By Michael Allen
Staff Reporter for the
WALL STREET JOURNAL

Your local bank may soon get to know you a lot better, courtesy of Uncle Sam's war on drugs. The Federal Reserve Board yesterday approved draft regulations, dubbed "know your customer," to help banks weed out money launderers from other clients. Under the proposal, banks that don't already do so will have to establish policies to track customers' typical transaction patterns and to flag significant deviations that might indicate illegal activity. Banks will be asked to be particularly watchful of private-banking customers, typically wealthy individuals who deal in large transactions, often involving offshore tax havens.

The move is part of a series of regulatory measures to make banks more proactive in fighting money laundering. U.S. officials estimate that as much as $500 billion in dirty money - the product of everything from drug trafficking to extortion to fraud - is hidden in the world financial system. (Of course, U.S. officials include such things as waitresses failing to report tip income under the fraud category, putting them in the same category as drug dealers! WFI Editor)

Richard Small, the Fed's assistant director of banking supervision and regulation, said he doesn't expect the new regulations to be onerous. The document is expected to be published in about two weeks, along with a companion set of regulations developed by the Office of the Comptroller of the Currency. After a 60-day comment period, regulators will likely take about six months to draft final regulations. Banks will then have an additional six months to comply. "My opinion is, most banks are doing this already," Mr. Small said, adding that regulators want to give banks maximum flexibility in deciding how to adopt the guidelines. The new regulations require banks to establish a system to determine the identities of customers, for instance, by requiring a photo identification for new individual customers and getting incorporation papers for a business client. (What bank on planet Earth does business with anyone without getting a copy of their ID or incorporation papers? WFI Editor) Banks are also required to determine a customer's source of income and establish what that customer's normal banking transactions will be. The bank will then have to flag big departures from the norm and report the customer to authorities, if necessary.

For instance, if a hardware store normally does $10,000 a day but suddenly starts depositing $50,000 a day, it might get a call from its banker asking where all the new money is coming from. This is especially true if the store were to start wiring the deposits to a secret account in the Cayman Islands. The Fed's Mr. Small said he doesn't expect banks will cast an overly wide net in searching for wrongdoers. For instance, an individual who suddenly deposits a $100,000 check one day, after years of putting in just $4,000 a month in paychecks, wouldn't necessarily trigger questions. Bankers might give him the benefit of the doubt, assuming he sold a home or inherited money. (Or, they might not give him the benefit of the doubt! WFI Editor) But if that person takes the $100,000 and immediately wires it someplace else, and then in subsequent days engages in a flurry of wire transfers that have no apparent logic, a red flag might go up. (The logic, of course, would be to avoid the draconian regulatory and taxation bureaucracies that is implementing this invasive and unconstitutional surveillance of American nationals. WFI Editor)

Fed officials say banks won't be required to track every transaction, although large institutions might feel compelled to do so to get sufficient data to establish a client profile. Brant Atchley, vice president of Atchley Systems, Inc., a Dallas provider of banking software, said banks will have to be careful not to get swamped with too much information. "If you set your parameters too fine and create a giant haystack, you won't have the resources" to figure out which clients are truly suspect, he said. Elliot Berman, a Milwaukee attorney who formerly was in-house counsel to bank-holding company Firstar Corp., noted that most banks already collect extensive data on clients and should view the know-your-customer requirements as an extension of marketing practices already in place. "As a bank, you want to know about your customer for a lot of reasons, such as cross-selling your services, and so on," he said.

POSTSCRIPT: AFTER PUBLIC OUTRAGE ERUPTED FOLLOWING THE PUBLICATION OF THIS STORY, THE GOVERNMENT BACKED DOWN AND DECIDED NOT TO IMPLEMENT THE "KNOW YOUR CUSTOMER" POLICY.

SOURCE: Excerpted from the 2 October, 1998 issue of the Wall Street Journal, West Coast Edition, entitled, "Feds Tap Banks in Laundering Crackdown." Excerpted in the public service of the national interest of the American people.