By: Gilbert NMO Morris, Gilbert Morris Associates LTD, 26 Sep 2002

Introduction:

The US PATRIOT ACT 2001 is an omnivorous creature. It is perhaps the most ambitious piece of law-making in the new millenium, and is certainly that piece of US legislation with an apparently domestic focus, which will have a greater impact internationally than any US law in memory.

To place these matters into context, my colleague and friend Mr. Jeff Dennis has explained that the PATRIOT ACT 2001 is already distinct in its achievements compared to the OECD initiatives. As I have demonstrated in previous lectures See: http://www.spgi.org/articles/pdf/morris_ifs.pdf) the OECD in international law, is not a "state actor". As such, it has no legitimate authority to enter into "agreements" – particularly by force which is a breach of international law – with nation-states.

Other bodies have exercised themselves in the financial services arena, attempting to enforce rules made by bureaucrats who are un-elected and seem – at times – unanswerable to any government in the letter and spirit of democracy. The UN sought – and still seeks – through the Interlaken Process to become the principle enforcer of a universal tax code (See: http://www.solami.com/MorrisUN.htm) It is as if – of a sudden – international agencies recognized the linchpin of global influence, each one seeking to enhance its power to force – most notably – small governments to undertake radical – even unconstitutional – changes to their systems which OECD countries themselves continue to enjoy – without apparent irony. (See: Marshall Langer-Who are the real Tax Havens?)

The US Internal Revenue Service (IRS) finally entered the game with the Qualified Intermediary (QI) Rules. The QI is meant to govern money invested in America from overseas.  The regulations impose reporting requirements on foreign institutions, are ostensibly designed to increase tax collections by catching U.S. taxpayers hiding income earned in America from the IRS by anonymously investing through foreign institutions. This seems fair enough, except that whilst this appears to be a regulation to which the IRS and institutions in QI jurisdictions are agreed, in fact the QI is an agency (IRS) to state treaty which is illegal in international law, since the IRS has no power to bind states. Equally to have achieved these agreements by force is in breach of both the UN General Assembly Resolution 2131 on non-interference and the Law of Treaties under the Vienna Convention of 1965. On this latter front, Article 50 and 52 are compelling. The former in particular invalidates a treaty where "consent to be bound by a treaty has been procured through the corruption of its representative directly or indirectly" a point made unabashedly clear by Maurice O. Glinton in the "Glinton-Esfakis Principles" which identifies the usurpation of states authority (See: www.offshoreon.com/othertext/Bahamas/glintonsuit01.pdf), through the complicity of state officials in the interests of foreign powers.

Nothing in this rejection of the illegal exercise of power should imply an unwillingness to act in the interest of either preventing or prosecuting transnational economic crime.  What is rejected is the abuse of the state which is the sole legitimate unit of consent in international law, and the rise of an international Leviathan or as my colleague Anton Keller would say: lex americana univeralis (www.solami.com/lexamericana). What is outrageous is the targeting of small states when the largest money laundering scandals occur and continue to occur in OECD member countries. (See: www.foreignpolicy.com/issue_mayjune_2001/thinkagain.html).
 

The Character of the PATRIOT ACT:

Against this background, one must see the genius and the terror of the PATRIOT ACT 2001. Plainly, it is the sloppiest, most inconsistent – perhaps unconstitutional - piece of legislative action and executive chauvinism since the which lead up to Marbury v. Madison (1803) in which the learned Chief Justice of the US Supreme Court insisted that the first duty of government was to obey law. But not only that, rather in obeying the law, to act within the uncodified principles which gave rise to the written law.  (One wonders from whence our justice Marshall will emerge).

The PATRIOT ACT has – on its face – none of the problems of international law so implicit in the initiatives of the OECD/FATF/IRS/UN. Its problems are more subtle and will show up in auxiliary practices derived from the precedent it sets.

The genius of the PATRIOT ACT – despite its obvious flaws – is that it is directed at US institutions. And it affects overseas institutions by creating "access rules" based upon initiatives very similar to those promoted by the OECD et al.  These rules are organic, ominous and onerous.

They are onerous because they increase exponentially the paper work associated with financial transactions and force institutions to over compensate in data collection, and in regarding every transaction as suspicious. (See: PATRIOT Section 352). In effect, under Title III specifically, US domestic institutions have become the official police agency for the world’s financial system, (319(b)) but they have become that without a direct breach of international law.

The Act is ominous because of the penalties likely to be imposed for breach of the rules. Failure to comply with the regulations promulgated under the USA PATRIOT Act - most notably the implementation of adequate anti-money laundering programs - can subject a company to fines of $25,000 per day civilly or up to $250,000 per day for "willful criminal violations". A company can also be criminally liable for up to $500,000 for willful violations of the Act if the company fails to implement proper anti-money laundering programs and if the company is involved in a pattern of illegal activity involving more than $100,000. The USA PATRIOT Act also increased the available civil and/or criminal penalties for violations of the due diligence requirements for United States private banking and correspondent accounts (previously covered by the BSA).

