WASHINGTON - Little more than a year after proposed know-your-customer rules died in an avalanche of criticism, the concept is making a comeback with a new name, new packaging, and fewer regulatory teeth.
Federal banking regulators are preparing to recast the anti-money-laundering requirements as "enhanced due diligence," using as a blueprint the settlement agreement reached between the Federal Reserve Board and Bank of New York in February over a money laundering scandal. In a key departure from last year's proposal, however, regulators plan to issue the requirements as guidelines, rather than a binding rule.
"Guidance is not a regulation, it's not enforceable, but it gives clear direction to banks about what we think they ought to be doing," said Richard A. Small, assistant director of the Fed's supervision division.
The new approach essentially gives the industry what it wanted: direction without an onerous regulatory burden.
"Despite the very real concerns about the know-your-customer regulation, banks are still looking for some direction on how they should focus their oversight, and this would be helpful," said John J. Byrne, senior counsel for the American Bankers Association.
The original know-your-customer proposal was meant to fight money laundering. It would have required banks to positively identify a customer's source of funds, and to report suspicious transactions to regulators. The proposal was withdrawn in March 1999, after regulatory agencies received more than a quarter-million comment letters complaining that the rule would require banks to act as surrogate police officers, and would violate customers' privacy.
"We tried to write the first regulation in a way that wouldn't alarm people, but we failed," said Mr. Small. In drafting the guidance on enhanced due diligence, he said, regulators will make it abundantly clear that only a small fraction of bank customers - such as private banking accountholders - should receive special scrutiny, a move that went a long way to alleviating industry concerns.
"A shift in exam focus toward riskier accounts is preferable to an across-the-board requirement that all accounts receive the same kind of due diligence," said Mr. Byrne.
The National Money Laundering Strategy for 2000, issued last month by the Treasury and Justice departments, called on the four bank and thrift regulatory agencies to work with law enforcement and industry representatives to develop guidance by yearend for "enhanced scrutiny of those customers and their transactions that pose a heightened threat of money laundering."
Last year's money laundering scandal at Bank of New York not only resurrected the demand for guidelines but also served as a blueprint for the current proposal. According to Mr. Small, the guidance will be based on the process the Fed prescribed for Bank of New York. That settlement agreement required the bank to identify high-risk accounts and monitor them for signs of suspicious activity.
The settlement reached by the Fed and the Bank of New York required the bank to complete a "risk-focused assessment" of its customers to identify accounts at risk for laundering. After identifying those accounts, the bank was required to determine the "appropriate documentation" necessary to verify the identity and business activities of the account holder, to identify "normal and expected" transactions for the account, and to report suspicious deviations from them.
The agreement included procedures for assuring that account relationship managers are monitored for compliance with anti-laundering laws, and that all new bank products are consistent with existing anti-laundering regulations.
Also, the agreement committed the bank to an ongoing employee training program focused on money-laundering issues and an internal review process to monitor compliance with the agreement.
The Fed reached a similar agreement with Banco Popular of Hato Rey, Puerto Rico, in March.
Deputy Treasury Secretary Stuart Eizenstat is expected to discuss the development of the guidance in remarks today to the Bank Secrecy Act Advisory Group.
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