- WASHINGTON (Reuters) -- U.S. banks must monitor their customers and alert
federal officials to "suspicious" behavior under a government
plan that has drawn fire as an Orwellian intrusion into Americans' privacy.
- A set of proposed regulations released
last Monday requires banks to review every customer's "normal and
expected transactions" and tip off the IRS and federal law enforcement
agencies if the behavior is unusual.
- "It turns us into surveillance agents
for the government," said John Ehrensperger, compliance director for
Atlanta-based Sun Trust Bank. Ehrensperger stressed that he was not speaking
on behalf of his employer.
- Adopting so-called "Know Your Customer"
programs will stifle drug-related money laundering, the Federal Reserve
Board has claimed for years. "The proposed regulations will reduce
the likelihood that banks will become unwitting participants in illicit
activities," the proposed rules say.
- Government officials argue the rules
are not overly intrusive, and that privacy critics are overreacting.
- "It's overly alarmist," said
Bob Moore, a spokesman for the Federal Reserve Board. "We're not going
to invade anyone's privacy."
- Unless regulators change their minds,
banks will be required to comply no later than 1 April 2000. The Federal
Reserve, the Office of Thrift Supervision, the Office of the Comptroller
of the Currency and the Federal Deposit Insurance Corporation have published
identical requirements. As written, the rules will not apply to credit
- When a bank detects any "suspicious
activity," current regulations require that the company complete a
five-page report that includes the customer's name, address, Social Security
number, driver's license or passport number, date of birth, and information
about the transaction.
- The banks are required to telephone law
enforcement "in situations involving violations requiring immediate
- The bank sends the information to a computing
center in Detroit, where it becomes part of the Suspicious Activity Reporting
System, a mammoth searchable database jointly administered by the IRS and
FinCEN that went online in April 1996. Over a dozen agencies-including
the FBI, IRS, Secret Service, bank regulators, and state law enforcement-share
access to the data.
- The proposed rules require banks to determine
the "source of a customer's funds"-such as payroll deposits-and
authorize federal agents to inspect "all information and documentation"
of accounts upon request.
- An alliance of conservative, libertarian,
and privacy groups is mobilizing to fight the Know Your Customer plan.
- "The idea that the average American
is going to have to justify to a federal agency where they got their money
and how they used it-and proving it to those agents-is just beyond the
comprehension of most Americans," said Lisa Dean, vice president of
the Free Congress Foundation.
- "It's not done in a free society."
- Dean is preparing a report to be published
by the end of December, but in the meantime she's encouraging groups to
submit their own comments to the government by the 8 March 1999 deadline.
- The American Civil Liberties Union believes
the proposed rules are "a major concern" and an unwelcome extension
of the drug war, said legislative counsel Rachel King. The ACLU plans to
fight the proposal, as will the Electronic Privacy Information Center,
director Marc Rotenberg said.
- In 1996, Federal Reserve Board Governor
Edward Kelley ordered the agency to begin developing Know Your Customer
regulations, and the first draft was finished in summer 1997.
- The Organization for Economic Cooperation
and Development's money laundering task force also has endorsed Know Your
Customer rules, calling them "the cornerstone" of the group's
recommendations to member nations.
- "The program should also be designed
to allow banking organizations to monitor the transactions of their customers
to ensure that they are consistent with their expected transactions, and
identify and report, as necessary, those transactions that are unusual
or suspicious," Herbert Biern, a top Fed official, told the House
banking committee in June 1998.
- The Fed and other banking regulators
that have developed the rules say no new laws are required, arguing existing
law gives them more enough authority.
- "The FDIC has the statutory authority
to promulgate this proposed regulation," the agency said.
- But Congressman Ron Paul, a Texas Republican
who serves on the House Banking committee, plans to nix their plans. "This
massive new program-euphemistically called 'Know Your Customer'-would convert
our nation's banks into wholly owned subsidiaries of the government-wide
movement to invade every aspect of Americans' privacy," Paul wrote
in a recent column.
- Paul plans to introduce legislation early
next year to prevent Know Your Customer from becoming reality, an aide
- "These costs get passed on to consumers,"
said Brad Jansen, legislative assistant to Paul. "We've already effectively
deputized bank tellers. Now we're making them private investigators as
- In the final draft of the rules, the
effective date was postponed from October 1999 to April 2000 to allow for
Y2K repairs of banks' computer systems.
- Some banks have opposed the measure,
but outcry has been muted since federal law immunizes financial institutions
from liability when disclosing suspicious customer activities to the government.
- "The majority of our membership
doesn't need to fill out more forms and profile people because they already
know them," said Steve Scurlock, executive vice president of the Independent
Bankers Association of Texas.
- "They've seen these people for the
last 20 years," Scurlock said. "They go to church with them.
They coach their sons in Little League baseball. To have more forms to
fill out is exactly the wrong thing to do."
- These regulations are another example
of the government asking the private sector to do its dirty work, economist
Richard Rahn argues.
- "Businesses ought not to do the
things that government should do. And governments ought not to be in business,"
said Rahn, CEO of Novecon and author of the forthcoming book The End of
- The combination of sky-high compliance
costs for banks and the relatively few money laundering prosecutions isn't
worth it, Rahn said. "The real cost of each money laundering conviction
is more than $100 million dollars," he said.
- Rahn estimates that between 1987 and
1996, banks have filed more than 77 million currency transaction reports-weighing
in at 308,000 pounds-with the US Treasury. That's 531 pounds per conviction.