Banking: Big Brother
By Wayne Caparas
If you’re not in banking, you may have completely missed one of the most lopsided battles in the history of citizens’ rights to privacy.
The now infamous “Know Your Customer” rule (KYC) was originally a banking bill defeated in the House of Representatives in 1998. The second skirmish began as a stealthy end run by the federal big four (the FDIC, the Federal Reserve Board, the Office of the Comptroller of Currency, and the Office of Thrift Supervision) in an attempt to implement the KYC rule without Congressional approval.
On December 7—yes, the day that will live in infamy—the big four published (for comment) proposed KYC regulatory enforcement policies that would require bankers to electronically profile, monitor, and “blow the whistle” on their customers if they registered any “suspicious activities.”
The effort was abandoned in March after disconcerted bankers and outraged citizens nationwide blitzed the Feds with more than 300,000 e-mails and letters demanding withdrawal of the invasive proposals. According to Donald Ogilvie, executive vice president of the American Bankers Association, the FDIC alone received 254,394 official responses—most from private citizens—with just 105 endorsing the proposed rules.
According to Congressman Mark Sanford, the coalition of federal agencies had claimed the authority to circumvent Congress by invoking the highly criticized Bank Secrecy Act of 1970. The law was created to guard against money laundering by drug traffickers and others involved in organized crime.
Despite the best of intentions, federal regulators have been wasting millions if not billions of dollars while failing miserably in their attempts to use banks as secret agents against money laundering. Sanford reports that “between 1987 and 1996, banks filed [as required by the Act] more than seventy-seven million transaction reports with the U.S. Treasury.
“As a result of this massive reporting, 7,300 defendants were charged, but only 580 were convicted. In other words, that’s a success rate of only one 1000th of one percent [.001%]. So on 99.999 percent of the occasions, law-abiding citizens going about their own business have had their privacy invaded.”
Even more outrageous, this appalling statistic is based on current enforcement of the law, which requires reporting only for transactions over $10,000. If the proposed KYC rule is ever implemented, banks will be required to report any suspicious activity.
How do they define suspicious? Any “out of the ordinary” deposit or withdrawal in the low hundreds of dollars could qualify, so if you suddenly make a transaction—any transaction—out of your normal patterns, under KYC you must be reported and could be investigated.
Mitch Godwin, vice president and compliance officer for the Conway National Bank was instrumental in alerting Sanford to the proposed regulatory evasion. Godwin wrote to the Comptroller of Currency that “this proposed regulation is simply so absurd it should be renamed the ‘Everyone is Guilty Until Proven Innocent’ regulation.”
Godwin adds, and the publication Financial Privacy Alert confirms, that many letters to the big four liken their regulations to “Gestapo tactics,” while the Associated Press reported that the rule “would turn every bank teller into a spy for Big Brother.”
The best defense
Sanford wants to remind constituents that the rule is far from dead. “It has died as a ‘front burner’ issue in Washington because they have backed down for now,” says Sanford. But the congressman stresses the big four could at any time bring the rule back to full boil.
In response to the public outcry, Congressman Ron Paul has sponsored—with Sanford as a co-sponsor—HR 516, which is a “Know Your Customer” Sunset Act. According to Sanford, this proposed law would “basically make it illegal for [the federal regulatory agencies] to resurrect this issue.”
Sanford credits constituents like Mitch Godwin for their vigilance and urges them continue their grass roots campaign against the KYC rule by supporting passage of HR516. Sanford insists that “if there had not been the outcry from folks back home, we may not have been able to shoot [the KYC rule] down.”
Quoting Thomas Jefferson, the congressman emphasizes that “democracy rests on the active participation of its citizens,” and he invites constituents to contact him by phone at 202-225-3176 or by e-mail at .
Writer’s note: This article was a work-in-progress of fellow Business Journal writer and personal friend, the late Richard Heymann. It has been an honor to pick up where he left off.