Jansen on Know Your Customer 1999
J. Bradley Jansen commentary on the proposed “Know Your Customer” banking rule
March 16,1999
The proposed “Know Your Customer” formal banking rule may be stillborn, thanks to privacy and technology advocates, as well as more than a quarter of a million Americans who sent letters of protest to the Federal financial regulators. These protesters joined me in a clear declaration of respect for financial privacy. We should not require banks to spy on their customers.
Too often government regulators impose these restrictions behind closed doors, and this monitoring continues unchecked until enough innocent Americans are victimized that a public outcry forces regulators to back down. Between the public outcry over the “Know Your Customer” proposals and the introduction of my financial privacy package (HR 516 the Know Your Customer Sunset Act, HR 517 the FinCEN Public Accountability Act, and HR 518 the Bank Secrecy Sunset Act), we have an opportunity to take real steps toward getting the government out of the checkbooks of innocent American citizens.
For the first time since then President Richard Nixon (not well known for his respect of privacy) had Congress pass the misnamed Bank Secrecy Act of 1970, Americans have said that there is a too high a price to pay — both in terms of sacrificed liberty and financial cost — for too little gain. The Independent Bankers Association of America wrote the regulators that “given the lack of demonstration of benefits from any prior reporting that has been required under the Bank Secrecy Act…the costs of the proposal would outweigh any minuscule benefits many thousand times over.” Indeed, one community bank estimated its first full year of KYC implementation would cost them $110,000, not including automation upgrades, overtime or overhead.
While significant in reversing the tide of lost liberties, the withdrawal of these regulations would only return us to the status quo. Although this is definitely better than actually allowing federal regulators to increase their domain of control, it is important not to lose sight of the invasiveness of the present regulations. Evidence of these blatant invasions of privacy is as close as the Federal Reserve Board, which posts a how-to-comply-with-the-Bank Secrecy-Act-Manual to its web site ( http://www.bog.frb.fed.us/boarddocs/SupManual/).
This Federal Reserve spy manual tells banks how to comply with the informal requirement of an effective KYC policy: a comprehensive knowledge of the transactions carried out by the customers “should allow the financial institution to understand all facets of the customer’s intended relationship with the institution,” determine “suspicious” transactions and decide if they are consistent with the “customer profile.”
Those most likely to be discriminated against are those lacking an established relationship with the financial institution such as the poor, and racial and ethnic minorities. Start up businesses, where growing numbers of women are finding their niche, with irregular cash flows would also face increased scrutiny. The last thing these young entrepreneurs and working mothers need is the burden of even more government regulation.
All of this financial information is then sent to the Treasury’s FinCEN (Financial Crime Enforcement Network) where the information in the government’s computer database is combined with purchased data (often sold by state governments, enabling identity theft) available to commercial information brokers; this information can include such things as your property, automobile and credit card history. FinCEN’s web site (http://www.treas.gov/fincen/) confirms this practice.
Fighting to reclaim our lost financial privacy as well as stop the formal KYC plan, Rep. Tom Campbell and I introduced an amendment to a bill that would have removed ANY requirement that banks spy on their customers. The Law Enforcement Alliance of America supported our amendment explaining that KYC actually harms law enforcement’s criminal investigations, “The pursuit of private information outside the traditional, time-tested, and court-approved law enforcement practices such as those proposed [KYC] will in fact have a deleterious effect on law enforcement’s ability to effectively prosecute its mission.”
While the Federal Reserve derided the quarter-million protests as coming from the “lunatic fringe,” those opposed to this newest privacy grab are in reality honest, hard working American citizens tired of seeing their personal liberties and hard-earned dollars flushed away on more excessive and futile regulations. As one banker commented:
“The intended targets of the regulations [i.e., the criminals] will most likely find ways to get around the requirements…It seems unlikely that individuals who smuggle drugs, commit murder or engage in other criminal acts will be seriously discouraged from those acts by the prospect of having to lie to a banker.”
Following the lead of the public and the state banking associations, the American Bankers Association now wants regulators not only to withdraw their formal KYC rule but the existing, informal, spying and reporting directives as well. They have seen that there are no concrete benefits to allowing the government to spy on its citizens, but the costs are very real, and their shoulders cannot bear much more of the monetary burden. The existing regulations have been around so long that people have just accepted them, but they represent a real challenge to our freedom as American citizens.
I am proud to have led the battle to bring these regulations to light. We’ve joined with conservatives, consumer groups, libertarians, civil liberties advocates, industry representatives and even some law enforcement groups to seize the opportunity presented by the negative publicity of the “Know Your Customer” regulations. The real challenge before us, though, is in trying to get people to reexamine the very foundations on which these regulations are grounded.
Technology can be either the instrument by which government controls every aspect of our lives in some Orwellian nightmare, or — as the success of the Internet campaign against “Know Your Customer” has shown — in the hands of the people it can be the twenty-first century tool for regaining lost liberty.