Ron Paul Dear Colleague Know Your Customer Briefing Summary
Ron Paul Dear Colleague Know Your Customer Briefing Summary
March 12, 1999
(J. Bradley Jansen was Ron Paul’s legislative staffer for these issues at the time)
The Office of Rep. Ron Paul will host a Congressional staff briefing (“Should We Require Banks to Spy on Their Customers?”) on Friday, March 19th at 9 am in room 1539 LHOB. Space is limited, please RSVP to me by email if interested.
The “back door” approach of the regulators effectively requiring the Know Your Customer rule under the manual of compliance of the notorious Bank Secrecy Act has also generated public and banking industry protest.
“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.” John Ehrensperger, SunTrust Banks, Inc.
ABA Director of Regulatory Trust Affairs James D. McLaughlin reported that one community bank estimated its first full year of KYC implementation would cost the institution $110,000, not including automation upgrades, overtime or overhead.
Today’s America Banker reports, “The American Bankers Association on Monday urged regulators not only to withdraw their know-your-customer proposal but to dismantle existing [spying and reporting] requirements.”
The ABA explained that banks must produce a KYC policy to bank examiners amounting to “de facto” regulation and called for stripping existing reporting language from the now-notorious Bank Secrecy Act exam manual. (The BSA exam manual devotes four pages to KYC policies, “Even though not presently required by regulation or statute, it is imperative that financial institutions adopt ‘know your customer’ guidelines or procedures to ensure the immediate detection and identification if suspicious activity.”)
Greg Nojeim of the ACLU reports:
Friends: Even if privacy advocates win the battle on KYC and have the regs.
withdrawn, we could well lose the war unless Congress goes further. The Fed
and other bank regulators already coerce banks to adopt KYC programs. I’ve
heard that 85% of the banks have them.
When the regulators come a callin’ to determine whether a bank is complying
with its customer-spying duties, the first thing it looks for is a Know Your
Customer institutional spy program.
The Federal Reserve Board even posted a Know Your Customer spy manual to
its website: http://www.bog.frb.fed.us/boarddocs/SupManual/. One of my
favorite parts of this how-to-comply-with the-Bank Secrecy-Act-Manual is in
Section 601:
“An integral part of an effective “know your customer” policy is a
comprehensive knowledge of the transactions carried out by the customers of
the financial institution. Therefore, it is necessary that the ‘know your
customer’ procedures established by the institution allow for the collection
of sufficient information to develop a ‘customer profile….’
[snip]
“The customer profile should allow the financial institution to understand
all facets of the customer’s intended relationship with the institution,
and, realistically, determine when transactions are suspicious or
potentially illegal. Internal systems should then be developed for
monitoring transactions to determine if transactions occur which are
inconsistent with the ‘customer profile.’”
Withdrawal of the regs. would only return us to this status quo.
The Independent Bankers Association of America (IBAA) sent the following letter to the regulators opposing the KYC rule:
Excepts include:
“the proposal encompasses entirely new and extensive analysis of data and customer information and is not merely a formalization of existing practices. The costs of the proposal to banks, both in resources consumed and potential damage to customer relations far outweighs the possible value for law enforcement.
“Bank customers are already leery of many of the information requests that bankers make of them when they open accounts, e.g. the need for a taxpayer identification number on a non-interest bearing account.
“the monitoring and analysis that would be injected by the Know Your Customer proposal in its current form would be a major new imposition, what one banker has called ‘another unfunded mandate forcing banks to be a watchdog for the federal government.’
“The proposal would require the implementation of new processing systems and review of information that is not currently performed. New systems of identification, of analysis of customers and of monitoring are NOT just a formalization of existing practices.
“Costs Outweigh the Benefits. The time and effort that would be required to comply with the Know Your Customer proposal are seen by bankers as providing virtually no benefit at a very great cost. The proposal is a case of overkill, where the great majority of law-abiding customers would be subject to scrutiny in order to deter a very tiny minority…There has been no indication of instances when these reports have been successfully utilized in the prosecution of criminal activities.
“the amount of analysis and data review that would be required is mind-boggling. The costs…are staggering.
“The costs for compliance are likely to be passed along to customers in the form of higher fees or lower rates on deposits. This will further alienate customers.
“Therefore, given the lack of demonstration of benefits from any prior reporting that has been required under the Bank Secrecy Act, and given the immense costs that the Know Your Customer proposal would entail, it is clear to the IBAA that the costs of the proposal would outweigh any minuscule benefits many thousand times over.
“The IBAA and others have encouraged law enforcement officials to share the results of these efforts with banks, but there has been little evidence that would convince banks that their compliance with the Bank Secrecy Act is providing useful information leading to prosecution and conviction of criminals.
“what [the regulators] fail to recognize is that certain provisions in the proposal would require a formalized analysis and documentation that goes well beyond existing practices.
“this proposal would require bankers to watch all transactions for those that depart from established norms.”
The Law Enforcement Alliance of America distributed a letter in favor of the original Paul-Campbell amendment explaining that it “would in no way impinge efforts of law enforcement to investigate criminal activity…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. Such intrusive measures will also infringe the privacy rights of law-abiding citizens while detracting from meaningful debate and discussion of measures that would improve law enforcement’s crime-fighting ability.” (The LEAA, with over 65,000 members, is the nation’s largest coalition of law enforcement professionals, crime victims and concerned citizens united to make America safer, the letter explained.)