March 1, 1999

Know Your Customer: George Bailey meets Uncle Sam

By: AF Editors

Recently proposed federal regulations-commonly referred to as “Know Your Customer” (KYC) rules-would require banks and other financial institutions to monitor every transaction conducted by each of their customers and report any “suspicious” activity to the government. However, for the first time since President Richard Nixon (not known for his respect for individual privacy) approved the misnamed Bank Secrecy Act of 1970, Americans have said enough is enough when it comes to federal intrusion into their personal finances.

Thanks to privacy and technology advocates (and more than a quarter of a million Americans who sent letters of protest to Federal financial regulators) the KYC regulations appear to be dead on arrival. Ten of thousands of average Americans joined me in a clear declaration of respect for financial privacy: Our government will not require banks to spy on their customers.

Too often government regulators impose rules such as “Know Your Customer” behind closed doors. Individual privacy is compromised until enough innocent Americans are victimized that a public outcry forces regulators to back down. The public outcry over the KYC proposals has shed light on the issue of financial private and created an op-por-tunity to get the government out of the checkbooks of innocent American citizens.

Yet, as significant as the withdrawal of the KYC regulations is in reversing the tide of lost liberties, this would only return us to the status quo. Present financial practices are still vastly too invasive. The Federal Reserve Board’s web site contains a un-apo-logetic guide to aid banks in compling with the Bank Secrecy Act (www.-bog.-frb.-fed.-us).

This Federal Reserve “spy manual” teaches banks both the informal and required practices of effective KYC policy. The guide-lines say that a comprehensive knowledge of the transactions carried out by the customers “should allow the financial institution to understand all facets of the customer’s intended relationship with the institution,” determine “suspicious” trans-actions, and decide if they are consistent with the “customer’s profile.”

All of this financial information is then sent to the Treasury’s FinCEN (Financial Crime Enforcement Network) where the infor-mation in the government’s computer data-base is combined with data purchased from outside vendors including state governments. This database includes such information as your property, automobile, and credit card history, and is often available to commercial information brokers. FinCEN’s web site ( confirms these practices.

The regulations breed a particularly suspicion of those without established relationships with financial institutions and are therefore likely to encourage banks to discriminate against the poor, immigrants, and other minorities. Start up businesses with their irregular cash flows-a sec-tor where women and young people increasingly find their commercial niche-also face more scrutiny. The last thing young entre-pre-neurs, working mothers, immigrants, and minorities need is the burden of even more government regulation and institu-tional suspicion.

As a way of fighting for our lost financial privacy stopping the formal KYC plans, Rep. Tom Campbell (R-CA) and I recently introduced an amendment that would have removed any requirement that banks spy on their customers. The Law Enforcement Al-liance of America supported our amendment explaining that KYC actually harms law enforcement’s criminal investigations. “The pursuit of private information outside the traditional, time-tested, and court-approved law enforcement prac-tices such as those proposed [KYC] will in fact have a deleterious effect on law enforcement’s ability to effectively prosecute its mission.”

While the Federal Reserve derided the quarter of a million protests registered against KYC as coming from a “lunatic fringe,” those opposed to this newest privacy grab are in reality honest, hard working American citizens tired of seeing their personal liberties and hard-earned dollars flushed away on more excessive and futile regulations. As one banker commented:

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.

Following the lead of the public and state banking associations, the American Bankers Association now is calling on regulators not only to withdraw their formal KYC rule but also to review informal spying and reporting directives already on the books. They have seen that while the costs are extremely high, there are no concrete benefits to allowing the government to spy on its citizens.

The Independent Bankers Association of America commented that “given the lack of demonstration of benefits from any prior reporting that has been required under the Bank Secrecy Act . . . the costs of the [KYC] proposal would outweigh any minuscule benefits many thousand times over.” One community bank estimated that implementation of the new KYC rules in the first full year alone would add an additional cost of $110,000, not including automation upgrades, overtime, or overhead.

I am proud to have led the battle to bring these burdensome regulations to light. We have joined with conservatives, consumer groups, libertarians, civil liberties advocates, industry representatives, and even some law enforcement groups to seize the opportunity presented by the negative publicity surrounding the “Know Your Customer” regulations. The real challenge before us, though, is trying to get people to reexamine the very foundations on which these regulations are grounded.

Technology can be either the instrument government uses to controls every aspect of our lives in some Orwellian nightmare, or-as the success of the internet campaign against “Know Your Customer” has shown-in the hands of the people it can be the twenty-first century tool for regaining lost liberty.