The raucous debate about the government's proposed know- your-customer rule has kicked up a storm over the suspicious-activity reporting system.
Under the congressionally mandated SAR program, financial institutions must report questionable customer transactions above $5,000.
"The reaction that we're hearing gives us a degree of pause and fear that the entire context and value of our anti-money-laundering programs somehow are up for grabs," said Peter G. Djinis, associate director of the Treasury Department's Financial Crimes Enforcement Network, or Fincen.
Since the SAR system's debut in April 1996, banks, thrifts, and credit unions have filed roughly 240,000 of the three-page forms. The reports are forwarded to Detroit, entered into a central data base maintained by Fincen, and accessed on-line by state and federal law enforcement agencies and bank regulators.
But House Banking Committee member Ron Paul has accused Fincen of using SAR forms to compile a financial dossier on each and every American.
Approving the know-your-customer proposal would only make things worse, the Texas Republican charged. Last week, Rep. Paul introduced legislation that would block implementation of the know-your-customer rule, repeal the Bank Secrecy Act, and open Fincen's SAR data base to citizens.
If anything, Mr. Djinis said, the know-your-customer proposal should reduce the number of SAR filings. With more information on their customers, bankers should know when otherwise suspicious-looking transactions are actually routine.
Moreover, he said, requiring Fincen to open its files to the public, as suggested by Rep. Paul, would have a "chilling effect" on banks' willingness to file SARs. Financial institutions would fear civil liability from suspects. Investigations would be ruined.
Law enforcement officials said SARs have been effective, tipping them off to dozens of crimes and some spectacular convictions.
In Newark, the U.S. attorney's office credited SAR information with helping crack the biggest Medicaid fraud case in history. In Charlotte, N.C., SARs helped the Federal Bureau of Investigation locate and arrest the thieves who stole $17 million from a Loomis Fargo & Co. vault in 1997.
Mr. Djinis insisted that financial institutions have been judicious in filing SARs. Though 240,000 have been filed since 1996, 13 million currency transaction reports, or CTRs, were filed last year. Unlike SARs, which are discretionary, CTRs must be filed on cash transactions over $10,000, regardless of whether criminal activity is suspected.
But Treasury and Fincen bear some responsibility for the know-your- customer controversy.
In 1992, Treasury requested and received the authority from Congress to draft know-your-customer rules for banks and nonbanks alike. Fincen took on the job in 1994 but never issued a proposal, choosing instead to focus on drafting SAR rules, which still have not been finalized for nonbanks.
Into the vacuum stepped Federal Reserve Governor Edward W. Kelley Jr., who in 1996 began work on a know-your-customer rule for banks, culminating in the interagency proposal now under fire.
The plan, which would require banks to identify typical customer transactions and then watch for deviations, was released in early December. Comments are due March 8. Major revisions are expected.
