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The War on Cash, the New Money, and the End of Financial Privacy
by Mark Nestmann

      (The following is an update of material that originally appeared in *How
to Achieve Personal and Financial Privacy in a Public Age*.  Names and
citations for court cases referred to in this special report are omitted.
Copyright, LPP, Ltd., 1994; all rights reserved.)

      Government bureaucrats don't like cash transactions. Cash is difficult,
if not impossible to trace. Cash makes it easier to do business "off the
books" without paying taxes. In short, cash is a *private* way of doing
business.

      To fight cash, governments worldwide have adopted legislation over the
last two decades to discourage its use. In some countries, if you use cash to
disguise a financial transaction, you're now committing a crime!

      The process is furthest advanced in the United States. In this country,
the so-called "Bank Secrecy Act" requires banks and other financial
institutions are required to report cash transactions over $10,000 and any
other "suspicious cash transactions." As of Feb. 1992, "cash" also includes
money orders, casher's checks, and traveler's checks.

      Amendments to this act enlist ordinary businesses into the war on cash.
The new cash reporting form for businesses, Form 8300, even requires merchants
to report "suspicious transactions" by their customers. No one is exempt--not
even your attorney. The money you pay your defense attorney can now serve as
the "smoking gun" to convict you of a crime.

      Forfeiture laws adopted in the 1980s give the government the right to
seize cash tainted by drugs. Yet analysis by the Drug Enforcement
Administration's own labs shows most cash circulating is drug tainted. Does
this make cash illegal? You be the judge!

The "Crime" of Structuring

      By far the most insidious Bank Secrecy Act crime is "structuring;" any
act you take in order to avoid filling out a currency transaction report (Form
4789 for banks; Form 8300 for other businesses; Form 4790 for moving cash
across a U.S. border). This might seem a fairly trivial offense, but you can
be imprisoned up to five years and fined up to $250,000 per violation, in
addition to having any property "involved in" the offense forfeited.  Did you
drive to the bank to structure a transaction?  If you did, prosecutors can
seize your car.  Seizure of such property can occur before trial, even before
arrest.

      There is no requirement that the funds be earned illegally or involve
tax evasion to sustain a structuring conviction.  Hiding your own lawfully-
earned, tax-paid dollars is the "crime."  In essence, the structuring statute
makes virtually any attempt you make to protect large cash transactions from
government financial inquisitors unlawful!  Because the structuring law is
worded vaguely, not even IRS agents are sure what structuring is, and what it
is not.

      It is clear from the regulations the IRS has issued that a person who
deposits $9,000 in cash into an account on two consecutive days is structuring
his transactions. But twelve consecutive $900 deposits may also be structuring
as well. The regulations don't address this possibility, or any of an infinite
number of other possibilities. And remember: not only transactions in cash,
but cash equivalents, are treated identically for the purposes of defining
structuring.

      I personally have received letters from dozens of persons in jail for
structuring whose only crime was trying to protecting their financial privacy.
In one case (U.S. vs. Aversa), the defendant's "crime" was "conspiring" with a
friend to hide income from the defendant's wife.  The scheme triggered reports
of suspicious transactions in Aversa and his friend's bank accounts.  Aversa
Judge Loughlin was particularly critical of the circus atmosphere surrounding
the U.S. District Attorney's office when the indictments were announced at a
press conference.  The implication was that prosecutors had broken up a major
money laundering ring.  Judge Loughlin wrote:


Defendants should never have been prosecuted for
structuring currency transactions...where evidence
showed that defendants were not attempting to avoid
paying tax on money or disguise where it came
from...The evidence shows that [Aversa] did not
believe that [he] was breaking any law...

This is a case that was never contemplated by the
drafters of the statute and that never should have
been brought by the U.S. Attorney.  There is only one
explanation for the bringing of these charges--it was
easy.

      Loughlin reluctantly sentenced Aversa to a mandatory prison term.

      In 1994, the Supreme Court briefly brought some sanity back into the
structuring statute by requiring that prosecutors prove that persons
criminally charged under the statute know they are violating the law, as the
structuring law's "willfulness" language required.  Congress, outraged by this
impudence, quickly removed the willfulness requirement, rendering the Supreme
Court judgment moot.

The New Money

      If the government can't end the use of cash overnight, the next-best
solution from a bureaucratic perspective might be to require all citizens to
use currency whose movements can be tracked.

      A "more traceable" currency has now been introduced. In 1991, the first
example of the new currency--the $100 bill--was introduced. New $100s contain
a microscopic line of print circling the portrait in the center of the bill
and a tiny thread running vertically down the left side of the bill. The bills
also contain magnetized ink. New $20s and $50s were introduced in early 1992.

      The thread running down the left side of the bill contains a band of
small letters running down the length of the bill. The Treasury claims the
threads are polyester, but they are interwoven with magnetic threads.
Moreover, these threads are capable of being encoded with messages--a Social
Security number, for instance. At least some U.S. banks are already equipped
with machines capable of "reading" the message. I've not seen the machines yet
(officially, they don't exist), but I've heard from reliable sources that they
are fully operational.

