Indulge yourself for a moment and imagine you're back in 1986. You're listening to "Addicted to Love" by Robert Palmer on the radio and on your way to the movie theater to watch Aliens, starring Sigourney Weaver. In Washington, DC, the "War on Drugs" is alive and well, and President Ronald Reagan is championing a new anti-money laundering bill he says will help win it.

A small piece of this 1986 law contains a little-known section reminiscent of another 1980s-era icon: the Smurf. These blue, elf-like creatures, only a few inches tall, starred in their own Saturday morning cartoon show. The tiny Smurfs were helpless individually, but if they banded together, they could defeat the evil wizard Gargamel, who regularly threatened their village in the forest.

At the same time, drug dealers (and anyone else dealing in large quantities of cash) were using a rather obvious method to avoid government surveillance. Since 1970, federal law had required that cash transactions over $5,000 (later increased to $10,000) be reported to the IRS. Those dealing in cash quickly realized that if they kept the deposits below $10,000, banks didn't need to file the form. But if you have millions of dollars in cash that you need to recycle through the banking system, you need a lot of people, each making transactions under $10,000.

All these cash couriers fanning out to make their $9,500 deposits reminded Gregory Baldwin, a federal prosecutor in Miami, of the Smurfs' collective efforts to defeat Gargamel. And the 1986 statute that criminalized this activity became informally memorialized as the "anti-smurfing" statute.

The real term for the crime the anti-smurfing statute criminalized is "structuring." Structuring is the act of making an effort to avoid the $10,000 cash-reporting rule by breaking up a cash transaction into a series of smaller amounts.

If prosecutors indict you for structuring, you could face a five-year prison sentence and a $250,000 fine. But the law also lets prosecutors seize every dime in your bank account, even if they never bother to indict you. There's no need that you deposit "dirty money" – indeed, the government can confiscate legally earned, after-tax earnings from your business or any other source.

On March 11, 1988, a notice appeared in the Federal Register that proposed posting a prominent announcement in every US bank announcing the fact that "smurfing" was now illegal. After all, given the choice of filing a form with the government that could lead to an investigation or not, which would you choose?

But very quietly, the proposed regulation was withdrawn. The results were entirely predictable: The vast majority of smurfing investigations involved cases of innocent non-criminal activity. Smurfing is smurfing, and if you do it, the government can confiscate every dollar in your bank account and put you in jail to boot. A Treasury Department analysis in 1991 concluded that over 75% of the money seized under the structuring law belonged to people not involved in any illegal activity.

This racket has now been going for 28 years, with thousands of law-abiding Americans stripped of their savings and, in many cases, imprisoned as well.

A textbook case is that of Daniel Aversa, who in 1993 was sentenced to a mandatory prison term for conspiring with a friend to hide income from his wife. The scheme, which involved smurfing, triggered reports of suspicious transactions in Aversa's and his friend's bank accounts. After sentencing Aversa and his "co-conspirator" to a mandatory prison term, Judge Martin 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… There is only one explanation for the bringing of these charges – it was easy.

In 1994, the Supreme Court overturned the conviction of another defendant convicted of structuring because prosecutors couldn't prove the defendant knew it was illegal. Congress responded in 2000 with a law that makes structuring punishable, even "without the need to prove specific knowledge that such evasion is unlawful."

And today, nearly three decades after the enactment of the original law, the vast majority of structuring investigations still involve legally earned, after-tax funds. Prosecutors love the law because winning is a slam-dunk. And it's getting used more and more because seizing agencies keep a cut of what they confiscate – sometimes as much as 80%. More than 100 multiagency task forces are now combing through the 700,000 Suspicious Activity Reports that banks file every year, looking for accounts to seize. And it's working.

According to a report from the Institute for Justice, in 2005, the IRS initiated only 114 smurfing seizures. By 2012, that number had grown to 639. But just like two decades ago, in modern structuring cases, criminal charges are brought about only 20% of the time.

Nor has the profile of the victims changed much since the 1980s:

  • A woman who owned a Mexican restaurant followed her mother's advice to keep deposits under $10,000 to "avoid paperwork." She lost $33,000 to the IRS.
  • The owner of a grocery store in Michigan had an insurance policy that only covered losses of cash of an amount smaller than $10,000. He would wait until he had close to $10,000 in the till, and then take the cash to a local bank. The IRS seized the entire account, more than $35,000.
  • An army sergeant asked a bank teller how to avoid paying a second round of tax on cash he was about to deposit in his bank account. The teller suggested keeping the deposits below $10,000. After complying with the teller's suggestion, the sergeant lost $66,000 to confiscation.

When someone fights back against the seizure, prosecutors usually offer them a plea deal. If they don't contest the confiscation of their money, they won't go to jail. It almost always works. And those who do fight rack up huge legal bills. A typical retainer for one of the few attorneys who actually handle structuring cases starts around $20,000. Sometimes the IRS offers a partial settlement. The agency seizes your lawfully earned cash and, like a kidnapper, asks for a ransom to get it back.

For decades, I've criticized the monstrous way the IRS has enforced the anti-smurfing laws. But finally, the agency has decided to back down – a little.

Last month, The New York Times published an exposé on the anti-smurfing laws, which included some of the more recent examples I've highlighted in this essay. Suddenly, for the first time since 1986, the anti-smurfing statute was in the spotlight.

You might have expected the IRS to trot out a spokesperson to defend the practice of confiscating legitimately earned money from cash-based businesses. It's done that before, most notably in defending the notorious "Foreign Account Tax Compliance Act" (FATCA).

But it didn't. Instead, Richard Weber, the chief of the IRS Criminal Investigation Division, without any apology or explanation, announced that, for the first time since the anti-smurfing statute was enacted in 1986, it would no longer confiscate funds associated solely with "legal source" structuring. Of course, there are exceptions; Confiscation of your legally earned cash is OK if "exceptional circumstances" justify the seizure.

Oh, and the new policy won't apply to past seizures. People like the Mexican restaurant owner, the grocer, and the army sergeant won't get their money back without a fight.

Not coincidentally, the anti-smurfing statute is unique to the US. There's nothing like it internationally, although most countries today require the reporting of "large" cash transactions with banks to a national anti-money-laundering authority. A handful of countries, including Australia and Canada, also ban "parceling" the transactions into smaller transactions below the applicable limits to avoid reporting. But in all cases, the relevant legislation targets only illicit funds, not legally earned cash. The US is the only country with anti-smurfing that explicitly targets lawful funds.

There are, of course, solutions available. The most important strategy is to avoid structuring currency transactions in the US. Despite the new policy that Mr. Weber announced, there's nothing to stop the IRS from going back to the old policy once the media shifts its attention back to the likes of Kim Kardashian, Justin Bieber, and Miley Cyrus. And since seizing agencies get to keep most of the cash they grab, there are plenty of financial incentives to do so.

The second strategy, of course, is to get your money out of the US into a financial system in which the government doesn't look at your legitimate assets as a piggy bank it can tap whenever convenient. There couldn't be a better time to start than now.

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