The Illusion of Financial Privacy

By Naomi Brockwell, Founder and Director of NBTV

Over the past half-century, financial privacy has diminished significantly. In contemporary society, individuals are required to justifying their routine financial activities, authenticating their identity and defending their choices at every financial turn. This shift in norms has become ingrained in our expectations of the financial ecosystem.

It appears that the collective memory has faded, and we’ve forgotten that just a few decades ago withdrawing one's own funds was a straightforward right—No probing questions about the intended use of those funds or one's occupation. Additionally, the routine bulk sharing of transactional data with countless third parties was not the standard. This evolution into an era of pervasive financial surveillance represents a stark departure from practices a few decades ago.

A paradoxical situation has emerged wherein many continue to believe in a notion of financial privacy that has ceased to exist. There is a widespread assumption that financial activities remain confidential, safeguarded by banks or credit unions. Reality, however, starkly contrasts with this belief. In truth, financial privacy in the United States is more illusory than real.

How do we explain this mismatch between what people believe is true, and the actual state of financial privacy?

First, the systematic dismantling of our financial privacy occurred gradually over time without people really paying attention.

Second, the bulk of this increased surveillance has actually been intentionally kept hidden from the public.

This article will explore the history of how financial privacy slowly disappeared, unveiling the extensive financial surveillance apparatus that remains largely opaque to the general public. While this analysis primarily focuses on developments within the United States, the implications of these changes are global, driven by the U.S.'s influence in exporting its legislative and regulatory frameworks abroad. The trend towards financial surveillance is a global phenomenon, with governments worldwide monitoring payment systems.

To understand the current state of financial privacy we should first look at what things were like prior to 1970, when some pivotal legislation was introduced to dramatically shift privacy norms, which we’ll look at in a moment.

The landscape of financial interaction was markedly different fifty years ago. Customers enjoyed greater autonomy in opening accounts and managing their money, often choosing to engage with banks based solely on the cash they possessed. The era was characterized by less scrutinized transactions and, occasionally, the absence of ID requirements for account setup. The discretion once afforded to banks in determining necessary information for account creation has been supplanted by federal mandates, with customer information no longer confined to the private domain of the bank-customer relationship.

The year 1970 heralded a transformative period in financial privacy with the enactment of the Bank Secrecy Act (BSA). Aimed at addressing concerns over secret foreign bank accounts, the BSA represented a significant milestone in the regulation of financial privacy, both within the United States and globally. The Act's premise was to enhance information gathering on financial activities to combat the concealment of wealth in overseas accounts.

The BSA introduced a paradigm shift by requiring financial institutions to maintain records of customers' transactions and personal information and to report significant transactions, specifically those exceeding $10,000, to the Treasury Department. This legislative move transformed financial professionals into de facto government informants, reporting on Americans for the mere act of engaging with their finances. The law sparked considerable debate, drawing criticism from various quarters, including Congress, the banking sector, and civil liberties organizations. A legal challenge ensued, questioning the BSA's constitutionality and its compatibility with the First, Fourth, and Fifth Amendments.

Central to the legal debate was the Fourth Amendment, which safeguards against unreasonable searches. The mandate for financial institutions to divulge personal financial information without a warrant was perceived as an infringement of this constitutional protection. Despite these concerns, the Supreme Court ultimately upheld the BSA, reasoning that information shared with banks constitutes business records rather than private data, thus not warranting the same expectation of privacy. This completely undermined the expectation of privacy that people had always had with their banks.

The BSA marked a fundamental shift in the confidentiality dynamics between individuals and financial institutions, effectively involving the government in financial interactions instead of allowing people the dignity of privacy.

The Supreme Court at the time commented that the reporting requirements for the banks were not an undue burden, because they applied only to “abnormally large transactions.” $10,000 in 1970 was indeed seen as abnormally large, because the purchasing power of the US dollar was so much higher back then. To put this amount in context, in 1970 it would buy two brand new Corvettes, or even a new house in some areas. From this perspective, if you were paying all cash for an entire, brand new house, it might be a suspicious enough and rare enough occurrence that it was not seen as a burden on financial institutions to report this, nor an unreasonable intrusion into people’s daily lives.

However the BSA never included any adjustment for inflation. Year after year, the purchasing power of the US dollar disappears, which means that this financial surveillance has silently and insidiously crept further and further into our lives. Inflation has incrementally extended the reach of financial surveillance into everyday transactions.

Since 1970, the Bank Secrecy Act’s powers have not only expanded silently through inflation but explicitly through all kinds of amendments that increase its scope. Subsequent expansions of the BSA, notably the Annunzio-Wylie Anti-Money Laundering Act of 1992, further broadened the scope of reportable activities through the introduction of Suspicious Activity Reports (SARs). This shift from reporting threshold-based transactions to any transaction potentially relevant to legal violations, irrespective of amount, opened the floodgates to a firehose of financial reporting.

Financial institutions now file approximately 26 million reports annually under the BSA, often erring on the side of over reporting to avoid potential penalties. This practice underscores the pervasive nature of financial surveillance, with significant costs borne by both the industry and consumers.

There was another big change that the Annunzio-Wylie Anti–Money Laundering Act ushered in. When the Bank Secrecy Act was first introduced, it was countered with something called the Right to Financial Privacy Act, that essentially said that if people’s finances are being looked into, they at least need to be told about it. The 1992 Annunzio-Wylie Anti–Money Laundering Act made it so that no one would be told about it—it became confidential that these reports are even filed. To this day, you can't be told that your bank filed a report to the government for you using your own money.

