Pubdate: Tue, 30 Mar 1999
Source: Wired Magazine (CA)
Copyright: 1999 Wired Digital Inc.
Contact:  http://www.wired.com/
Author: Declan McCullagh

KNOW YOUR (CUSTOMER) RIGHTS

When federal regulators said last week they were abandoning a controversial
plan to expand bank surveillance of customers, privacy advocates were
hopping mad.

The not-so-obvious reason? Banks already are required to monitor customers
for "suspicious" deposits and withdrawals. And last week's decision to nix
the formal "Know Your Customer" proposal didn't change that a bit.

Over 88 percent of US banks had Know Your Customer policies in place as of
January 1999, according to an American Bankers Association survey.

To privacy advocates, it's a stark example of government meddling in
personal lives.

Groups as far apart on the political spectrum as the ACLU and the
Libertarian Party have reacted in unison, launching campaigns that urge
Americans to investigate their bank's current practices and, if necessary,
to complain.

The ACLU's online campaign, called "Know Your Banker," is scheduled to begin
Tuesday.

"We are trying to put the banks out of the business of spying on their
customers and we're enlisting customers in that effort," says ACLU
legislative counsel Gregory Nojeim.

"We are asking customers to ask their bankers two questions: First, has the
bank already adopted a Know Your Customer program, and how many times in the
last year did it report its customers as suspects to the government?"

Reports are filled out by a teller or other bank official, and consist of a
five-page form that includes the customer's name, address, Social Security
number, driver's license or passport number, date of birth, and information
about the transaction.

If tellers have PC terminals, the Financial Crimes Enforcement Network
(FinCEN) offers a Windows fill-in-the-fields application that submits the
data electronically.

In whatever form, the information ultimately goes to FinCEN, a sister agency
of the IRS also housed within the Treasury Department. An estimated 100,000
reports were filed last year.

The IRS computing center in Detroit is the home of FinCEN's Suspicious
Activity Reporting System (SARS), a mammoth searchable database that went
online in April 1996.

Hundreds of law enforcement agencies -- including the IRS, Drug Enforcement
Administration, the Postal Service, bank regulators, and state law
enforcement -- share access, sometimes via modem dialup. The FBI, Secret
Service, and US Customs regularly download the data and import it into their
own databases.

The reason for the complex and expensive system: illegal drugs. The Federal
Reserve has defended surveillance programs as a vital weapon in the war on
drugs and drug-related money laundering. In its annual report last April
FinCEN said, "SARS reflects the philosophy that suspicious-transaction
reporting is central to counter money-laundering policy, both in the United
States and abroad." Under current rules, banks and credit unions -- about
19,000 in all -- must inform FinCEN of all transactions $5,000 and above
that have no "apparent lawful purpose or are not the sort in which the
particular customer would normally be expected to engage."

Any currency transaction above $3,000 requires that a customer's name and
home address be recorded and kept for five years. So must deposit slips or
equivalent records for all transactions involving more than $100.

If banks and credit unions don't comply, they can be investigated and fined.
But there's a bigger incentive for them not to protest: When they submit the
forms, they're immune from liability. They're also not permitted to tell
customers their transactions have been reported as suspicious.

While Know Your Customer programs aren't absolutely required, they're
strongly encouraged by the US Federal Reserve board. And the vast majority
of banks have complied.

"It is necessary that the 'know your customer' procedures established by the
institution allow for the collection of sufficient information to develop a
'customer profile,'" says the Fed's Bank Secrecy Act Examination Manual, a
313-page document that was last updated in September 1997.

Loans are covered too. One of many suspicious activities that requires a
report to the Feds, according to the manual: "Customer's stated purpose for
the loan does not make economic sense."

In the first 18 months of FinCEN's existence -- from April 1996 to September
1997 -- 110,000 suspicious reports were filed, according to FinCEN. At
25,551 reports, California accounted for the bulk, with New York and Florida
in second and third place, respectively.

What would the now-abandoned rules have done? Not much more. The biggest
changes would have been formalizing existing practices and requiring banks
to identify the source of customers' funds.

The status quo is objectionable enough that Americans will speak out against
it once they are informed, the Libertarian Party believes.

In response to the Know Your Customer proposal, the group launched a Web
petition that garnered 171,200 signatures. Those were sent to regulators,
who cited public outcry as the chief reason they abandoned the expansion plan.

The libertarians' next goal, in a campaign scheduled to begin this week: To
repeal the laws that allow regulators to concoct such schemes in the first
place.

"We're going to be putting up a new petition that will go directly to
members of congress," says Steve Dasbach, the national director of the
Libertarian Party. "There will be information about why legislation is
needed." Dasbach supports legislation introduced by Rep. Ron Paul (R-Texas)
that would repeal the Bank Secrecy Act, the law requiring banks to report
suspicious activity. 

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