Frontier Bank of LaGrange, GA, had only two simple requirements for its new customer identity program: keep the gates up, but the costs down.
The $305 million community bank in West Central Georgia was already challenged in meeting stringent CIP requirements of the USA Patriot Act finalized a year ago. New account holders had to be verified to near certainty and screened against the OFAC database and other government watch lists to thwart crooks, scam artists and potential terrorists.
The bank needed a cost-effective and compliance-ready solution through automated ID verification software, a niche IT product that seamlessly works with existing new account procedures to enhance identity safeguards and build a database of documentation showing the bank's compliance with Section 326, the customer identity regulations in the Patriot Act. The answer, in this case eFunds' ID verification system, which came packaged with Scottsdale, AZ-based eFunds' ChexSystems fraud prevention and risk management solution already employed by Frontier.
The nine-office bank has geographically dispersed branches across two states, which made it difficult to monitor employee adherence to procedures and to gauge customer attitudes toward the additional scrutiny. Students without deep financial histories at its two college-town locations might face hurdles in opening accounts without their parents-whose own identities would have to be researched as well under new CIP rules. Frontier also operates on the outskirts of larger cities, which regulators say are becoming more attractive to crooks or terrorists seeking low profiles. "If you take a look at some of the situations that occurred before 9/11, that's how some of those people filtered in," says Maria Roush, vp and a branch administrator/ compliance officer at Frontier.
Roush says the new system clues the institution fully into a customer's background, as well measuring the compliance performance of employees. For example, the new system could track what records new account reps were pulling for customer verification, allowing Roush to determine which employees are not completing full records checks, or those who aren't clearing up "false positives" that mistakenly rejected customers.
eFunds, Certegy, Experian, Bankers Systems, Lexis-Nexis and other high-profile risk management vendors have entered the CIP-Patriot Act frenzy in recent years by launching or acquiring products-most Web-based-to automate background investigations or OFAC list checks. Certegy launched PatriotGuard in June 2003. Bankers Systems acquired Atchley Systems in October 2003 to broaden its Patriot Act compliance offerings. Lexis-Nexis' RiskWise Instant ID solution, introduced in 2001, has a feather in its cap with an American Bankers Association endorsement.
The eFunds' ID verification product is the former FastWatch software system, which eFunds acquired last April in the $6 million buyout of Atlanta-based Penley Inc. While Penley was early to market with its solution, co-founders Bruce Louthers and Cleve Shultz say now it was really a bit of serendipity. The company had developed an ID verification feature for automatic enrollment account systems, and during a demo in 2001 a client mentioned that the software might have potential for meeting compliance requirements under the new USA Patriot Act. That was news to Shultz and Louthers, who knew next to nothing about the recently enacted legislation. But they managed to wing it. "We looked back at the client, and said. 'Of course,'" laughs Shultz, now an evp for strategy at eFunds.
The two later poured over the new requirements of the Act, and relaunched a few months later with FastWatch, software that would eventually find itself on the platforms of nearly 1,600 banks prior to the merger, according to Shultz.
The merger into eFunds' risk management division seeks to capitalize on eFunds' nearly 90,000 ChexSystems customers, as well as its additional database of consumer transactions-through ChexSystems and eFunds' ATM network reach. "I don't think they have a lot of competition," asserts Nik Fisken, a managing director of Stephens Inc.
While eFund's solution is looking robust, there is still no mad rush on the part of bankers to solidify Section 326 compliance. Sheshunoff Information Services bank compliance consultant Lorraine Hyde believes most banks are largely taking the necessary steps from a "safety and soundness standpoint," but not just for examinations.
Why is that? Because examiners still haven't uncovered the kind of violations that would start ringing alarms and jolting the banks to action. According to the OCC, out of hundreds of CIP examinations, its examiners have cited only 34 violations of the CIP at 20 banks since October 2003. Most of the violations have been of the minor variety-not having a board-approved policy, or improper documentation of verification procedures. No major enforcement penalties from the OCC or the U.S. Treasury's Financial Crimes Enforcement Network have been issued over CIP.