The effect of this will be to further motivate US institutions to deny access and or participation to international firms unless they comply. (See: FinCen Assessment of Civil Money Penalty against Florida Bank (August 23, 2002)

Organically, under 314 the Act bolsters the information exchange regime by enhancing two key channels for sharing information: (1) information exchange between the government and financial institutions (section 314(a)); (See: http://www.ustreas.gov/fincen/bothrules.pdf) and (2) information exchange among financial institutions (section 314(b)). (See: Information Sharing Between the Government and Financial Institutions) The proposed rule released today seeks to create a communication network to link federal law enforcement with financial institutions so that vital information relating to suspected terrorists and money launderers can be exchanged quickly and without compromising pending investigations.

 The above provisions are backed by an immunity clause (Section 223) which limits the Civil liability of government agencies for certain unauthorized disclosures. This provision makes a number of changes to prohibitions against unauthorized disclosure of by the government of information obtained through the surveillance authority provided by ECPA. The most significant of these changes is an explicit clarification that civil lawsuits are not available against the federal government under 18 U.S.C. §§ 2520 or 2707 for unauthorized interceptions or disclosures. However, it does not preclude actions against government agents, specifically prohibits willful unauthorized disclosure or use of information that the government obtains through surveillance, and increases the accountability of the government to discipline employees who willfully violate these sections. This provision is decidedly more favorable to the government than the initial version of this provision owing to an amendment by Rep. Barney Frank (D-MA) approved in the House Judiciary Committee mark-up of the bill, which would have allowed lawsuits against the federal government for certain ECPA violations.

Provisionally, the Patriot Act 2001 is marked by two further implications for overseas institutions wanting to do business in the US; which come as close to explicit breaches of international law or disregard for the law of other jurisdictions:

Under Section 319 of the USA PATRIOT Act, US institutions must comply with a request for information within 120 hours after receiving it. Specifically, they must provide information and account documentation for any account opened, maintained, administered or managed in the United States by an institution that is covered by the request, as well as any information requested relating to its anti-money laundering compliance. The difficulty obviously is that transfer of that information from the Bahamas for instance is subject to fundamental constitutional right of privacy, and as the House of Lords had ruled recently, the individual owner of the information must have an opportunity to defend himself. Remember also, Article 48(1) (b) of the Bahamas constitution prohibits Bahamas government officials from "acting under ANY acknowledgement of allegiance, obedience, or adherence to a foreign power or state" (emphasis added). The 120 hour rule ignores the possibility of these legal and constitutional hurdles, and is therefore problematic as a question of law.

Second, Section 215 of the PATRIOT ACT - dealing with access to records and other items under the US Foreign Intelligence Surveillance Act (FISA) – is potentially a broad expansion of the types of items which may be subject to FISA subpoena; may include servers, but provides for immunity for good faith disclosures. This provision substantially revises the FISA provisions governing access to business records for foreign intelligence and international terrorism investigations. Most significantly, the provision no longer limits the FBI's ability to obtain business records pursuant to an ex parte court order to specific categories of businesses. (Meaning the implicated party will have no notice).

Previously, section 501 of FISA (50 U.S.C. § 1862) had subjected only common carriers, public accommodation facilities, physical storage facilities, or car rental facilities to FISA business record authority. By eliminating these categories and allowing these subpoenas to be issued to any person, Congress has, for example, included Internet service providers, banks, and any other business within the reach of business record authority.

Second, Section 215(e) creates immunity for good faith disclosures of business records under this provision, and provides that disclosure of records does not waive any privilege in any other proceeding or context. Third, Section 215 eliminates a previous limitation of FISA business record authority to "a foreign power or an agent of foreign power," 18 U.S.C. § 1862(b)(2)(B), and expands the scope of items that may be obtained through this authority from "records" to "any tangible things," which might include, for example, a computer server on which information is stored. Fourth, the provision specifically prohibits investigations under this authority of U.S. persons that are conducted solely based on First Amendment activities.

Finally, this section amends 50 U.S.C. § 1863 to require the Attorney General to fully inform and provide reports to select congressional committees, on a semiannual basis, of all requests for production of "tangible things," and to indicate in his report the total number of applications made, in the preceding six-month period, for court orders and, of those, the number of applications that were granted, modified, or denied

The extent of the PATRIOT ACT seems to continue to grow organically: in a recnet ruling on regulations - April 23, 2002 PO-3034 Treasury Department USA Patriot Act Update – The Treasury Department announced new regulations that will require additional key financial sector industries to implement programs designed to prevent the services they offer from being used to facilitate money laundering or the financing of terrorism.

These new regulations will expand the number of financial institutions required to have such a program, as required by the USA PATRIOT Act. (The financial institutions are defined in the Bank Secrecy Act, 31 U.S.C. 5312(a)(2)(A) thru (X), as amended by the Patriot Act). The Act mandates that all industries defined as financial institutions must have anti money-laundering programs in place by April 24, 2002 unless the Secretary exempts them.

