is the retail sale of durable goods, collectibles
or travel services paid in cash and/or other monetary instruments.
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If you purchase US$3,000-$10,000 of
money orders or traveler’s checks, you must present a government-issued
photo ID, and the vendor must keep a record of the transaction. The same
requirements apply to money transmission services.24
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| Do not divide transactions over
US$10,000 into smaller ones to try to avoid the reporting obligation. This
is known as “structuring” and is illegal.25 Many individuals have been
jailed for the crime of “structuring” cash transactions in their bank account,
even when every dime of the money was legally earned, and taxes paid. |
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| Avoiding Surveillance in Your
Bank Account |
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| Since 1970, U.S. banks have been
required to keep copies of all account transactions for at least five years.
Since 1986, they have been required to notify the IRS of all interest earned
in the account, and to ask for a Social Security number (SSN) when you
open an account. |
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| SAR reporting began in 1988 and
has become increasingly stringent. And beginning in October 2003, opening
a bank account requires submitting to a rigorous “know your customer” identification
process. |
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| The disclosures you make prior to
opening an account are largely unavoidable, but once you have done so,
you can take several steps to lower its profile. Consider the following
strategies. |
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• Write personal checks only for
ordinary, everyday expenses. Don’t write a personal check for any purchase
that you’d rather keep private. Pay for such purchases with cash or a money
order.
• Carry a minimal account balance.
Larger accounts merit investigation much more often than smaller ones.
• Never have your home address or
SSN imprinted on your checks. This is an invitation to identity theft.
• Do not engage in unusual transactions
without first discussing them with a representative from the bank. Large
deposits in an account with a historically low balance, large funds transfers
in or out of the account or any other activity not in keeping with the
historical use of your account all can lead to a SAR. Contact the bank
and ask them for their recommendation as to the “best” way to handle such
a transaction. This gives you an opportunity to explain the transaction,
and greatly reduces the possibility it will be viewed as “suspicious.”
• “Opt out” of information exchanges.
A 1999 law requires financial services companies to give customers the
option of not sharing account data with unaffiliated third parties. When
you receive such “privacy notice” from your bank (or credit card, insurance
or brokerage company), follow the instructions to restrict data sharing.
This won’t reduce data disclosures to government, but may reduce your vulnerability
to identity theft. |
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| Keeping Securities Transactions
Private |
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| While for many years, U.S. brokers
were not subject to the full thrust of U.S cash transaction and suspicious
activities reporting requirements, thanks to the USA PATRIOT Act, you can
now anticipate the same type of surveillance when you open and operate
a securities account as with a bank account. |
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| Most of the same precautions that
apply to bank accounts in the preceding section also apply to securities
accounts. However, I recommend one further precaution: to take delivery
of your shares in physical or certificated form, rather than have a broker-dealer
hold them electronically. |
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| This precaution makes it much more
difficult for an identity thief or anyone else to use your securities account
for illegal purposes. It also makes discovering the existence of the securities
themselves much more difficult. The only “paper trail” that will exist
for securities held in this manner will be for the original transaction
and a record of any dividends paid. |
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| The downside occurs when you want
to sell your securities. You will pay extra for commissions and even more
for registered mail or courier service fees, and experience delays. And
if you lose the certificate, you will have to post a bond (approximately
2% of the certificate’s market value) to get it replaced. |
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| Because it is inconvenient for the
securities industry to issue share certificates, it is trying to persuade
states to pass laws that would permit corporations to issue shares only
in non-certificated form.26 It is probably only a matter of a few years
before share certificates are only a collectors’ item. But in the meantime,
they are a valuable supplement to your privacy arsenal. |
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| Buying and Selling Precious Metals
Privately |
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| Under U.S. law, purchases of gold,
silver, platinum or palladium don’t need to be reported to anyone, although
the cash reporting requirements we’ve already described still apply. |
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Dealers must report sales by the
public to the IRS on Form 1099-B that equal or exceed minimum Commodity
Futures Trading Commission approved contract sizes, as follows:
• Gold bars. 1 kilogram (32.15 troy
oz.), .995 fine or higher.
• Silver bars. 1,000 oz., .999 fine
or higher.
• Platinum bars. 25 troy oz., .9995
fine or higher.
• Palladium bars. 100 troy oz.,
.9995 fine or higher.
• 1-oz. gold coins. Maple Leafs,
Krugerrands and Mexican Onzas. 25 coins.
• Pre-1965 silver U.S. dimes, quarters
and half dollars. $1,000 face value (full bag). |
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| A dealer must notify the IRS if
a customer appears to be deliberately “structuring” multiple sales under
the reporting thresholds to avoid broker reporting. |
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| However, the reporting regulations
apply only to “unincorporated individuals.” So, if you sell your precious
metals through a business entity, no report need be filed with the IRS.
You can also buy and sell precious metals without triggering these requirements
by dealing with a fellow investor, either at a coin show or in a classified
ad through publications such as Coin World or Numismatic News, which are
available at any U.S. newsstand. |
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| Protecting Privacy With Collectibles |
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| No broker reporting requirements
apply to purchases or sales of collectibles: art, diamonds, antiques, stamps,
rare coins, etc. Another reason collectibles are valuable as a private
investment is that they do not generate current income. Nor are dealers
required to notify any government authority when you sell collectibles,
except for the cash transactions we’ve already discussed. |
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| Numismatic coins. Rare or
“numismatic” coins are among the most liquid collectible investments and
subject to the smallest dealer mark-ups. From a privacy standpoint, uncertified
coins (not pre-graded in plastic “slabs”) are preferable. If you’re new
to coins, though, you’ll probably want certified coins to guard against
overgrading—although some certified coins are overgraded. The Professional
Coin Grading Service (www.pcgs.com) and the Numismatic Guaranty Corporation
(www.ngccoin.com) are the most widely accepted certification services. |
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| The most private way to purchase
rare coins or other collectibles is at auctions, coin shows or local coin
shops. Pay cash and don’t leave your name. Selling inexpensive coins in
transactions under US$1,000 rarely poses a problem. Larger sales may make
dealers suspicious of your motives. |
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| Diamonds. Diamonds are the
world’s most concentrated form of wealth. They also have such a low profile
that you can privately carry tens of thousands of dollars or more of value
on your finger, with very few people noticing. In addition, the diamond
market is highly liquid. Diamonds can also be transported quietly and legally
and sold globally in most major cities. |
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| However, like rare coins, diamond
prices fluctuate dramatically. And DeBeers (a company that has controlled
the diamond market as a virtual monopoly for nearly a century) has announced
that it will stop controlling the price of diamonds through manipulation
of the amount of rough (uncut) diamonds on the market. With prices set
by supply and demand, diamond values are likely to become even more volatile.
One diamond purchasing strategy involves investing in colored diamonds,
which are much more rare than white diamonds and that, unlike white diamonds,
have enjoyed relatively steady price appreciation for the last 30 years. |
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| All diamonds should be purchased
with an accompanying Gemological Institute of America (GIA) grading report
or GIA origin of color report. (The GIA is the world’s pre-eminent independent
gemological laboratory that issues reports on a diamond’s quality.) |
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| Index
of Sovereign Society Articles |
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