A joint Federal Reserve-Treasury Department effort to write new money-laundering rules has bankers expecting the worst.
As mandated by Congress last year, the rules will require banks to keep extensive records of wire transfers. A related regulation will require banks to tell the Treasury which of their customers are nonbank financial institutions.
Drafts of the rules are expected to be published within a few months. The rules are meant to help law enforcement agencies stem the estimated $100 billion to $300 billion of illegal proceeds - mostly from the drug trade - that yearly are laundered through the U.S. financial system.
"Trying to [comply with] some of these things will be a nightmare," said Richard C. Insley, vice president and compliance officer at Signet Banking Corp., Richmond, Va.
The new rules are in an amendment to the Housing and Community Development Act of 1992. They were enacted in the wake of the Bank of Credit and Commerce International scandal.
Right to Revoke Charter
The laws gives regulators the authority to revoke a bank's charter, terminate its deposit insurance, or place it in conservatorship if it is convicted of criminal violations of money laundering or financial-transaction reporting rules.
John J. Byrne, senior legislative counsel for the American Bankers Association, said bankers believed these provisions were fairly crafted.
Other parts of the law also pleased bankers, including one exempting institutions from civil liability for reporting suspicious transaction to the government.
But bankers fear that the wire-transfer rules, depending upon how they are crafted, could cost a bundle and gum up the country's payment system.
Five Years of Records
Essentially, the rules will require banks and nonbank financial institutions to keep records for five years of who sent and received wire transfers over the Fed Wire, Chips, or Swift payment systems. Banks will also have to know the addresses and account numbers of the parties to the transfers.
Financial institutions currently must store wire transfer records. But these records don't necessarily have to show who sent and who received the money.
Without this critical information, it can be difficult or impossible for law enforcement officials to track financial criminals, said Peter Djinis, director of the Treasury's Office of Financial Enforcement.
"When you investigate, some banks can give you the information you need fairly readily, but most cannot because their records are not in the order law enforcement would like," he said.
In 1990, the Treasury floated a handful of proposals to address the problem. But the proposals drew fire from many in the banking industry.
Bankers were concerned that the Treasury would force financial institutions to refuse to accept wire transfers that didn't have all the required information, a rule that could grind the payment system to a halt.
Bankers also feared that they would have to manually inspect each wire transfer to assure compliance, slowing down processing and boosting costs in a highly automated operation.
Cost of Compliance
One institution estimated the industry's cost of complying with the 1990 proposals would exceed $100 million, the ABA's Mr. Byrne said.
Mr. Djinis was unable to respond to specific compliance questions in advance of the release of a draft of the rules. But he insisted they will be reasonable.
"I'm confident that the cost of compliance with the ultimate end product will be reduced dramatically" from the 1990 proposals, he said.
Bankers already view money-laundering and cash-reporting rules as a costly headache.
The number of currency transaction reports that banks are required to file for cash transactions greater than $10,000 has skyrocketed from 7,000 in 1977, the first year a tally was kept, to 9.2 million in 1992, Mr. Byrne said. The volume is swamping law-enforcement agents, he added.
"Money laundering is one of a bank's most expensive compliance concerns," said Sarah Jane Hughes, an associate professor at the Indiana University School of Law.
But, for the first time, Congress and the Treasury appear to be listening to banker's compliance concerns. For example, last week, the House Banking Committee held two days of hearings in search of ways to streamline "the government's efforts to combat money laundering" said Rep. Henry B. Gonzalez, D-Tex., chairman of the committee, in a prepared statement.
"This should lead to better results and lower costs, something which I believe the administration and I see eye to eye on," he added.