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'Know Your Customer' rule could turn tellers into policemen

Unless the bank regulators come to their senses, April 1, 2000, will have more impact on bank customers than the Year 2000 concerns coming true. All federal bank regulatory agencies have proposed the "Know Your Customer" rule. The comment period ends March 8,1999, and compliance is expected by April 1, 2000.

While the rule is only 758 words long, it took the FDIC 4,944 words to comment. Since these comments were first published Dec. 7, 1998, in the Federal Register, the FDIC chairman has been quoted as saying that she wants the rules scaled down. This is after receiving some 14,000 responses against the rule.

It has been said that the rule turns bank tellers into policeman for the federal government trying to find illegal monies. The proposal would require each financial institution to have a written program, approved by the board of directors, that would include provisions to enable the bank to:

* delineate appropriate documentation requirements and due diligence procedures;

* provide for identification and transaction monitoring procedures; and

* identify transactions that would be subject to the suspicious activity reporting requirements.

It also would require each financial institution to adopt compliance measures, specifically:

* internal controls;

* independent testing;

* designation of an individual to be responsible for coordinating the program; and

* training of personnel.

Doesn't sound too bad. Well, read FDIC's comments from the Federal Register, which you can find at http: / / www.yennik.com/knowyour customer. htm. All bankers worth their keep know their customers, so why a rule? It's simply more government control over your business. Some of FDIC's comments about the Know Your Customer rule follow:

* "The proposed regulation requires insured nonmember banks to gather information about customers that, if misused, could result in an invasion of a customer's privacy."

* "Under the proposed regulation, the FDIC would expect each nonmember bank to design a program that is appropriate given its size and complexity, the nature and extent of its activities, its customer base and the levels of risk associated with its various customers and their transactions."

* "The proposed regulation defines the term 'customer' as any person or entity who has an account involving the receipt or disbursal of funds with an insured nonmember bank covered by this regulation and any person or entity on behalf of whom an account is maintained. Thus, for instance, if an account is opened on behalf of a third party, the nonmember bank will need to treat as a customer both the person or entity opening the account and the person or entity for whom the account is opened."

* "The proposed regulation does not differentiate between current customers and new customers."

* "If an insured nonmember bank has reasonable cause to believe that it lacks sufficient information to know the identity of an existing customer, paragraph (d)(4)(ii)(A) also requires that the program provide a system for determining the identity of that customer."

* "All documentation reviewed, as well as verifications of the information contained therein, should be recorded and maintained by the nonmember bank."

* "Any practice of an insured nonmember bank that allows for the establishment of a customer relationship without face-to-face contact with bank personnel, such as banking by mail or Internet banking, poses difficulties in the identification of the prospective customer by use of the traditionally accepted practice of obtaining identification documentation, to include photographic identification."

* "Determine the source of funds. Paragraph (d)(2)(ii) requires that the Know Your Customer program provide a system for determining the source of a customer's funds."

* "Determine normal and expected transactions. Paragraph (d)(2)(iii) requires that the Know Your Customer program provide a system for determining a customer's normal and expected transactions involving the insured nonmember bank."

* "Monitor the account transactions. Paragraph (d)(2)(iv) requires that the Know Your Customer program provide a system for monitoring, on an ongoing basis, the transactions conducted by customers to identify transactions that are inconsistent with the normal and expected transactions for particular customers or for customers in the same or similar categories or classes."

* "Know Your Customer programs would better enable financial institutions to alert law enforcement authorities to potential criminal conduct and help deter criminal conduct in the banking industry.

* "The FDIC has two primary objectives for this proposed rule making: (1) increasing insured nonmember banks' detection and reporting of suspicious customer activities; and, (2) deterring financial crimes at insured nonmember banks."

If the above seems scary, just try to imagine the costs. FDIC's comment on this is, "The FDIC cannot, at this time, determine whether the proposed rule would have a significant economic impact on a substantial number of small entities." I would like to assure you that this rule is going to cost your bank.

In conclusion, I would like to state that I should be in favor of this rule since I am a bank consultant who works with community bankers on various regulatory issues. The regulations states in part that the bank must "provide for and document independent testing for compliance to be conducted by bank personnel or by an outside party on a regular basis." While this is potential new business for me, I do not believe that the "Know Your Customer" rule is good for the banking industry. If the rule goes into affect, give me a call as I have a house payment due.

[Author Affiliation]

R. Kinney Williams is owner of R. Kinney Williams & Associates, a bank consulting firm in Lubbock, Tex.