      Now that the new money has been introduced, the next step might be for
an outright recall of the "old money." In 1989, a suggestion for a currency
recall came from former Treasury Secretary Donald Regan. He recommended that
all $50 and $100 bills be recalled and replaced with a new currency. The
changeover would occur in a 10-day period, Regan proposed, and the old money
would no longer be legal tender after that time. Furthermore, Regan
recommended that anyone turning in more than $1,000 in old bills be forced to
prove that all taxes on the cash had been paid, and that it had not been
generated through illegal activity. Otherwise, the funds would be impounded by
the IRS--and their former owner would face further investigation.

      Shortly after the Regan proposal was made public, Massachusetts Senator
John Kerry introduced an act that called for machine-readable bar codes on all
U.S. currency so that all $20s, $50s, and $100s would be "more traceable."
Kerry recommended that serial numbers on these bills be tracked by optical
scanning devices such as those used at grocery store check-out counters. In
this manner, perhaps in combination with a national ID card, the identity of
the individual spending the currency could be ascertained.

      Today, the tools are in place to put into effect Regan and Kerry's
suggestions. If a sudden currency recall were to take place, it would
presumably be justified as part of the War on Drugs. And once the old money
had been recalled, the Treasury could announce that money laundering, for all
intents and purposes, had been eliminated.

      But I believe the recall would have a much more sinister purpose; the
introduction of a two-tiered currency--a "domestic" currency to circulate in
the United States and an "international currency" to circulate abroad. The
two-tiered system could be justified as providing a permanent end to the money
laundering problem.

      The latest drumbeats for a currency recall and a new currency came in
1993 and early 1994 because of a counterfeiting "crisis;" one involving the
"new money."  Now a new "new money" is proposed that will be counterfeit-proof
and at the same time "fight money laundering."  How?  By issuing it in two
colors: one color to circulate in the United States, one outside of it.

      The real reason for the changeover, however, would have nothing to do
with fighting counterfeiting or money laundering. It would be to establish a
two-tiered exchange rate for the dollar.

      At first, the values of the domestic and international dollars would be
equal. However, having a currency that could not leave the country except
under restricted conditions would permit the Federal Reserve and the Treasury
to inflate away the government's gargantuan debts and unfunded obligations,
using the power of the printing press. This would rapidly depreciate the value
of the domestic currency against the international currency.

       A law on the books for nearly a decade makes this kind of debasement
completely legal (and the U.S. dollar has already lost more than 90% of its
value in relation to gold in the past 60 years; see Chart 1). U.S. Public Law
96-221, the "Depository Institutions Deregulation and Monetary Control Act of
1980" made the following change in what constitutes legal monetary reserve for
the U.S. money supply:


Bills, notes, revenue bonds and warrants with a
maturity date not exceeding six months and obligations
of, or fully guaranteed as to principal and interest
by a foreign government or agency thereof.

      In other words, it is perfectly legal for the U.S. government to simply
buy or borrow a few trillion dollars worth of foreign bonds denominated in the
Russian ruble, Brazilian cruizero, or any other third-world currency. It could
then use these "assets" as a "legal monetary reserve" in order to print as
much currency as is required to meet its obligations to the welfare state.

      Moreover, the Fed could allow the international dollar to float in the
international currency markets. U.S. Treasury securities issued for purchase
by foreigners would be denominated in this new currency, perhaps even backed
by gold. This would have the effect of greatly increasing foreign purchases of
U.S. Treasury debt, which have declined in the past five years, as the value
of the U.S. dollar has collapsed.

      Treasury securities held by U.S. citizens would be denominated in the
virtually worthless, non-gold-backed, domestic currency. Only selected banks
would be authorized to exchange domestic dollars for international dollars,
and the amount of currency that could be exchanged at one time could be made
progressively smaller. The domestic dollar would become a "blocked" currency,
no longer freely exchangeable in world markets.

      Even if you don't think you have anything to hide, currency recall could
touch your life directly. Millions of us have perfectly legitimate reasons to
hold cash. These reasons do not relate to any unlawful activity. For instance,
many people who experienced the Great Depression firsthand recall that
thousands of banks failed during those years. The present economic situation
looks hauntingly familiar to anyone who lived thorough this period. Anyone who
lost money in a failed bank during the Depression, or fears that the
government might possibly violate its current deposit guarantees, might prefer
to keep his money in cash.

      If you think that there would be massive opposition to a new money
conversion, you're not reading the same opinion polls that I am. Market Facts,
a market research company, showed enormous public support for any currency
exchange that was part of a fight against counterfeiting or drug trafficking.
"Conservative" columnists such as William Safire have gone on record as
favoring currency recall to fight drug trafficking and money laundering. And
when former Treasury Secretary Regan proposed the recall of all $50 and $100
bills, his suggestion met no criticism that I read about outside the alterna-
tive press.

The Ultimate Bureaucratic Goal: The Cashless Society

      One way for bureaucrats to do away with cash is to make possible
substitutes very convenient. Today, credit cards and personal checks have done
away with most cash transactions. And tomorrow, electronic "debit cards"
promise to do away with the remainder.