The industries that will have a new obligation to implement an anti-money laundering program as a result of these regulations include: (1) mutual funds; (2) operators of credit card systems; (3) money services businesses, such as money transfer companies and check cashers; (4) securities brokers and dealers registered with the Securities and Exchange Commission; and (5) futures commission merchants and accompanying introducing brokers registered with the Commodity Futures Trading Commission.

Additionally, Treasury is also exercising its authority to defer, for a period of no more than six months, the application of section 352 to the remaining categories of financial institutions under the Bank Secrecy Act to allow Treasury time to study these new industry sectors and develop regulations applicable to them. The business sectors subject to further study include dealers in precious metals, stones, or jewels; pawnbrokers; loan or finance companies; private bankers; insurance companies; travel agencies; telegraph companies; a business engaged in vehicle sales, including automobiles, airplanes, and boats; persons involved in real estate closings and settlements; investment companies other than mutual funds; and commodity pool operators and commodity trading advisors.
 

The Reasons for US Pervasive Authority:

The truth is that the world economy has become overly dependent on the United States and its mushrooming trade deficits, which though they are "unsustainable,", show no sign of abating. Foreigners have invested billions in American stocks and bonds. In addition, Europe suffers from generous unemployment benefits, rigid regulations and high taxes. The first perpetuates joblessness; the second and third deter job creation. This is the main reason the Europeans have used the OECD as a tool for tax collection to feed these social commitments.

In Japan, low interest rates and big budget deficits have failed to revive an economy cursed by weak banks, cautions consumers and low corporate profits. None of these problems is easily treatable by economic policy, because all are deeply rooted in national politics and psychology. As Robert J. Samuelson has written: "The desire of the Japanese for social "consensus" has kept them from making needed economic changes. Europeans prefer generous welfare benefits and strict regulation".

What this all means is again, the world’s productive capacity is being absorbed by US consumers and overseas institutions seeking access to US markets, stock and bonds. This desire for access gives the PATRIOT ACT its teeth. Neither Germany, nor France or Britain and certainly not Japan could have imposed such rules upon its domestic institutions under the assumption that the institutions would then enforce the rules against the rest of the world. Without a doubt the reason the PATRIOT ACT works – for the time being anyway – is our dependence on the US financial system – which is not likely to change anytime soon.
 

Conclusions:

Having argued all of the above, the situation is not – and in fact is never hopeless. Ninety percent of Title III of the US Patriot Act comes under the discretion of the Secretary of the treasury with the advice of the Board of Governors of the Federal Reserve Bank and the Federal Deposit Insurance Corporation and the Securities and Exchange Commission Chairman.

To the enlightened observer this has potentially good and bad possibilities. First, the discretion of the secretary extends the potential influence and effects of the Patriot Act to unlimited extents. However, this also means logically, that there are significant opportunities to influence and to affect the secretary’s decisions and the advice of his colleagues through studied, matured and comprehensive lobbying efforts backed by profound research.

Additionally, the Patriot Act carries within it a sunset clause through which the more offending and significant potions of the act will be rendered void in four years except through re-visitation by the US Congress. This multiplies the targets of any lobbying effort and jurisdictions who possess a keen understanding of their objectives and goals in financial services provision and their competitive and comparative advantages will be best served.

In the Bahamas there are some measures we may undertake prior to lobbying. A significant reason for the influence and authority of the Patriot Act is the new world security crisis caused by terrorism. Unfortunately under the Patriot Act terrorism, money laundering, general fraud, corruption and tax issues are all bundled in incoherently.  This is unsustainable. The Bahamas can take a lead in developing clarity on this front by first reviewing its financial services regulations bringing them in line with the latest case law.  Second, we should join Switzerland, Luxembourg, Bermuda and Cayman Islands in their recent statements on the importance of state sovereignty and constitutional privacy.  Third, we should establish a court for financial services at the level of the Bahamas Supreme Court. Fourthly, we should separate the terrorism issue by establishing a special unit between the Attorney General’s office, the ministry for Financial Services and the Ministry for National Security on terrorist activities.

There are several further steps to be taken but preliminarily these efforts will send a message that the Bahamas intends to be taken seriously and will lay the ground work for comprehensive lobbying efforts through a clearer definition of our objectives. I must make it plain, we cannot rest and wait to see what others will do. New players are already making moves in the financial services markets; player who can avoid the US market because of their own stellar investment products. Whilst Singapore is the leader in this category, it has emerged that more than 25 leading financial service providers have confirmed that they want to establish a presence in the Dubai International Financial Centre when it launches, despite the fact that the legal framework for the venture has not yet been finalised, and registration does not officially begin until January 2003.

I am confirmed in the view therefore that unless we act now, we shall have every reason to regret the world order now taking shape.