Reacting to a backlash from bankers and privacy advocates, regulators are considering toning down sections of a proposal meant to discourage money laundering.

The policy, released for comment less than a month ago, would require banks to verify the identity of new customers and monitor accounts for suspicious activities. The critics argue that the proposal would violate customers' civil liberties, force bankers to act as police officers, and cost too much to implement.

"If there are certain things that have triggered a misunderstanding, then I am absolutely willing to discuss it," said Richard A. Small, an assistant director at the Federal Reserve Board who drafted the know-your- customer proposal. "We want to work this out."

Gary W. Webster, president of Farmers National Bank of Central City, Neb., said his bank would be forced to purchase "extremely expensive" computer equipment to comply with the rules. "We do not think bankers should be acting as investigators," he said in a letter to the Fed.

Rick A. Anthofer, agriculture loan officer at Carroll County (Iowa) State Bank, said the proposal would place an "onerous burden" on small banks, which lack the resources to establish computerized monitoring systems. "I urge you to send this proposal back to the drawing board," he wrote.

Comments from the public were even more direct. "This very idea reeks of 'Big Brother' tactics," wrote Lee Wollgast of Florissant, Mo.

These letters were among nearly 350 sent so far to the central bank. The Federal Deposit Insurance Corp.-the only banking agency to accept comments via e-mail-has gotten more than 6,600. The vast majority were sent by consumers, not bankers. The Office of the Comptroller of the Currency has received roughly 425 letters.

In response, regulators said they may eliminate phrases that have inflamed the public, such as the term "profiling," which has set off alarms among privacy advocates and Internet-based civil liberties groups.

"The word 'profile' has developed a life of it own," Mr. Small said. "It has become a big government conspiracy to learn everything you do with your money and what you eat for breakfast. That is not what we intended."

The proposal was designed to give banks discretion to implement anti- laundering measures, regulators said. Rather than specify the steps required to verify customer identities and detect suspicious transactions, the agencies proposed allowing banks to set their own criteria by establishing the parameters of a typical transaction for that institution. Transactions that were unusual and thus outside the bounds of the profile would warrant further review.

"This was intended to provide flexibility to an institution," said Christie Scicacca, FDIC's associate director of supervision. "It wasn't provided to suggest that you need profiles on specific customers."

Regulators also want to clarify that they do not expect most banks to adopt new know-your-customer policies. Federal law has long required banks to report suspicious activities and examiners have required informal know- your-customer policies for several years.

"No one seems to understand that the information that we want as part of this know-your-customer proposal is not new and has been collected for years," said Mr. Small.

The agencies also are considering adding more privacy safeguards, a spokesman for the Comptroller's Office said. "Privacy was a key concern for us as we looked at this regulation," he said. "We are going to look at the comments and see if there are other things we need do to further protect consumer privacy." The spokesman declined to elaborate.

The know-your-customer proposal won initial support from the trade groups and some big banks, which are expected to submit comments before the March 8 deadline. "The regulators are trying to say that the program you already have should be satisfactory," said John G. Medlin Jr., chairman of Wachovia Corp. "You don't need to go through a lot of red tape to change anything."

Tweaking the wording should satisfy most of the industry's concerns, said John J. Byrne, senior federal legislative counsel at the American Bankers Association. "Those who have complained the loudest are upset at the word choices in the proposal," said Mr. Byrne, who added that the industry has known for the several years what the regulation would entail.

Federal regulators who have reviewed the comment letters said most lack constructive recommendations on how to improve the regulation. Instead, they appear to be shoot-from-the-hip remarks from bankers and others who have not studied the proposal.

"We haven't gotten one substantive comment," Mr. Small said. "Either they haven't taken time to read it and they are being hyped up by these things on the Internet and consultants or they have read it and just don't get it."

Regulators plan a cross-country tour to explain the proposal. Stops already scheduled include: Los Angeles, Miami, Portland, Ore., New York City, Austin, Tex., Nashville, Chicago, Louisville, Ky., Lexington, Ky., Manchester, N.H., Pierre, S.D., Montpelier, Vt., and Boston.

Their task will not be easy. The Internet is full of pleas for consumers to object to the proposal. The Killeen, Texas-based Christian Alert Network, for instance, warned that the profiles would let the government track how consumers spend their money and could be part of a larger plan to "trace, track and control" all financial transactions.

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