US banks must monitor their customers and alert federal officials to "suspicious" behavior under a government plan that has drawn fire as an Orwellian intrusion into Americans' privacy.

A set of regulations requires banks to review every customer's "normal and expected transactions" and tip off the IRS and federal law enforcement agencies if the behavior is unusual.


"It turns us into surveillance agents for the government," said John Ehrensperger, compliance director for Atlanta-based Sun Trust Bank. Ehrensperger stressed that he was not speaking on behalf of his employer.

Adopting so-called "Know Your Customer" programs will stifle drug-related money laundering, the Federal Reserve Board has claimed for years. "The proposed regulations will reduce the likelihood that banks will become unwitting participants in illicit activities," the proposed rules say.

"It's overly alarmist," said Bob Moore, a spokesman for the Federal Reserve Board. "We're not going to invade anyone's privacy."

Unless regulators change their minds, banks will be required to comply no later than 1 April 2000. The Federal Reserve, the Office of Thrift Supervision, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation have published identical requirements. As written, the rules will not apply to credit unions.

When a bank detects any "suspicious activity," current regulations require that the company complete a five-page report that includes the customer's name, address, Social Security number, driver's license or passport number, date of birth, and information about the transaction.

The banks are required to telephone law enforcement "in situations involving violations requiring immediate attention."

The bank sends the information to a computing center in Detroit, where it becomes part of the Suspicious Activity Reporting System, a mammoth searchable database jointly administered by the IRS and FinCEN that went online in April 1996. Over a dozen agencies -- including the FBI, IRS, Secret Service, bank regulators, and state law enforcement -- share access to the
An alliance of conservative, libertarian, and privacy groups is mobilizing to fight the Know Your Customer plan.

"The idea that the average American is going to have to justify to a federal agency where they got their money and how they used it -- and proving it to those agents -- is just beyond the comprehension of most Americans," said Lisa Dean, vice president of the Free Congress Foundation.

The American Civil Liberties Union believes the proposed rules are "a major concern" and an unwelcome extension of the drug war, said legislative counsel Rachel King. The ACLU plans to fight the proposal, as will the Electronic Privacy Information Center, director Marc Rotenberg said.

In 1996, Federal Reserve Board Governor Edward Kelley ordered the agency to begin developing Know Your Customer regulations, and the first draft was finished in summer 1997.

The Organization for Economic Cooperation and Development's money laundering task force also has endorsed Know Your Customer rules, calling them "the cornerstone" of the group's recommendations to member nations.

"The program should also be designed to allow banking organizations to monitor the transactions of their customers to ensure that they are consistent with their expected transactions, and identify and report, as necessary, those transactions that are unusual or suspicious," Herbert Biern, a top Fed official, told the House banking committee in June 1998.
The Fed and other banking regulators that have developed the rules say no new laws are required, arguing existing law gives them more enough authority.

But Congressman Ron Paul, a Texas Republican who serves on the House Banking committee, plans to nix their plans. "This massive new program -- euphemistically called 'Know Your Customer' -- would convert our nation's banks into wholly owned subsidiaries of the government-wide movement to invade every aspect of Americans' privacy," Paul wrote in a recent column.

"These costs get passed on to consumers," said Brad Jansen, legislative assistant to Paul. "We've already effectively deputized bank tellers. Now we're making them private investigators as well."

In the final draft of the rules, the effective date was postponed from October 1999 to April 2000 to allow for Y2K repairs of banks' computer systems.

Some banks have opposed the measure, but outcry has been muted since federal law immunizes financial institutions from liability when disclosing suspicious customer activities to the government.

"The majority of our membership doesn't need to fill out more forms and profile people because they already know them," said Steve Scurlock, executive vice president of the Independent Bankers Association of Texas.

"They've seen these people for the last 20 years," Scurlock said. "They go to church with them. They coach their sons in Little League baseball. To have more forms to fill out is exactly the wrong thing to do."

These regulations are another example of the government asking the private sector to do its dirty work, economist Richard Rahn argues.

The combination of sky-high compliance costs for banks and the relatively few money laundering prosecutions isn't worth it, Rahn said. "The real cost of each money laundering conviction is more than $100 million dollars," he said.

Rahn estimates that between 1987 and 1996, banks have filed more than 77 million currency transaction reports -- weighing in at 308,000 pounds -- with the US Treasury. That's 531 pounds per conviction.
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Further Comments

A law that only the KGB could love -- the chilling, so-called "Know Your Customer" law that requires banks to spy on their customers.

This regulation, published in the Federal Register on December 7, 1998, requires banks to create a profile of every customer and then notify the government if they do anything "suspicious." Specifically, it requires banks to determine their customer's sources of funds; determine their customer's "normal and expected" transactions; identify transactions that are inconsistent with expected patterns; and report suspicious activity to federal investigators.

In other words, the government wants to turn every bank teller into a government informer and everyone with a bank account into a criminal suspect.

The government's rationale for imposing this regulation: To catch money launderers. But how is monitoring everyone's bank account to check for laundered money different from searching everyone's home to check for stolen goods, or stopping every car to check for drunk drivers?

It isn't, of course. In America, we're supposed to be innocent until proven guilty -- not the other way around.

So what kind of "unusual activity" could set off a red flag at your bank under Know Your Customer? Anything that deviates from your normal pattern, like depositing a Christmas bonus or inheritance, or withdrawing money to buy a house or car. Soon, an ordinary trip to the bank could turn into an interrogation, with Americans trying to prove to agents from the FBI, the Internal Revenue Service, or the Drug Enforcement Agency that they are not drug dealers or money launderers.

In order to put the brakes on this Big Brother banking law, the Libertarian Party has joined a coalition with the ACLU, the California Bankers Association, the Free Congress Foundation, and others to flood the FDIC with more comments.

But stopping Know Your Customer won't be easy. Even after being pummeled by 50,000 comments already -- 600 times as many as the FDIC normally receives in response to a regulation -- the bureaucrats still haven't gotten the message, or just don't want to listen.

Now, they're suggesting that Know Your Customer simply needs to be "reformed." Wrong. The last thing America needs is a reformed bank spying law. Our message to the FDIC is don't reform it; repeal it. Here's why:

• Americans' banking habits are none of the government's business. In a free society, the government has no business asking where innocent Americans get their money or how they spend it. This is the kind of regulation one might have expected in East Germany, North Korea, or Cuba. But in the United States of America?
• It's an illegal, warrantless search that violates the Fourth Amendment. This new rule would force banks to turn over customers' records to government investigators within 48 hours -- without a search warrant. This is unconstitutional, plain and simple.
• There is no money-laundering crisis in America. Of the 7,300 people charged with money laundering between 1987 and 1995, only 580 were convicted. So the government is proposing to invade the banking privacy of over 100 million Americans because of crimes committed by an average of 72 people a year.
• Know Your Customer could subject customers' money to asset forfeiture. If customers can't immediately prove they're not criminals, the government could seize their money under asset forfeiture laws, which allow police to impound the property of Americans without even charging them with a crime. Perversely, instead of being the safest place to store your money, banks could become the most dangerous place.

If there's anything positive about the Know Your Customer law, it's that it teaches Americans a lesson: Know Your Government. In a supposedly free country, your government is plotting to destroy your financial privacy and force your bank to spy on you, with no evidence that you've done anything wrong.

Now that's a crime.

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