Letter to FDIC Opposing Know Your Customer from Ron Paul, Bob Barr, Tom Campbell, Frank Lucas, Bob Ehrlich, Jim Ryun, Merrill Cook, Vince Snowbarger, Bob Riley, Pete Sessions, Walter Jones and Bill Redmond
(J. Bradley Jansen was Ron Paul’s legislative staffer for these issues at the time)
December 18, 1998
Robert E. Feldman, Executive Secretary
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
Dear Mr. Feldman,
While we are pleased to learn your agency has decided to delay implementation of this proposed “Know Your Customer” rule, and then apply it only to new accounts, we members on the House Committee on Banking and Financial Services still oppose the draft regulation. First, it is our desire to ensure that any new regulation accomplishes only legitimate and necessary law enforcement purposes without violating the privacy rights of customers. Secondly, we are opposed to any regulation that forces needless and expensive unfunded mandates on financial institutions.
In addition to consumer privacy concerns, the “Know Your Customer” draft rule would undermine the relationship between the financial institution and the client. The unofficial “profiling” of transactions that are not “regular and expected” may discriminate against the poor (who are more likely to be unbanked) as well as racial and ethnic minorities (some of whom use cash more for cultural reasons).
Because the financial institution is already held accountable for tracking and reporting any “suspicious” transactions to the regulators, any alleged benefits of this proposed rule would be outweighed by the additional cost. This rule essentially deputizes tellers not only as law enforcement agents but private investigators as well. We are concerned that the financial institution lacks an adequate safe harbor from liability and that the customer is presumed guilty of suspicious behavior until proven innocent.
The cost of these proposed financial regulations would be excessive. Financial institutions will attempt to impose the increase on their customers through higher rates and new or higher fees. According to the Financial Crime Enforcement Network (FinCEN), the compliance costs in 1996 amounted to over $83 million for just the Bank Secrecy Act. This act is part of the estimated, aggregate cost of financial institution regulation (noninterest expenses) on commercial financial institutions totalling $125.9 billion in 1991, according to an April 1998 Fed Staff Study.
Moreover, the new regulations will impose a disproportionately large cost on smaller institutions because larger institutions have a comparative advantage in internalizing the cost of compliance of additional regulation. This inherent advantage for larger institutions would contribute to the further consolidation of assets in the financial system. Efforts must be made to reduce–not increase–the regulatory compliance costs, especially for smaller institutions.
It is our hope that the resolution of this matter will not require legislative action.
cc: Jennifer Johnson, Board of Governors of the Federal Reserve System;
Communications Division (Docket No. 98-15), Office of Comptroller of the Currency;
Manager Dissemination Branch (Docket No. 98-114), Office of Thrift Supervision.