Is Apple Trying to Act Like an Offshore Tax Haven in its Fight with the FBI?

April 14, 2016

The war of words arising out of the FBI–Apple controversy is sure to continue, even after the FBI managed to find a “tool” to unlock the San Bernardino cell phone without Apple’s help. There are already more criminals with smart phones that law enforcement wants to get into. The battle lines are drawn. Each side, it seems, is overlooking an important historical analogy arising out of a different industry: American banks.

Let’s go back to 1970, when Congress enacted an oddly named statute — the Bank Secrecy Act (BSA) — which essentially harnessed the power of American financial institutions in crime fighting. The law requires banks to snitch on their clients. They must report to law enforcement any customer transactions over $10,000 in cash. These are called Currency Transaction Reports. A little later, Treasury regulations went further, requiring banks to report to law enforcement whenever they sensed that their customers were using the bank to do something illegal. The vehicle for this reporting was called Suspicious Activity Reports, or SARs.

The banks at the time, much like Apple today, cried bloody murder. They very much did not want to be crime fighters. They insisted that they were the guardians of their customers’ financial privacy. They argued they had a confidential, or privileged, relationship with their customers. They claimed their First Amendment right to associate with their customers was being trampled on by federal law enforcement. They had a property right too, in the form of intangible goodwill that was being taken by the government without due process. The associations of banks got together and sued the Treasury Department, seeking to prevent enforcement of the BSA. It was a war of words very much like what we are seeing today. The bank openly worried about the precedential impact the law would have on them. Plenty of industry experts supported them.

The case went to the Supreme Court, the banks lost, and the sun rose the next day.

A funny thing happened over the next 40 years: The banks got with the program. They created compliance departments, staffed by former regulators and law enforcement professionals. They formed their own professional associations, and began trading technological strategies on how to ferret out crime that may be occurring through their institutions. Their reporting became robust, and many a serious crime was solved and successfully prosecuted on the basis of BSA reports like SARs. The bad guys, as expected, became wary of being too transparent with their bankers, and they started to obfuscate. New law enforcement tools, like anti-money laundering statutes and the crime of structuring, soon emerged. As often happens, the cover-up became more serious than the alleged crime that gave rise to the scrutiny.

It seems that, behold, it was good business for bankers to prevent their institutions from being used by criminals. This recognition was coupled with regulatory pressure. To the extent that banks were being cavalier about being used by criminals, it was a reputational risk, jeopardizing the safety and soundness of customer deposits and, therefore the bank itself. Bank regulators began judging the institutions’ soundness in part by how good their BSA compliance was. The bad ones were punished, and some even went out of business. Remember Riggs? Today, you will not find many bank executives who openly challenge the notion that criminals who exploit them should not be reported and, when appropriate, punished.

This brings us back to Apple, and some of the arguments of its partisans. They claimed, for example, that Apple was being threatened with “involuntary servitude,” in violation of the 13th Amendment, for being required by the All Writs Act to open up the cell phone that was used by the San Bernardino shooters and was by that point owned by the county. This argument was extremely curious, in view of the federal government’s willingness to reimburse Apple for the costs of its services. It also overlooks the history of the BSA and the American banks. How much were BSA-covered institutions reimbursed by the government for the cost of developing compliance departments capable of ferreting out crimes being committed by their customer base? Zero. Bank compliance departments do not produce revenue. They do something more important: assure the continuing good reputation of the banks.

Some will argue that this analogy is not apt, since the privacy interests involving electronic communications are distinct from those that attach to customer records maintained by banks. That argument, however, will have to deal with the reality that Congress has clearly established a privacy right in bank records, in the form of the Right to Financial Privacy Act. Today, there are plenty of foreign jurisdictions who continue to do a thriving banking business by offering their customers “discretion” in dealing with their home countries’ law enforcement. Look at Panama.

Perhaps an example will drive this point home: Imagine if a wealthy American went shopping for discrete banks in which to put all of his money. He sets up a number of interviews, and tells each of the competing banks hoping to get his business that he has one absolute condition: They must encrypt, in their own bank data repository, all of the electronic data that they maintain on his accounts. Then, when and if law enforcement come calling, the bank must insist that they are not permitted by their client to decrypt that information.

Would any bank agree to this condition? My bet is that no bank in the United States would, because of the system that has evolved since 1970. The rich American might find success in Panama or Lichtenstein, but I have doubts about whether he would find a taker even in Switzerland in the current climate.

While we are on the subject of banks, let’s imagine that the dilemma for law enforcement in the San Bernardino attacks was getting access to the shooters’ bank records from an offshore haven. Let’s say that the shooters are alive. How would the FBI get these records?

It would be through our old friend, the All Writs Act. It seems that federal law enforcement can compel someone, under the Act, to consent to the release of their foreign bank records. According to the Supreme Court, this act of compulsion does not violate the 5th Amendment prohibition on self-incrimination.

The problem, for Apple, seems to be its fancying itself like an offshore tax haven, or like one of the angry American banks circa 1970 who complained that it had no interest in helping law enforcement and should not be required to do so. Individuals and companies who put themselves in that position are bound to be disappointed by the sweep of legal history.

 

Jeff Breinholt is a lawyer with the Department of Justice’s National Security Division in Washington DC. He is a member of the State Bar of California. The views in this article are the author’s own and do not necessarily reflect that of the Department of Justice or the United States.

 

Photo credit: Alice Rosen