Compliance officers are calling it "regulation through examination." The Annunzio-Wiley Anti-Money Laundering Act of 1992 gave Treasury the authority to promulgate a know-your-customer rule.
Such a rule has yet to materialize. Nevertheless, U.S. branches and agencies of foreign banks and Edge Act corporations that engage in private banking are confronted by regulators who are enforcing their own variation of a know-your-customer standard.
The ad hoc KYC standard for banks differs with each regulator and even within some regulatory agencies. Nonbank financial institutions have by default been given an unfair competitive advantage as their regulatory agencies appear to be waiting for issuance of the mandated rule.
With each year that passes without the mandated standard, private bankers find it more difficult to anticipate their regulators' expectations. Just when the private banks think they've got it right, the next examination team "raises the bar" to a higher level. In 1994, private banks provided a copy of their know-your-customer policies to the examiners. Examiners tested for adherence to the policy, reviewed the types of documents required to open accounts, and spoke to private bankers about their clients.
In 1995, the process intensified. In addition to a KYC policy, examiners expected to see a private banking mission statement, client relationship officer policy, and due diligence policies and procedures. The domicile of private bank clients became an area of special interest, and emphasis was placed on the travel requirements for private bankers. Examiners also scrutinized systems used by banks for filing client information. To determine whether private bankers keep "shadow files," bank employees were questioned about the types of client files maintained by the bank.
Interviews with private bankers in 1995 were intensive and prolonged. Questions designed to elicit as much information as possible about the private banker's knowledge of the bank's KYC policies and procedures and his/her clients were posed in a variety of ways in an attempt to "trip up the private banker."
If a private banker said a client grows cotton, the banker is asked what he or she knows about the geography of the country and whether growing cotton is consistent with it. If a client borrows from the bank, examiners ask how the banker determined the money was used for the stated purpose.
The 1996 examinations have proven to be the most rigorous yet. Private bankers are expected to provide a transaction profile for each client and justify the legitimacy of the activity. Special focus is given to the quality, quantity, and depth of KYC documentation.
It is not unusual for private banks to hold accounts for offshore companies and trusts established in bank secrecy havens. In the past, regulators accepted the existence of such accounts when the parent of the U.S.-based bank had a global KYC policy that provided for an independent person to visit the offshore location, review the account, and report to bank management. This year, banks in certain regulatory districts were told this is no longer acceptable. KYC information must be in the United States or be capable of being brought in.
Bankers would prefer to have clear, consistent KYC standards instead of the present ad hoc approach and feel very strongly that nonbanks should be required to operate under the same standards to ensure fair competition.
Ms. Tuccillo is a vice president and regional compliance officer for Coutts & Co., a subsidiary of London's National Westminster Bank Group.