This really ushered in a new era of mass surveillance of the financial activity of innocent Americans. The banking sector's role has evolved from safeguarding depositor privacy to facilitating government surveillance. It’s also a major reason why people have this illusion of financial privacy -- they just don’t realize what’s been happening, by design, because the whole surveillance process has been made confidential.

Further legislative developments, such as the Patriot Act of 2001, have intensified financial surveillance. The Patriot Act was invoked in the immediate aftermath of the September 11 attacks, and utilized the urgency of national security to enact broad surveillance powers. It represented a watershed moment in financial surveillance, incorporating extensive provisions that had been drafted in anticipation of a suitable legislative opportunity. Among these was the formalization of "Know Your Customer" (KYC) regulations, which have since become a staple in the arsenal of financial surveillance tools. KYC regulations require a thorough vetting of a customer's identity, occupation, and financial activities, significantly reducing the realm of financial privacy. They mandate banks to not only verify the identity of their clients but also to conduct ongoing monitoring to detect and report suspicious activities.

This expansion of surveillance capabilities was facilitated by the passage of the Patriot Act as an omnibus bill, which, due to its urgent framing as a necessary response to terrorism, underwent minimal scrutiny before enactment. The complexity and volume of the legislation meant that many lawmakers voted on the bill without fully understanding its implications, or even having the time to actually read it, embedding extensive surveillance mechanisms within the financial system.

The trend of utilizing omnibus bills to quietly introduce or expand surveillance measures is ongoing. The American Rescue Plan Act of 2021, another omnibus bill, attempted to introduce surveillance of bank accounts with transactions totaling $600 or more. In response to pushback against this provision, the Treasury changed the reporting requirement so that instead of applying to ALL bank accounts, it would just apply to anything including a payment transmitter (for example, PayPal, Venmo, or Cash App). Although this specific provision was partially amended, it is an offensive attack on the privacy expectations of innocent Americans. It underscores the ongoing efforts to extend the reach of financial surveillance under the guise of regulatory compliance or national security.

A recent piece of legislation on this road of increasing financial surveillance is the Special Measures to Fight Modern Threats Act introduced in 2022, which aimed to eliminate some of the checks and balances placed on the Treasury. The Treasury Secretary has a special ability to sanction transactions and because this is such a powerful tool, there’s always been a check on this power. The Treasury Secretary has to report every time they do this on the federal register. The Fight Modern Threats act tried to remove this balance of power, by removing this reporting requirement, which would allow it to be used more.

This bill hasn’t been passed, but it also hasn’t gone away either. And this same language to eliminate public oversight and expand treasury powers keeps appearing in different bills -- It was introduced as an amendment to the National Defense Authorization Act, which failed, an amendment to the America COMPETES Act, which failed, and then as a standalone bill.

There is an ongoing onslaught of bills that try to expand financial surveillance, and each time another one slips by, financial privacy in our lives is chiseled further and further away.

The legislative journey from the Bank Secrecy Act to the present day reflects a steady expansion of financial surveillance, driven by various rationales from combating crime to national security. Yet, this expansion has come at the cost of eroding financial privacy, raising critical questions about the balance between security measures and individual rights—To what extent should we as a society permit pervasive surveillance in the name of stopping crime?

To answer this question, it’s important to first recognize that the optimal crime rate is not zero. While a world with zero crime may intuitively seem better than a world with some crime, it depends on the costs of getting to that zero-crime world. We can't bring the world to halt to stop someone jay-walking because the cost is too high. Similarly, you can’t strip individuals of their right to privacy by allowing omnipotent surveillance of every financial activity in order to stop anyone from ever committing a crime, because the cost is too high. In this instance, the cost would be sacrificing what makes a free society possible – Privacy.

It’s through surveillance that our freedoms are limited. Every totalitarian regime in existence and maintained power through pervasive surveillance. Our financial activities reveal intimate details about us, including our religious beliefs, daily habits, and the causes we support that might hold powerful people accountable or demonstrate our political affiliations. Without financial privacy, all of these aspects become vulnerable to exploitation, and those involved are susceptible to being targeted. We must be vigilant against creeping surveillance that shifts the balance of power away from the individual.

That being said, removing the mass-surveillance apparatus we’ve created doesn’t mean ending the fight on terror or the fight on crime. It just means respecting Fourth amendment protections – If the government wants your information, they can get a warrant and prove probable cause.

It's not supposed to be absurdly easy for the government to dive into people’s private information. The purpose of the Constitution is to restrict the powers of government and protect the people. Yet over the past few decades, we have slowly built a system of unchecked financial surveillance that makes it trivial for the government to search your affairs with impunity, and with almost no oversight or accountability. It’s time to question whether this is the world we want to live in. Instead of having a regime that generates 26 million reports on Americans in a given year, we should have something that actually respects their rights and only goes after criminals.

As surveillance mechanisms become increasingly embedded within the financial system, the safeguards of freedom are slowly chipped away, and the worst part is that nobody really recognizes that this is what is happening. Most people continue to hold on to the illusion of privacy, because what’s actually going on has been both hidden from view and normalized.

Changing this is an uphill battle, but it’s one that’s worth fighting. The first step is just making people aware of how far financial surveillance norms have shifted in just a few decades. The narrative of combating terrorism and serious crimes, while compelling, must be weighed against the potential for overreach and the erosion of fundamental liberties. It is through ongoing dialogue, rigorous oversight, and a commitment to upholding individual rights that society can navigate these challenges, especially in today’s increasingly interconnected world.

A version of this article first appeared in video form on NBTV. NBTV is a non-profit educational platform that teaches people how to reclaim control of their lives in the digital age. They give people the tools they need to take back their privacy, money, and free online expression.

Learn more at NBTV.media