Eyeing Your Customers

Article excerpt

Federal agencies consider new approach to money laundering detection rules

Nearly 30 years ago, as part of the government's ongoing war on drugs, Congress enacted the Bank Secrecy Act. The act requires banks to notify law enforcement agencies about consumer transactions that could stem from criminal activities. Regulators developed Currency Transaction Reports and Suspicious Activity Reports to flag possible money laundering.

To reduce banks' mounting paperwork from these reports and to streamline information flowing to police, regulators revamped the rules under which banks file Currency Transaction Reports to comply with the Bank Secrecy Act. In revising these transaction reporting rules, regulators want banks to play a stronger role in detecting suspicious financial activities, such as drug dealing, rather than simply swamping police with huge volumes of routine transactions to review.

To that end, bank regulators want banks to be familiar with all the customers they serve. But regulators have struggled to define and implement this new, more subjective "know your customer" approach.

After several years of study and discussion, however, the Federal Reserve released proposed "know your customer" regulations in October.

The :FDIC and OCC soon followed suit with virtually identical proposals, and the OTS released a similar draft of rule changes shortly afterward. In November, the four agencies simultaneously printed their proposals in the Federal Register to draw public comment and set the stage for new money laundering procedures.

If adopted, the regulatory proposals would require banks to establish a written "know your customer" program to monitor their customers' financial transactions for illegal activities. While each bank would design its own program, such programs would have to have six basic components:

Determine the true identity of all customers;

Know the source of funds for transactions;

Understand a particular customer's normal and expected transactions;

Monitor customer transactions; Identify transactions that do not appear consistent with normal transactions; and

Determine if a transaction is unusual or suspicious (and therefore reportable under existing regulations).

Under the proposed rule changes, your bank's board of directors would have to approve your "know your customer" program and you would be required to audit periodically for compliance.

While customers' transactions would have to be carefully monitored for signs of illegal activity, regulators say they do not expect banks to review every customer's financial transactions, nor do they expect banks to purchase expensive computer equipment to monitor transactions. However, as currently written, the proposed regulations would require banks "to develop and implement effective monitoring systems, commensurate with the risks presented by the types of accounts maintained at the bank and the types of transactions conducted through those accounts. …