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OPINION

Protective Laws Have Taken Some Wrong Turns

The opinions expressed by columnists are their own and do not necessarily represent the views of Townhall.com.
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Two of the biggest global challenges of the past decade -- terrorism and the 2008 financial crisis -- have given rise to some well-intentioned legislation that has missed the mark.

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The U.S. Treasury Department is charged with maintaining the nation's financial health. Things like money laundering and terrorist financing jeopardize that health, but there's so much shady dealing that it's impossible for government bureaucrats to keep up. Nonetheless, rules are passed, and affected parties are expected to be able to show that they've paid some lip service to the new mandates. Compliance is accepted as a cheap substitute for due diligence deep dives -- and that's where it all unravels into uselessness.

In the wake of the financial crisis, new regulations were passed to prevent banks from failing. Nothing will prevent failure because markets can't be controlled. These regulations are so Byzantine that they'd be useless in a crisis situation where they had to be carried out quickly. Applying bankruptcy provisions to a massive systemic banking failure is like trying to get everyone down an inflatable slide in an orderly fashion while the airplane is still falling from the sky.

Lawmakers have leveraged the opportunity that the crisis presented by moving on to the regulation of insurers, then asset managers, then ... "conflict minerals" in Africa.

A section of the Dodd-Frank Wall Street Reform and Consumer Protection Act compels U.S. companies operating in the Congo and surrounding countries to file reports with the Securities and Exchange Commission proving that they have executed due diligence along their entire supply chain to avoid using minerals determined "to be financing conflict in the Democratic Republic of Congo or an adjoining country" through slave labor, taxation or extortion by militias involved in the trade of such minerals.

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Yes, the U.S. government has managed to tie a domestic housing and lending bubble that crashed the economy to legislation aimed at preventing your iPhone and other electronics from containing African minerals that could be tied to the funding of local conflicts -- on a different continent.

The government couldn't even stop a meltdown on Wall Street. And it's going to fix problems in Africa?

Meanwhile, the Patriot Act legislation passed in the wake of the 9/11 attacks has imposed due diligence requirements on parties to real estate transactions -- under the pretext of combating terrorism. Foreign ownership of pricy housing purchased in the names of opaque companies has led to concern about the laundering of funds through the real estate sector by criminals and terrorist groups. The government apparently believes that by forcing real estate agents, attorneys, insurers and banks involved in such transactions to check whether the buyer is on the U.S. Treasury's sanctions list, it's making America safer.

Due diligence is only as good as the motivation and capability of the people executing it. Capability is often a matter of how much time and money one is willing to spend on the effort. For instance, if you need to prepare a tax return, you'll probably be OK with hiring the cheapest tax preparer you can find. But if you're facing charges for tax fraud, you'll mortgage your house to get the best defender you can find.

The same principle holds true for due diligence: You get what you pay for. And with enforcement so lax -- a recent Shearman & Sterling report noted that fewer than 20 people were charged under the Foreign Corrupt Practices Act in each of the past two years -- why spend the money if you can settle for paying lip service to ticking the boxes? Heck, the Treasury itself isn't going to expend vast resources on its own investigation unless it's certain that it can reap a return on its investment. Offenders know this.

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A business interested in cutting into a competitor's market share is more likely to consider paying for a private investigator to dig up some dirt and drop it into the lap of the government or the media. However, private real estate transactions are a different matter. They lack the financial motivation of competitive gain.

Even when cash cows actually worth milking are caught running afoul of the rules, they just negotiate a fine and carry on with business as usual.

In their current form, regulations passed under the pretext of combating terrorism or preventing the next financial meltdown won't make much of a dent on either front. They just create more paperwork and billable hours for those who benefit from it, while burdening average people -- all while allowing the government to perpetuate the myth that it's actually doing something to protect the public.

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