      With a debit card, purchases are paid for with a card read by a
merchant's computer terminal. Your bank account is debited automatically for
the amount of purchase and the merchant's account is simultaneously credited
that same amount, minus a service charge. The process is neat, simple and all
the paperwork is done automatically. A paper trail on every item you purchase
is created. But if you are making a purchase or contribution that you wish to
keep private, then you have a problem.

      Debit cards are popular with merchants because they permit an instant,
foolproof credit to be applied to their accounts. Bouncing checks and credit
card chargebacks are eliminated. Debit cards also permit a merchant to
categorize his customers by what they purchase and how much they spend. This
analysis permits him to direct his marketing efforts appropriately.

      Banks like debit cards because they can deduct a service charge for
making the transaction. My bank recently began imposing a service charge for
use of its automatic teller machines (ATMs), which are nothing more than debit
card terminals. Yours will too, if it hasn't already.

      Marketing firms like debit cards since the profile created from
individual purchases will create a much more detailed picture of consumer
spending patterns than is currently available. Government bureaucrats like
them because they eliminate cash and permit much more detailed financial
surveillance.

      Debit cards won't eliminate cash overnight. But their convenience will
make them a hot product of the nineties, and beyond. A national debit card
system is already in use in France.  Canadian banks intend to launch a
national debit card system in 1992. A recent agreement between a dozen of the
largest regional ATM networks in the United States would set up a national
debit card system that would allow consumers to instantly deduct purchases
from their checking accounts anywhere they travel. In the near future, you'll
be hearing much more about them.

How the Cashless Society Will Operate

      In 1984, the IRS announced an initiative designed to lead to a "return-
free system."  Once complete, the IRS would figure your taxes for you, and
electronically debit your bank account for whatever it calculated you owe. How
convenient!

      The only way the IRS can figure your taxes, however, is if it's
reasonably certain you've reported every penny of your income. With non-
traceable cash in circulation, the return-free system is impossible to set in
motion. The only alternative is a more traceable currency. Even better would
be no currency at all.

      From this viewpoint, the new money is only an interim step toward the
government's ultimate goal of a cashless society. In Congressional testimony
in May 1991, a Secret Service representative stated that anti-counterfeiting
advances would have to continue indefinitely "unless we can come up with a new
medium of exchange." A new medium exchange, of course, means the elimination
of cash.

      Until the cashless society arrives, the government discourages cash use
in the ways I've already described. At the same time, more traceable cash
alternatives are becoming ever more convenient. The government encourages
credit card use to the point where the U.S. President calls for lower credit
card interest rates. Use of debit cards is exploding.

      Advocates of the cashless society would have you believe that its
arrival would spell the end of tax evasion, money laundering, the drug trade,
and black markets. But it won't work. Instead of wiping out the underground
economy and black markets, the cashless society will expand both dramatically.
Exchanges in the cashless underground economy will be made in the form of
barter.

      Barter, already under attack by the IRS for over a decade, will come
under renewed assault. But the sheer volume of barter exchanges will overwhelm
any enforcement policy short of "stationing IRS agents in every American
kitchen," as George Bush once accused former Democratic Presidential candidate
Michael Dukakis of proposing.

      How should you react to the prospect of a more traceable currency, a
possible currency call-in, and the eventual move toward a cashless society?

      If you can't prove that you've paid taxes on your cash holdings, you
need to take steps to construct a paper trail to prove that the funds were
earned legitimately. This is a job for an accountant or even better, a tax
attorney. Then you need to pay taxes on these funds, if you haven't done so
already.

      Even if you can prove taxes you paid all taxes due on the cash you hold,
you must still be careful to avoid being stung by a cash recall. Furthermore,
you shouldn't hold too much cash; $1,000 was the suggested threshold for a
full-scale IRS audit in the cash recall proposed in 1989 by former Treasury
Secretary Donald Regan. Convert cash holdings larger than $1,000 to traveler's
checks, which are unlikely to be recalled, and can be replaced if lost or
stolen.

      If you prefer cash, make certain that it contains no drug residues. One
good way to accumulate drug-free cash is to take back some cash from every
paycheck you deposit in your bank. Ask the teller to provide you with new and
uncirculated bills, which should be free of drug residues. If the teller asks
you why you want new bills, simply say you are a currency collector.

      Have the teller put the bills into a bank envelope with the withdrawal
slip. Then have the teller seal the envelope and stamp over the seal with the
bank's date stamp. If the teller asks why you're going to all this trouble,
just say you want to be able to prove you withdrew the money directly from a
bank, and that the bills really are uncirculated.

      Keep these funds at home in a floor safe, not in a safety deposit box.
The IRS presumes cash it finds in a safety deposit box is the proceeds of
illegal activity, and automatically seizes it. Then buy some books on
bartering (privately, of course).

      (Mark Nestmann is the editor of *Low Profile* newsletter and author of
*How to Achieve Personal and Financial Privacy in a Public Age*, now in its
fifth edition.  For a free catalog describing these and related publications,
e-mail [e-mail], Subject: Catalog, for an electronic version of our
catalog.)


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